A little more than a decade ago, our community was embroiled in a great chicken-or-egg argument over entrepreneurship. The enthusiasts claimed the region had amazing, latent entrepreneurial prospects and all that was needed to unlock them was sufficient, local early-stage capital. The skeptics (you know who you are) countered that capital wasn’t the issue. Northeast Ohio simply lacked attractive investment opportunities. Show me the nine-figure opportunity I missed, they would say. Leave town was the best advice you could give to an entrepreneur at the time.
Guess what? It turns out it was the chicken after all. In bold leaps of faith across many institutions and individuals, the community expanded local pools of entrepreneurial capital. The state launched the Third Frontier Program, the Ohio Capital Fund and an aggressive Entrepreneurial Signature Program; foundations and other endowment institutions dedicated a portion of their balance sheets for locally directed investment; hospitals and universities carved out budget allocations for commercialization funds; banks supported local venture capital; and high-net worth individuals formed angel networks. That capital infusion led to the formation of local venture and angel funds and the attraction of venture firms from out of state.
The result was an explosion of entrepreneurial activity that is reshaping our economy. Want your proof points? They are coming in quick succession: Think Brandmuscle, TOA Technologies, Simbionix, CoverMyMeds, Explorys, Catacel, ViewRay, Blue Spark Technologies, CardioInsight, OrthoHelix Surgical Designs and UrbanCode, among others.
Indeed, venture investments in the region more than tripled to nearly $350 million from 2004 to 2014 according to the Northeast Ohio Venture Capital Report. And using venture capital as a proxy, the number of companies receiving funding has steadily climbed over the last decade by a factor of 2.5 times. So what is the advice to a budding entrepreneur these days? Build it here.
All of this support changes the complexion of our economy and ultimately leads to jobs. Average incomes in Northeast Ohio are just over $47,000, but the average incomes of companies supported by the Fund for Our Economic Future’s entrepreneurship grantees is greater than $61,000. A recent economic analysis of local venture firm Early Stage Partners found that its first two funds have led to an annual $38 million in Ohio-based payroll and resulted in more than $400 million of positive economic impact during the past 10 years.
So we can declare victory and move on? Not so fast. Our community and its investors need to step up again. Northeast Ohio has a rich and growing pipeline of opportunity, but we face an ominous local capital gap. VentureOhio, a statewide venture capital trade association, estimated in a 2014 report that Ohio needs at least $392 million in early-stage capital just to fund the investable opportunities that already exist, and that gap falls especially hard on Northeast Ohio.
One might ask how such a situation can exist, given all of the previous decade’s successes. Like so many things in life, the situation is not as simple as it initially appears. First, it is important to note that while capital for later rounds of company investment can flow from anywhere in the United States and beyond, early dollars — known as seed and Series A — tend to be local. Unfortunately, some of the critical local sources of capital have diminished. Financial reforms now limit the ability of banks to invest in venture funds. The state’s Ohio Capital Fund, whose $150 million leveraged another $700 million dollars, is now fully invested, and the state has decided not to renew funding. Local investors like foundations feel less urgency around the issue due to the time it took to get their first rounds of returns and competing programmatic priorities. This current environment threatens to choke our recent successes as fully invested local funds struggle to raise new investment and out-of-town venture firms close up shop.
Thankfully, some organizations and individuals are starting to take action. The state has committed $60 million of loan funding for early-stage investment, and Cuyahoga County has stepped up with $4.5 million in loans for venture investment. Northeast Ohio corporations and individuals have committed $7.5 million to the JumpStart NEXT Fund (Series A fund), while members of North Coast Angel Fund have recently committed another $3 million for their third seed fund and $8.5 million-plus for a new Series A fund. Additionally, some philanthropic organizations are recycling their gains from investments made in Early Stage Partners into a next round of funding. The Fund for Our Economic Future is also looking at investment options.
But we need to do more as a community. There are perhaps a dozen entities raising funding at this point. As institutions, companies and individuals, we need to support our angel and Series A funds to ensure sufficient capital to fuel employer growth.
So if you are invited to an investor presentation, please attend and listen with an open mind. If there’s one thing we’ve learned during the last decade-plus, it’s the chicken, er, capital, that will support our growth and expand our potential as a region.
What is early-stage capital?
Early-stage capital includes “seed” and “Series A” capital, both forms of venture capital. Venture capital comes in many forms and should be seen as a continuum of capital which begins with “pre-seed capital” that helps an entrepreneur do what is necessary to get off the ground. Pre-seed dollars often come from friends and families and/or nonprofits. The continuum continues into “seed” funding that provides the resources an entrepreneur needs to start operations — and extends into what some call “seed plus” that gets companies ready to grow rapidly. Seed and seed plus capital may be provided by so-called angel investors, or high-net worth individuals, a network of angels or smaller venture funds (both for-profit and nonprofit) that specialize in this area. Next comes “Series A” capital, often provided by national or regional venture funds that operate a large, diverse portfolio of investments. Series A capital often provides the capital needed for a company to transition into the rapid-growth phase of its evolution. “Series B, C and D” capital can follow before a company either is successful enough to be bought by a larger enterprise, is able to generate sufficient capital on its own to sustain its growth or sells stock to the public.