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.

Any entrepreneur looking to grow their business is always thinking (or should be) about how to improve their investor pitch. Once you have an opportunity to get in front of an investor, you want to do everything you can to make your pitch successful. I offered some tips I’ve learned during my years coaching entrepreneurs in my post, ‘Things NOT to Do When Presenting to Potential Investors‘. Last week, a fellow blogger, Timothy Hay posted ‘Entrepreneurs’ Most Common Mistakes When Pitching VCs‘, offering some great builds on the ideas I’d shared.

Some of the key mistakes he shares, and my thoughts on each:

1. Not at least considering the potential of taking your company public someday. - Although IPOs are about as common as Browns playoff appearances these days, shaping your company so that it could conceivably go public is a great way to ensure that you are touching all the bases and thinking big enough. And… you never know… the Browns might make the playoffs, and you could be a candidate for an IPO.

2. Being overconfident. - If you remember, I said in my post that ‘Not Bragging’ is a mistake. You DO need to be confident, knowledgeable and sell yourself and your team. You shouldn’t be overconfident, and act like you have all the answers, however — the VC knows that you don’t. And besides, VCs have big egos — if anyone has all the answers, it will be them! Be sure to be willing to say that you “don’t know” or that you are “unsure” to certain questions, while accepting suggestions from the investors — they have seen a lot of companies, and have a lot of knowledge to bring to the table. The trick is to be thought of as “confident”, but not “overconfident”.

3. Never being audited. - This is directly related to my mention of having your detailed financials prepared - and going a step further to have them audited. This shows potential investors that someone else has validated your books, and mitigates their risk and questions in this area. Despite that, do NOT put the detailed financials into your investor presentation — they don’t care at that point. When I was raising money for my company, Ion Optics, we handed interested investors a CD that had all of our slides, our more detailed business plan, audited financials, articles on the company and technology, and other tidbits. This showed attention to detail, and made the investor’s life a little easier.

Read Timothy’s full post - and share your questions and additions so we can continue to share the knowledge gained through our collective experiences.

Chris Mather is the President of JumpStart TechLift Advisors. Previously, he managed a number of technology initiatives in Northeast Ohio for NorTech. Before entering the economic development world, Chris ran a number of technology companies in Northeast Ohio and New England, including Ion Optics Inc., where he raised $6.7 million in venture capital, and Apsco Inc. and Gould Instrument Systems. Prior to that, he spent 13 years in sales, marketing and management roles with Hewlett Packard after graduating from Worcester Polytechnic Institute with a BS in Electrical Engineering.

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. 

Recently I was asked to give a presentation at a local Chamber of Commerce’s annual meeting on ‘What is happening in entrepreneurial development in Northeast Ohio?’. The topic made me think about what initiatives are ‘getting it done’, and some of the key organizations taking part in the transformation. With the list of such organizations being so long, this will be the first post of a series (‘Getting It Done’), taking the key points of my presentation and bringing them to life here in our blog. If you remember, I did another post on a similar subject early this year. ‘We’re building something big‘ took a 30,000 foot look at the ecosystem. ‘Getting It Done‘ will be a deep dive into some of the individual organizations behind the transformation.

Let’s start with BioEnterprise and JumpStart Ventures, organizations that have played pivotal and nationally visible roles in our entrepreneurial ecosystem. 

BioEnterprise

BioEnterpise came onto the scene in 2002, and has led Northeast Ohio’s surge in the Healthcare space.

How it works: BioEnterprise has made itself a national leader for regional healthcare industry development, and has been a coalescing force in making Northeast Ohio a recognized hub for healthcare entrepreneurship and activity. They give extremely strong support for select, high potential healthcare startups from industry experts who have done it before. BioE connects these select companies with investors across the nation interested in healthcare investing. 

Results: The results have been impressive. BioE has been involved with creating, recruiting, and accelerating over 80 companies, evaluated over 1,100 opportunities and more than 1,900 invention disclosures, and brokered over 300 technology transfer deals. However, the best measure of BioE’s success is in the new capital brought into Northeast Ohio, which includes nearly $150 million in technology transfer revenues, and over $860 million of new capital attracted in the healthcare sector. 

Why it works: BioE has made itself a huge piece of the Northeast Ohio entrepreneurial ecosystem. Baiju Shah and his team have been able to create a huge “buzz” around Northeast Ohio as a healthcare destination and center for medical device development, and coalescing the strengths represented by the Cleveland Clinic, University Hospitals, the top-ranked biomedical engineering department at Case, the Summa health system and others. They have hired top talent to provide support for their companies, and have developed a reputation and relationship with venture capital funders throughout the U.S.

JumpStart Ventures

JumpStart Ventures is JumpStart Inc.’s (started in 2004) line of business investing in, partnering with, and accelerating the growth of early-stage companies. 

How it works: JumpStart Ventures employs a highly selective process to choose companies for investment, and strictly adheres to the process to achieve fairness and consistency. Unlike traditional funders, they actually help companies selected to present to them through a process called ASSIST. After investment, JumpStart Ventures companies receive significant operational support from a Venture Partner (as much as 20% of an experienced executive’s time), as well as direct help in raising the all-important next round of funding.

Results: JumpStart Ventures is primarily measured by follow-on capital raised by its portfolio companies, and the results are outstanding from the more than 40 companies in the portfolio. Since 2004, these companies have raised over $80 million in follow-on funding and generated an estimated $180 million in regional economic impact. Additionally, JumpStart has been recognized by the U.S. Economic Development Agency as the nation’s top urban or suburban economic development group, and has been featured in national press like The New York Times, The Wall Street Journal and PARADE magazine. 

Why it works: JumpStart Ventures works by primarily providing funding to early-stage companies at the time when they most need it — when they are in the proverbial “Valley of Death”. Beyond that, the operational support and connections to next level funders afforded to portfolio companies is top-notch and significant. JumpStart Ventures has taken a very process oriented approach to company selection and to other aspects of the successful entrepreneurial mix, making it understandable and repeatable. Like BioEnterprise, JumpStart Ventures has created and accelerated a “buzz” around Northeast Ohio as a place where things are happening in early-stage entrepreneurship.  

Next in the series: JumpStart TechLift Advisors and JumpStart Inclusion Advisors

Chris Mather is the President of JumpStart TechLift Advisors. Previously, he managed a number of technology initiatives in Northeast Ohio for NorTech. Before entering the economic development world, Chris ran a number of technology companies in Northeast Ohio and New England, including Ion Optics Inc., where he raised $6.7 million in venture capital, and Apsco Inc. and Gould Instrument Systems. Prior to that, he spent 13 years in sales, marketing and management roles with Hewlett Packard after graduating from Worcester Polytechnic Institute with a BS in Electrical Engineering.