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.

The Burton D. Morgan Foundation in Hudson has an incredible asset: a Norman Rockwell print called “High Dive”. As you can see, it’s a boy leaning over the edge of the diving board, scared to jump into the pool. As Deb Hoover (President of the Foundation) told me, Steven Spielberg has the original and takes a look at it prior to starting each movie; the Foundation thinks it’s a great example of how many of us feel prior to taking a risk.

Last week, I had the chance to participate in a meeting of the JumpStart Higher Education Collaboration Council, held at the Foundation’s offices. This Council was formed in the fall of 2009 with the express purpose of increasing the connection between JumpStart and members of higher education communities across Northeast Ohio, including university, community college, liberal arts college, and technical college constituents. In addition, for me, it was a chance to immerse myself more with this thriving, dynamic set of leaders, who represent constituencies equal in size to 50% of Cuyahoga County’s residents.

While we are still in the process of pulling together both our agenda and our marketing communication approach (more to come on that in future months), I was 100% energized by what seemed obvious to me:

There is no better regional higher education network for supporting student entrepreneurs, in the country. Period.

(Perhaps that’s why the region’s Entrepreneurship Education Consortium — a group of just nine of the higher education institutions in the region — recently won the 2010 National Outstanding Entrepreneurship Pedagogy Award from the U.S. Association for Small Business and Entrepreneurship. The national award, which has always gone before to just one university, recognizes innovative teaching in the field of entrepreneurship.)

So students (and that means undergrads, graduate students, adult students, high school students, students of life), we want you! Learn more about high growth entrepreneurship. Test the waters with an idea through a business plan competition (check out IdeaLabs (info coming soon) and LaunchTown) or just devoting some time to an idea. Jump in to the myriad of opportunities across the region to learn more about starting up a company at the higher education institutions. Learn more about how JumpStart can support you by signing up to receive our email communications or reading the website. Jump off the high board. The region’s assets will help you swim.

Cathy Belk is the Chief Marketing Officer of JumpStart. She specializes in branding, marketing communications, and business management. She brings 16+ years of experience in a variety of marketing and business roles, but gets her energy from working daily with entrepreneurs and their growing companies.

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.

Why don’t more minority entrepreneurs, particularly African American and Hispanic entrepreneurs, attend the array of technology based workshops, seminars, and events throughout the region, or join more of the organizations focused on emerging industries and technologies? While this is somewhat of a rhetorical question given that I’m not completely unaware of why this phenomenon exists, I pose the question nonetheless as I believe the variety of responses to this question can inform some larger strategies around inclusion for our region, state and nation. JumpStart recently put on a groundbreaking event in collaboration with a host of regional and national diverse partners entitled – Transforming the Landscape of Business In America: A Minority Business Early-Stage Capital Summit, which attracted over 250 diverse entrepreneurs, investors and stakeholders to a world class event focused on preparing more minority entrepreneurs for high growth ventures that are likely to attract angel investment and venture capital. We had a terrific mix of ethnicities, genders, and backgrounds present for the event, which got me thinking about why this rich diversity doesn’t take place on a more regular basis. A few thoughts came to mind:

• Minority leaders must create a sense of urgency around the need to get involved in the industries and opportunities of the future.
• Event planners and tech-based organizations must jointly promote their events and activities with media partners that cater to unique audiences.
• Guest speakers, panelists, or participating members must consist of and represent the diversity that exists within the community.
• The messaging as to “who should attend” must speak directly to the variety of “pain points” that different audiences are experiencing or are likely to experience if they fail to act.
• Minority entrepreneurs and stakeholders must be far more proactive in seeking out and attending events or joining organizations that are not necessarily “minority focused” but address universal issues and challenges that impact all constituents.

While the above list is by no means all inclusive, and each point could easily consume volumes of information on its own, I’d like to pay particular attention to the final point which basically places the responsibility on each individual to simply get involved. 

Ultimately you are responsible for you –- period. To the extent that you recognize that learning is continuous, and we all must continue to broaden our skills, competencies and relationships, I urge those of you who have not historically been proactive in joining associations or attending events focused on emerging industries, technologies, and strategies to do so at your earliest opportunity. To assist you in this effort, please refer to JumpStart’s event postings frequently for upcoming events taking place throughout the 21 counties of Northeast Ohio, and beyond.

I also urge event planners and “mainstream” associations and organizations to rethink your promotional campaigns to ensure your partners, messaging, and strategies are as diverse as the communities that you serve.

Collectively we can truly make a difference in better engaging more of our diverse community. 

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.