JumpStart: IdeaExchange Blog

In 2008, according to PWC MoneyTree and VentureXpert, Ohio moved into the top quartile, among all states, for number of venture capital deals. In 2009, Ohio moved into the Top 10. The states ahead of Ohio are: California, Massachusetts, New York, Pennsylvania, Texas, Washington, New Jersey, Colorado, and Maryland. Ohio is the only Midwestern state to break into the Top 10.

As far as $$ invested, we are lower down on the list — 21st in 2009, where historically, over 10-15 years, Ohio has ranged from 9th to 28th, averaging about 21st. In order to move up to a Top 10 spot, investors would need to more than double the amount of capital going into Ohio’s early-stage companies. Has something like this been done before? Yup: Maryland, for example, moved from 22nd in 1992 and 25th in 1993 to 8th in 2006.   

So, risk-oriented investors might say, “That’s fine, Becca — love your passion for Ohio’s innovation environment — but, um, what about returns?” My answer is that they are pretty good: an analysis done by Chrysalis Ventures shows that returns in Midwestern deals were higher than returns in every other region except California and the Southeast (where the Southeast had fewer deals than the Midwest). I have not reviewed this analysis since 2006, but even if updating shows it to have fallen, the 2006 data do show that strong returns can be generated in the Midwest — Ohio included.

Those same risk-oriented investors might next say, “Yeah, but what about exits? As investors, we know, obviously, returns are a sign of exits, but still, how about stories: do you have great stories of exits, stories that capture the imagination and define a region? Where’s your Google? Your Amgen?”

OK, I have to admit: you got me there. We do not have many of those tales of Stanford PhDs or MIT wunderkinds opening up entirely new industries and IPO’ing five nanoseconds later, and let’s face it: those are fun, iconic tales that generated great returns and captured the imagination. But, here is the good news. An analysis I recently saw showed that Ohio entrepreneurs and investors are actually quite good at something that may be emerging as an enduring investment thesis in the venture industry: entrepreneurs raising money in a capital efficient manner from smaller funds and growing solidly and well to provide those funds with nice returns, IRRs that are above-equity-stock-indices-and-above-venture-IRRs-as-a-whole-but-(admittedly)-no-Google/Amgen.  

I cannot, alas, offer here the details of this analysis because the person who conducted it is a trusted Ohio investor who was able to get many of his peer investors to offer up information that they requested not be made public. But I can, for illustrative purposes, offer up names of some of the companies whose exits were public domain and that collectively make the point that we do have exits, good exits, sometimes great exits, but admittedly not iconic, blockbuster exits. In IT, over the past 5-10 years, Ohio entrepreneurs and investors have seen exits from angel or venture-backed companies like Hyland, Plansoft, Brulant, Flashline, TMW Systems, Everstream, MRI, Northcoast PCS, Entek, and many more. In Healthcare, over the past handful of years, there is WholeHealth, MemberHealth, RIS Logic, Edgepark Surgical, Cleveland BioLabs, Atricure, NDI Medical, and many more. In Cleantech, of late, there is Sorbent Technologies and Solar Fields, plus others, and in Business Services, there is Flight Options, Atomic Dog Publishing, and more.

So, here is the summary of all this. Ohio is Top 10 nationwide in investment activity and Ohio’s entrepreneurial strengths are in areas where the venture industry may well be moving: Ohio growth businesses and entrepreneurs are capital efficient and, among states, Ohio is among the leaders on consistently starting strong, high growth businesses that pragmatically solve a certain problem in the world, grow quickly, and generate solid returns. This entrepreneurial mindset, or strategy, if you want to call it that, offers an outsized return to investors as shown by the Chrysalis analysis. The entrepreneurs who led these businesses are adept at growing more of these types of businesses as CEOs, serial entrepreneurs, angel investors, and board members.

These are all reasonable strengths to build on. With a lot of effort, which is what anything worth doing takes, we could become a Top 5 state in venture activity (deals, not dollars, given the more capital efficient nature of Ohio growth stories). Wouldn’t that be great?  

That’s not a rhetorical question, because I guess what I want to know is this: is this compelling? Is the paucity of iconic IPOs that capture the imagination, even if IRRs for investments in Ohio early-stage companies are collectively as strong as or better than elsewhere in the U.S. and the venture industry as a whole, a deal-killer (literally)? It strikes me and many successful Ohio entrepreneurs I speak with that it should not be.   

While “should not be” is not a strategy that will make quantum leaps in capital formation and high growth entrepreneurship, IRR is.

Becca Braun is President of JumpStart Ventures. She founded and led a number of early-stage companies and organizations, as well as worked as a private equity investor and management consultant. She received her MBA from Harvard Business School and her BA in Linguistics from Harvard University. She is keenly interested in the intersection of wealth creation and broad-based regional economic growth.

Great things are on the horizon for minority-owned and inner city based businesses in Northeast Ohio. And that’s not only good news for those minority and inner city based firms, but it’s good news for the entire region! It’s been well documented how growing larger scale diverse businesses represent an essential component of a broader economic development strategy – particularly the positive impact on job creation given that minority, women and inner city based businesses tend to hire at greater rates from those same underserved communities. I am thrilled to announce an exciting new initiative at JumpStart that will directly address this vital component of our region’s strategy. 

On Thursday, March 25th we will unveil a game changing initiative that is already being touted by some state and federal officials as a platform that should be considered by communities across the country. The new initiative is called Launch100 which represents a five year focused objective to create a pipeline of 100 high potential minority and inner city based businesses across the state of Ohio. The initiative will be piloted in Northeast Ohio for up to 18 months, with plans to roll out the effort across the entire state should the pilot prove successful. Unique to this effort is the unprecedented collaboration with over 15 State funded business assistance organizations, all working together to ensure that Northeast Ohio’s most promising early-stage minority and inner city based firms are receiving the necessary support and resources to enable these firms to achieve their potential. 

Register for the public kick-off of this extraordinary effort to be held on March 25th at Corporate College East, 4400 Richmond Road, Cleveland, Ohio 44128. Governor Ted Strickland, and a host of dignitaries will be present to share their remarks and underscore how vital the success of this initiative is to our region’s and state’s economy. 

To preview the objectives of Launch100, and the minimum criteria to apply, please log on to www.launch100.org for more information. For an example of a recent high potential minority-owned business that received the type of assistance Launch100 firms can expect, (which ultimately led to the company being funded by JumpStart), take a look at Melody Management which has developed a revolutionary online platform for independent artists and musicians across the globe.

As I mentioned previously, great things are on the horizon for our community, so please be sure to save the date of March 25th and register for the launch event to make sure you’re on hand.

Darrin is Chief Economic Inclusion Officer of JumpStart and President of JumpStart Inclusion Advisors. He founded and ran his own strategic planning and management assistance firm and spent 16 years in the commercial banking and finance industry. Darrin has an MBA from Baldwin Wallace College and an undergraduate degree from Mount Union College. He has led a series of workshops and seminars on matters of economic development and diversity.

Last month the Brookings Institute published a report, authored by Frank Samuel, called “Turning up the Heat: How Venture Capital Can Help Fuel the Economic Transformation of the Great Lakes Region.”  

The 54 page report makes the case for increasing the amount of pure venture capital in the Great Lakes region* as well as the amount of funding for those organizations that essentially “prime the pump” for VCs. For those of you who have read my blog posts you know that this topic is right up my alley, so I say “Right On!” to Frank and encourage the leaders in these states to read the report and take action.

For those of you who prefer the CliffsNotes version, here goes: The region in question has more than enough assets to support a vibrant venture eco-system — great university R&D**, quality graduates from top tier educational institutions***, a strong industrial base, and expertise in growth sectors such as biomedical and cleantech. Of all the venture capital raised in the U.S. approximately 40% is contributed by the Great Lakes region’s large public pension funds while the region only receives about 13% of that back in the form of investments. (Hmmm, does this seem fair?) Mr. Samuel’s proposal involves forming a fund-of-funds (with capital invested by Midwest pension funds) that will be invested in venture funds actively investing in the Midwest region. I love the idea and it makes tons of sense. More Midwest VC money = more Midwest deals funded = more Midwest economic growth = more Midwest employment = more Midwest prosperity.

The devil is always in the details, however. My guess is that the situation at present is a result of the average Midwestern pension fund manager claiming not to be able to find any “top tier” Midwestern-based venture funds to invest in. Most Midwest-based venture fund principals bristle at this complaint, but there’s some truth to it; there simply are not enough large VC funds in the Midwest with “top quartile” track records to absorb all of the money pension funds want to invest in this asset class.**** So, what’s the solution? I am sure there are several, but I can think of two at the moment. One, invest the money with a coastal firm only if it will open and staff a Midwest office (hint: Draper Fisher Jurvetson provides a great example of how to do this) and two, take some risks and invest in first time funds (something conservative pension fund investors have been historically loathe to do) as long as the principals at the fund can show they have experience successfully investing in and/or starting and exiting companies.

I hope this report creates momentum and cooperation among the leaders of these 12 states and, in turn, these leaders put pressure on the pension funds to invest in their own backyards (or put their money where their mouths are — pick your idiom). The benefits of a vibrant venture ecosystem are obvious (think Silicon Valley, Austin TX, etc.) and could be realized with a little bit of cooperation and whole lotta creativity.

* the Great Lakes region as defined in the report includes 12 states: Illinois, Indiana, Iowa, Kentucky, Michigan, Minnesota, Missouri, New York, Ohio, Pennsylvania, West Virginia, and Wisconsin

** 33% of all U.S. research and development dollars and 35% of all NIH research grants go to the Great Lakes region

*** who, historically, have fled to the coasts to look for work

**** most pension funds only want their investment to represent a small portion of the overall venture fund’s assets

Lynn-Ann Gries is the Chief Investment Officer of JumpStart Ventures. She previously worked in the investment banking departments at both McDonald Investments and Smith Barney (now part of Citigroup), and in the sales and trading area at Morgan Stanley. She received her MBA from New York University’s Stern School of Business and her BA in Economics from Smith College. She currently serves on the board of the Fund for the Future of Shaker Heights, the Great Lakes Science Center and Summer on the Cuyahoga (SOTC).

Issue 1 is a statewide ballot measure that would authorize renewal and continuation of the highly successful Ohio Third Frontier (OTF) program. OTF is a visionary public-private partnership created in 2002 with bipartisan legislative leadership and support as well as widespread editorial support.

The purpose of OTF is to firmly establish Ohio as an innovation leader and to fuel long-term economic growth and create jobs in our state. OTF targets state investments to promising industries, technologies, and entrepreneurs. The initiative is directed by a bipartisan, appointed advisory board and commission. Funds are awarded through a competitive process in which independent experts review proposals and assure a base level of excellence for all projects.

With a 10 year initial life and an initial commitment of $1.6 billion, OTF has emerged as the centerpiece of Ohio’s technology-based economic development and job creation efforts. The bond funding mechanism for OTF, approved by Ohio voters in 2005, expires in 2012. On February 3, 2010, the Ohio General Assembly authorized a bond measure on the May 2010 ballot at a level of $700 million over four years. Support for placing the bond issue on the ballot was strong and bipartisan (30-2 in the Senate, 83-14 in the House).

OTF also has proven results including helping to:

• Create over 48,000 jobs.
• Attract or capitalize 571 startup companies.
• Attract $3.2 billion in follow-on dollars (from federal, state, local, private, and foundation funds) on top of the $473 million it has expended (through June 2009) on technology-based programs.
• Produce more than $6.6 billion in total economic impact in Ohio (through December 2008).
• Produce a total return on investment that has averaged 22% per year over the life of the initiative.
• Grow product sales from OTF-funded projects to $440 million per year (through June 2009) and are estimated to total at least $900 million by 2013.
• Double licensing income earned by Ohio’s leading research institutions from 2002 to 2007 it rose from $16 million to $40 million.
• Increase Ohio’s research base, from 2002 through 2008, it increased more than 60 percent, from $1.1 billion to $1.8 billion.
• Increase venture capital investment in Ohio. From 2003 through 2008, venture capital investment in the state grew almost 2.5 times faster than the U.S. average – 20.4% per year compared to 8.6% per year.
• And, 50% of the State’s OTF investment to date (through December 2008) has been repaid through tax receipts. The original investment, now projected to be $1.35 billion, is forecast to be fully repaid by 2014.

Most importantly for JumpStart and the entrepreneurs across Northeast Ohio and the State, OTF provides the opportunity for future potential critical resources which will leverage significant non-state resources for both direct investments into companies and for additional resources that may support the work of all of the Edison incubators in the region. The incubators include the Akron Global Business Accelerator, BioEnterprise, Braintree in Mansfield, GLIDE in Elyria, MAGNET, and the Youngstown Business Incubator, in addition to our local research-focused Universities and innovative established companies in the state.

Please read more about Issue 1 and please join everyone at JumpStart to help accelerate the progress of innovative companies in Ohio!

In the above blog, Ray is expressing his personal views as a citizen of the State of Ohio.

Ray Leach is CEO of JumpStart and brings his energy and leadership experiences from founding five high growth entrepreneurial and intrapreneurial endeavors in the last 20 years. Ray is a Sloan Fellow and earned an MBA from the MIT Sloan School of Management. He also earned a BA in Finance from the University of Akron.