JumpStart: IdeaExchange Blog

In late 2004, Lynn-Ann and I sat with our computers one night at a cafe at Cedar-Lee and put together a five year projection of how much additional capital the companies JumpStart would invest in might be able to raise. The first year showed $3 million. The second showed $6 million. We had benchmarked against Innovation Works in Pittsburgh, a phenomenally successful venture development organization; we would try to use their success ratios for our projections; no sandbagging. The third year showed $15 million. Year four showed $20 million. And year five showed $30 million. These numbers (totaling $74 million*) seemed huge at the time, especially since we projected that 25-50% of the companies we invested in would likely fail; it’s inherent to Imagining, Incubating and, to a lesser extent, Demonstrating stage investing. As we sat at our computers that night, JumpStart had only invested ~$300 thousand in two companies, Stanton Advanced Ceramics and PreEmptive Solutions. 

Suffice it to say, $100 million seemed light years away.

About three weeks ago, the companies in JumpStart Ventures’ portfolio officially surpassed the $100 million in capital raised mark (almost $103 million to be precise, or nearly 7 times the $15.7 million we have invested in 45 companies). By the numbers, 32 of the portfolio companies have raised follow-on capital over 127 fundraising rounds, with the average total amount raised by those 32 companies being $3.2 million and ranging from $50 thousand to $20 million, and the median timeline from our investment to next investment being 15 months (and trending downwards). Twenty-three companies raised over $1 million dollars. Cleantech companies have slightly edged out Healthcare companies, with the former totaling $41 million in follow-on funding raised, and the latter at $39 million. Phycal and Echogen (fka rexorce) have led the charge in Cleantech, and in Healthcare, Juventas, CardioInsight, and Synapse Biomedical have also raised significant capital. By type of investor, venture capital investors have carried the day, with angel investors close behind; grant funders (especially from the federal government) rose as a percent in 2010, but we expect that to even back out in 2011. Also, $100 million represents about 10% of the total amount raised in the Northeast Ohio region over the past five years of $1.1 billion.**

That’s the numbers, but as we all know, this is not about “companies” raising “capital”: too cut and dry sounding in so many ways. It is human beings, namely Northeast Ohio entrepreneurs, telling a story about innovation and how that innovation will somehow make the world a better place. And these entrepreneurs being resourceful enough to find people with money who happen to love their particular story – whether these people are former entrepreneurs turned angel investors, associates at investment funds, or even sometimes government officials who provide grants. Sure, while it’s not really “companies” and “capital” and various takes on the numbers, it is also no love story. Anyone who’s raised money knows that it is due diligence, term sheets, a whole lotta elbow grease, and, eventually, return on investment. It’s about taking something that is a science project and turning it into a product that customers want, which, if the revenues at our portfolio companies are any indication, is happening consistently, with ever more customers buying what these portfolio companies are offering.

$100 million is more than a number. That’s the point. So, regardless of which number or ratio holds meaning to you, here’s to the entrepreneurs who lead the companies in the portfolio and to whom “capital efficiency” is way more than a buzz word: Andrew, Arnon, Bill, Bob (3 of them actually), Brad, Brian, Chad, Chris, Craig, Dan, Dana, Dave, David, Dean, Elliot, Ethan, Fred, Gabe, Jay, Jeff, Jeeva, Jim (2), Jodi, Jon, Karl-Heinz, Ken, Kevin, Krzysztof, Lance, Laura, Len, Mark, Mike, Nick, Phil, Rahul, Scott, Steve (2), Sue, Tony (3), and Wendell. And here’s to the hundreds of investors who have put their hard-earned money behind these growth stories, from Arboretum to Charter Life Sciences, from Draper Triangle to Early Stage Partners, from North Coast Angel Fund to Ohio TechAngels, and from the Ohio Department of Development to the U.S. Department of Defense.   

Now before year’s end, the JumpStart Ventures team will sit and project out the path to $1 billion for JumpStart Ventures portfolio companies. It’ll feel like as much of a SWAG as $100 million did five years ago. But at least now that path has faces, names, relationships and the other things that make a spreadsheet more than a spreadsheet: they make it an ecosystem.***

Notes:

* These numbers then increased by about 25% because we increased our investing budget from $3 million per year to $3.75 million per year, hence giving us the $100 million number.

** This is a slight apples to oranges comparison since our follow-on funding numbers include some grant funding and the overall region’s numbers include angel and venture capital only.

*** Thanks to Kerri Breen who took the spreadsheet I referenced at the beginning of the post and who has not only successfully supported many entrepreneurs on their fundraising efforts but also runs the numbers like it’s nobody’s business.

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.

Albert Einstein once said “If, at first, the idea is not absurd, then there is no hope for it.” Here is my list of the top ten most absurd and hopeless ideas I have heard about in my lifetime:

1. Coffee shops? The world hardly needs more coffee shops. Plus, coffee shops don’t scale.
2. A Maine-based line of natural products that are made with bees wax? Last time I checked, the “bee” supply chain wasn’t that scalable.
3. Overpriced, finely made historically accurate dolls that will teach children about history? Seriously? I don’t even know where to go with that.
4. An algorithm that will improve upon Yahoo’s web search technology? Fatal flaw: why couldn’t Yahoo just do that themselves?
5. Packages overnight? The infrastructure required to make that happen is prohibitively expensive. Nice idea, but too much capital risk.
6. Growing a technology business in Seattle? Cow town, and too far away at that: investors want to be able to drive no more than four hours from their home. Plus, there’s no entrepreneurial talent in Seattle.
7. You want to trade collectibles and knick-knacks on the web? That’s maybe, like, a $1,000 market on a good day.
8. Your children have an “orphan disease” for which you want to find a cure? OK, so what don’t you understand about the healthcare industry(?): orphan diseases are unfundable.
9. Sell books on the Internet? People want the experience of touching books, opening the covers, being in a bookstore. Sorry, but the need just is not there.
10. You don’t want to develop computers but you do want to (basically) assemble them? There’s nothing novel or even very protectable about that. If you had invented a new microprocessor or something, I might be interested. But just putting the boxes together isn’t going to generate sustainable gross margins.

These are unassailably awful ideas. Every one of them. Laughable almost. I wonder what the poorly thought-out, misguided, ill advised…OK, can we all just agree to call them patently absurd?…ideas of the next decade will be:

• Making cost competitive oil out of algae (been there, tried that; plus, the whole algae industry is too capital intensive, don’t you know)?
• Competing with Google (ok, can you say naïve)?
• Starting a great company in Cleveland (too cold; no talent — seriously: none, anywhere in the entire state in fact)?

I confess that I do not know. But, I have the time of my life working with entrepreneurs trying to figure it out.

(So, the terrible ideas listed above are examples so well known to most Americans — never mind you fair, brilliant readers steeped in innovation history and always seeking contrarian ideas — that they are almost trite. But, to my mind, they bear repeating because they remain stalwart, iconic reminders of how visions and dreams become great companies in spite of a slew of reasonable obstacles and well reasoned protests. In case you didn’t recognize one or two, here they are:

1. Starbucks, founded in 1971 and a market cap of $17.2 billion today
2. Burts Bees, acquired by Clorox for $913 million in 2007
3. American Girl, founded in 1986 and acquired by Mattel Inc. for $700 million 1998
4. Google, founded in 1998 and a market cap of $184 billion today
5. FedEx, founded in 1971 and a market cap of $27 billion today
6. Microsoft, founded in 1975 and worth $274 billion today
7. eBay, founded in 1995 and a market cap of $29 billion today
8. Novazyme, acquired by Genzyme for $225 million in 2001; see Extraordinary Measures, which came out last week
9. Amazon, founded in 1994 and a market cap of $55 billion today
10. Dell Computers, founded in 1984 and a market cap of $28 billion today

Also, it should be noted that angel and/or venture capital investors believed in and invested in almost all of these companies. Each entrepreneur in question was able to get someone, and in some cases numerous someones, to believe in and put money behind the entrepreneur’s harebrained, crackpot — and I mean that with all due respect — idea.)

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.

When entrepreneurs are frustrated with the terms they are offered by investors, they should find other investors who will invest on better terms. Simple, right? Not so much. In many cases, entrepreneurs are already locked into an exclusivity clause, at which point it is indeed advisable (from a legal standpoint, if nothing else) that they do not go find other investors. The “Exclusivity” clause of a term sheet is a common clause, and though some investors abuse the clause, using it to lock in an eager, cash-low entrepreneur (too) early, the vast majority use it properly: they do as much due diligence as possible before issuing the term sheet, and then issue the term sheet only when they are prepared to go into a brief (4-6 weeks) period of legal documentation. At this point, the legal costs begin and the investor wants to make sure the entrepreneur is motivated to get the investment closed quickly. The time to court other investors is over.

Entrepreneurs should realize that investors issuing the term sheet not early but rather towards the middle or end of due diligence is a good thing; it is not intended to string out the entrepreneur. It allows the entrepreneur to continue seeking other investors until one firm is truly ready to commit, and therefore allows the entrepreneur to try to “create a market for their securities” (which theoretically increases the price of the deal). To play this dynamic right, though, entrepreneurs should try to get as many investors as possible interested in their company, get from the investors the likely terms (without formally getting a term sheet), and then get a term sheet only when the entrepreneur is very comfortable with what the terms are likely to be. By the way, I think investors who do not require exclusivity in a term sheet are wise and brave: my compliments. I like to think that if I were an early-stage, for-profit investor, this is what I would do, but I understand all the upsides and downsides of this non-standard path. (JumpStart Ventures’ term sheet is non-exclusive, btw).

In one instance I have done the opposite of this advice, and that was in a case where, as an existing investor, I very quickly needed the physical proof of a signed term sheet to show other existing investors that new investors did indeed want to invest in the company in question. Speed was required, and I advised an entrepreneur to sign an exclusive term sheet very early in the game with virtually no due diligence completed. Long story short: while not perfect, this tactic did do the job. (Playing soon in theatres near you…Coming to Terms: War Stories from Cleveland’s Economic Development Jungle, directed by Quentin Tarantino and starring Angelina Jolie and Ralph Fiennes).

So, in summary, try to avoid an exclusivity clause in your term sheet, but since these are not unusual, just try to optimize the timing of getting the term sheet issued (they usually expire if not signed within a week, so you don’t even want it issued, never mind signed, too early). Work it out so the term sheet is mutually signed as late as possible and when you really want to lock into one investor. Before signing, ask the investor what the average timeline is from term sheet to close. Ask them when they’ve seen it extend and why. If an investor is pushing you to sign way earlier, without giving any signs of likely terms and without having done much due diligence, I’d suggest moving on. Unless you have no cash, in which case the terms are the terms are the terms.

Finally, though it’s cold comfort in the heat of a deal, remember that you don’t have to take a term sheet at all. It’s a free country, and it is your decision to start a company that doesn’t get money the traditional way (i.e., through customers, bank loan, etc) and that must use a statistically rare type of capital — OPM* — to become successful.**

(Here is one good resource on the exclusivity clause in a term sheet – venture capital for the serious entrepreneur).

* “Other Peoples’ Money”

** Attention Scriptwriters: please punch up this killer last line so that it’s in the voice of Angelina. She wouldn’t say “statistically rare type of capital”. Or maybe she would; she’d just be wearing a cat suit and carrying an Uzi as she said it. 

National Awards. Global Product Launches. Lifesaving Products. New Investments. Here’s a rundown of some progress in the JumpStart Ventures portfolio in just the past week or two:

• BusinessWeek named two JumpStart Ventures portfolio companies — Phycal and Freedom Meditech – to its inaugural list of the Top 25 Most Intriguing Startup Companies in the World. I really like that Phycal founder and CEO, Kevin Berner, is not only commercializing a technology (its lipid extraction process is projected to make algae an economical biofuel), but he also is building an enduring company. From day one, he has built into the company culture certain values based on his experiences and life beliefs, values such as discipline, charity, and intelligence.
• Microsoft featured PreEmptive Solutions in two separate keynotes on two continents (in Berlin and Las Vegas) as part of the launch of PreEmptive’s Runtime Intelligence Service (RIS), a cloud-based service that monitors application usage and user behavior. RIS has the distinction of being the only part of Visual Studio not written by Microsoft. Given this powerful, unique “in-the-box” position, I think RIS’s global product launch could take PreEmptive, which is already profitable and growing, to a whole new level as a leading company in the application lifecycle management industry.
• China suffered a mining tragedy over the weekend and in China alone, 3,000 miners have died this year in mining accidents. Our portfolio company, InSet Systems, has a technology that helps find miners within ten feet instead of within 500 or so feet (which is the approximate accuracy of existing technologies). Noting that it could save many lives in a very dangerous industry, Popular Science magazine, in 2008, named InSet’s inertial tracking and wireless communications technology “one of the Top 10 technologies” of the year. The InSet system will be ready for pilot installation in a working mine in a few weeks; the company has a software development partnership with the renowned Draper Labs as well as a distributor relationship in the Far East; and the company needs angel investment to get to the next steps. I hope the early-stage capital markets will support this company so that it can get this product to market and save lives.
• We made a new investment in Checkpoint Surgical which has developed a neuromuscular locator/stimulator. Checkpoint is a spin-out from NDI Medical, which was founded in 2002 by Geoff Thrope. NDI spun out its MEDSTIM bladder pacing system technology a few years ago and shortly thereafter the product line was acquired by Medtronic, which provided a nice “early exit” to the NDI team and others. The excellent Checkpoint team, led by CEO, Len Cosentino (former VP of Business Development at NDI), and Chairman, Geoff Thrope, is well positioned to do a repeat of  MEDSTIM: develop a differentiated product, build a good company, forge strong partnerships, and get acquired. Easy, right?

About as easy as sailing across the Atlantic on a cargo ship and arriving in unfamiliar territory at the start of winter. And on that note, I wish these entrepreneurs and all the metaphoric pilgrims of the North Coast technology scene (OK, I know that brand-wise I’m supposed to say “Northeast Ohio” not “North Coast”, but go with me here: my literary side is trying to get a coastal angle on this pilgrim thing) a happy Thanksgiving!

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.