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128 BUILDING THE OHIO INNOVATION ECONOMY
Panel IX
Early-Stage Finance and Entrepreneurship in Ohio
Moderator:
Lisa Delp
Ohio Department of Development
Ms. Delp said that she and her fellow panelists anticipated “the most
valuable session of the day” in addressing the essential process of early funding.
She began by saying that she manages the entrepreneurial assistance, capital
access, and incubation program of the Ohio Department of Development
(ODOD). “The collaborative nature of the organizations here is frankly
phenomenal. We encourage that at ODOD, certainly with the Entrepreneurial
Signature Program (ESP). In fact, in some parts of the state, we held what we
referred to as ‘shotgun weddings’ to make sure everyone played nicely
together.” That, she added, was not necessary in northeast Ohio, where
partnerships have already formed.
MAKING OHIO A PLACE TO ‘LAUNCH, BUILD,
AND GROW YOUR BUSINESS’
The broader goal of the Third Frontier program, which falls under the
ODOD, is to build the innovation ecosystem in Ohio, including early-stage
activities and early-stage funding. The Entrepreneurial Signature Programs in
northeast Ohio are represented primarily by Jumpstart. The ESP programs are
designed to help entrepreneurs by offering support packaging them for later
stage investment activities, and help preparing them to be growth-oriented
organizations that bring high value, high quality jobs, and remain focused in
their communities. This all helps to keep jobs in the state and helps build supply
chains—a “continual, aggressive, concentrated effort to make Ohio a good place
to launch, build, and grow your business,” Ms. Delp said.
The other programs she manages are the Edison Incubators, which
include the University of Toledo, the Youngstown Business Incubator, GLIDE
at the Lorain County Community College, and other organizations in and around
the state. She also manages Ohio Third Frontier supported angel capital funds,
her first role when she came to the state about three years ago. “We try to
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provide incentives for our angels to make investments in Ohio companies. We
want to make sure that all of our money stays in Ohio, so we’ve provided grant
funding to the angel capital organizations. These organizations professionally
manage funds to help the angels by providing money that matches their own
investments. So, in a sense, our angels are playing with 50-cent dollars when
they make their investments. And about 50 percent of the angel funds in the
state have received capital from the Ohio Third Frontier.”
The Innovation Fund at Lorain County Community College is a good
example of that, Ms. Delp said. The fund started in the ESP program and then
moved on to start its own fund, receiving grant money from the state. Ohio also
provides a 25 percent investment tax credit from the Ohio Technology
Investment Tax Credit program when angels invest farther down the road. The
tax credit carries forward for 15 years, and does not have to be used against a
specific investment, so if the investors have a good exit at a later date, they can
use their credit to offset the profits from other investments. This further reduces
the risks and barriers for those early-stage angel investors.
STIMULATING ENTREPRENEURSHIP:
THE LORAIN COUNTY MODEL
Roy Church
Lorain County Community College
Dr. Church said that one reason for Lorain County Community
College’s deep involvement in economic development was that “Lorain County
for the last 30 years has had the highest percentage of its work force directly
involved in manufacturing of any county in northern Ohio.” In 1980, 43 percent
of the work force was in manufacturing, but today that figure has shrunk to
about 14 percent. “Our county has epitomized the transformation that has taken
place from traditional assembly line manufacturing to whatever is evolving in
the knowledge economy of the 21st century. As a community college, we have
to be responsive to the needs of the local community, and that means
rejuvenating the entrepreneurial spirit of the manufacturing economy.”
The effort began, he said, with a focus on work force development, but
it quickly became apparent that this effort was directly connected to the larger
economic development milieu. “We knew that if people were going to be able to
live in our county and enjoy the quality of life, they had to have jobs.” The
county has always had limited resources, he said, “So we knew we’d have to
learn how to partner with others and create synergies.” The college started by
forming the Great Lakes Innovation and Development Enterprise, GLIDE, as a
business incubator, in partnership with the Lorain County commissioners and
chamber of commerce. “The goal was to try to wrap good business processes
around entrepreneurs who had good product or business ideas.” The project
began in 2001, at the beginning of the recession. The first step was to go to the
Third Frontier program at the Ohio Department of Development and ask for
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130 BUILDING THE OHIO INNOVATION ECONOMY
support as an Edison technology incubator. The director of development, Bruce
Johnson, said he was then cutting funds to technology incubators, and to come
back again “when you’ve got a track record.”
Learning How to ‘Wrap a Good Business Around Their Idea’
In 2006 Dr. Church and his partners returned to share their early
success. By then the GLIDE business incubator had placed third out of twelve
then existing in the state, and Third Frontier agreed to take them on. “It really
was a teaching and learning process consistent with the role of higher
education,” he said. “We discovered that most of the entrepreneurs had great
business ideas, technology ideas, and passion for what they were doing, but they
were not trained in business. They didn’t know how to wrap a good business
around their idea and breathe life into it.”
Since 2001, GLIDE has worked with more than 1,900 entrepreneurs and
incubated 65 companies, about 45 of them on the Lorain campus and the others
“virtually” in the community. “The exciting news is that 62 or those 65 are still
in business.”
However, Dr. Church found that most of the young companies ran into
the Valley of Death as soon as they had exhausted friends and family, second
mortgages, and credit cards. “We knew we had to figure out a way to bring in
some pre-seed capital that would enable them to move their ideas to market.”
The team assembled by GLIDE came up with the notion of using the foundation
to raise some funds philanthropically that could then be invested at that earliest
stage.
Using Philanthropy to Support Business
Here they encountered a legal roadblock. “We knew that if we were
going to use philanthropic dollars, the IRS would have to agree that the donation
was tax deductible—even though invested in a private business. It took us three
and a half years and five IRS reviewers, but we won. We have the only private
letter ruling in the country allowing those contributions to be tax deductible, and
for us to invest them in private enterprise.” The IRS ruled in 2006 that a “public
good” was served if the entrepreneur receiving the award provided one or more
students with a work-based learning experience. This brought a “triple win”—
for the college in gaining educational value, for the community in building a
business, and for the entrepreneur in reducing financial risk.
Dr. Church realized, however, that if the fund were going to be
successful, it would need to draw great ideas from across northeast Ohio. Rather
than restricting it to Lorain County, it now serves 21 counties. A first natural
step was for form alliances with other educational partners. The first was the
University of Akron. The two institutions began to raise funds together to
provide matching dollars and bring eligibility for the Ohio Third Frontier pre-
seed funds. They added Youngstown State University, and have now added
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Cleveland State University, NEOUCOM,18 and Stark State College as partners.
“So this is in fact a partnership of the state, higher education, and business,
utilizing philanthropic dollars to drive that earliest pre-seed investment.”
He said that GLIDE makes investments at two levels: $25,000 for the
“imagining stage,” to help finish the research, build a prototype, or prove a
concept, and $100,000 to mature the business, which must be matched 1:1 by
the entrepreneur. And the entrepreneur must agree to replenish the fund after
five years. “Our notion was to create something that is sustainable,” he said,
“certainly for a decade or more.”
Success of the Innovation Fund
With state funding and favorable tax status now secured, the Innovation
Fund was rechristened the Ohio Innovation Fund and officially launched in July
2007. Since then, the Innovation Fund has received almost 4,000 on-line
inquiries, and 424 completed applications—including a business plan, financial
figures, and a rigorous due diligence process staffed by volunteer entrepreneurs.
It has made 71 awards to 60 companies, each of $300,000 or more, totaling $4.3
million. Applications have come from 17 of the 21 counties, “so it truly is a
regional fund.” These come from professors, students, and citizens from the
community. “We provide the support and just a little funding to get them
started.”
Dr. Church added that “the most exciting aspect part to me is the return
on investment. If you look at the performance metrics required by Third
Frontier, and add follow-on investments, earnings, other kinds of investments,
we’ve experienced an 11 times return on investment.” The $3.8 million invested
by the end of September 2010, he said, drew $42 million in follow-on
investments. “So this is a good indication that these companies are going to be
successful, launch, and move forward. The whole notion behind the Innovation
Fund was to help reinvent and rejuvenate the entrepreneurial spirit of northeast
Ohio.”
ANGEL INVESTING: THE ARCHANGEL EXPERIENCE
Barry Rosenbaum
The University of Akron Research Foundation
Dr. Rosenbaum said he had come to Akron in 1990 as vice-president
for technology of a joint venture between Exxon and Monsanto, and finally he
had the opportunity to “learn to be an entrepreneur.” For the last five years he
had worked with the University of Akron Research Foundation, helping small
businesses. “My passion in life,” he said, “is to engage higher education in the
18
Northeast Ohio Universities and Colleges of Medicine and Pharmacy.
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132 BUILDING THE OHIO INNOVATION ECONOMY
TBED19 ecosystem, and to take the Akron model and spread it not only in
northeast Ohio, but across the U.S., and even in a venture we’re developing with
the University of Le Mans in France.”
The priorities of the University of Akron strategy, he said, are not only
excellent student education and world class research, but also societal impact—a
concept accentuated by Dr. Proenza. This concept includes fostering innovation
and entrepreneurship, engaging in regional economic development, and
providing leadership and assistance in technology commercialization.
Dr. Rosenbaum said that his office is dedicated to excellence in
technology transfer and commercialization of research; outperforming national
benchmarks for the number of startup companies; partnering with industry to
create jobs and increase business profitability; and strategic partnerships with
industry, government, other educational institutions, and the VC community.
“My point is,” he said, “that the ARCHAngel experience is a natural part of the
strategy of the University of Akron and its Akron model.”
He noted that Dr. Proenza highlighted the University of Akron
Research Foundation, which has the responsibility of managing the intellectual
property of the University of Akron. “But it’s not about the University of
Akron,” he said, “it’s about the community, about northeast Ohio, about the
state of Ohio. So we get involved in translating intellectual property into real
products across the community.”
Creating Networks to Leverage Market-ready Technology
The ARCHAngel network was formed in 2005 as an angel network.
“To get it started,” Dr. Rosenbaum said, “we gathered the Rolodexes of some of
the people in this room and brought together about 30 accredited investors from
the greater Akron community.” The network was sponsored by the University of
Akron Research Foundation, and the initial leaders were Baiju Shah of
BioEnterprise and Ray Leach from Jumpstart. “The vision that we had was to
create wealth in the northeast Ohio community. The strategy was to create
intimate networks and partnerships among universities, industry, the business
leadership and regional government, and to leverage leading-edge market-ready
technologies. We wanted the ARCHAngel experience to be primarily market-
driven.”
At the outset there were 30 investors, and the initial vision was “rather
conventional.” After conversations with Dr. George Newkome of the University
of Akron, its role has expanded and changed. The membership has grown to
about 550 people who are primarily business leaders and service providers from
all sectors of the community. About 20 percent are accredited investors, “but
money is not the goal of what is required to create that ecosystem for
entrepreneurs to be successful,” he said. “We ask three or four companies to
present at our quarterly network meetings, along with a keynote speaker. We
19
Technology-based economic development.
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invite active core of mentors and service providers to startup companies. Many
members are people in the community who want to give back, to help the
entrepreneurs, who want to provide the services and support. So the network
substitutes invaluable service, mentorship, and support for just financial aid.”
The network is also strongly allied with the Lorain County Innovation Program.
Most of the companies presented at the regular meetings are technology-based
companies in the area which are supported by the Ohio Third Frontier; those
companies, in turn, tend to advance to the Lorain County Innovation Fund and
often to “pre-Jumpstart.”
A Strong Interest From Students
An interesting development of ARCHAngel is the strong interest it has
drawn from students. About 125 people attend the quarterly meetings, and of
those typically about 50 are students from across northeast Ohio. “The
educational experience these students get is quite important,” Dr. Rosenbaum
said. “We’ve even spun off a student venture fund which is now expanding
beyond the University of Akron into northeast Ohio.”
ARCHAngel is strongly allied with the Austen Bioinnovation Institute,
the Akron Global Business Accelerator, and GLIDE in Lorain County.
ARCHAngels has become syndicated with all the angel groups in Ohio “because
we want to strengthen the role of universities as participants in the ecosystem.
That includes supporting early-stage companies. We’ve become an advocate for
university engagement in SBIR and STTR programs, trying to get universities
more involved with SBIR companies. We also work with the educational
foundation of the Angel Capital Association to develop tools for improving
education across the boundary between angel investors and tech transfer
offices.”
Leaders Who Give Back
Most of those who have worked for the ARCHAngels, he noted, have
done so pro bono. Many of them are community leaders who want to give back
to future entrepreneurs and innovators. The network has engaged about 65
companies in its five years of existence, and generated an estimated $80 million
in follow-on funding. “This is not surprising,” he said, “because a lot of those
companies moving through the ecosystem are supported by Jumpstart in the
region and by the Third Frontier in the state.”
Dr. Rosenbaum offered several conclusions from his experience to
date. “The most important,” he said, “is that research universities can be
strategically vital to regional economic development. Some do this better than
others, and we are fortunate to have some of the best. Also, the culture of the
community is critical. We work hard at improving the economic development
culture in Akron. Third, the creation, attraction, and retention of entrepreneurial
talent are vital. And finally, early-stage funding will always be precious, but it’s
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134 BUILDING THE OHIO INNOVATION ECONOMY
not the only thing that drives entrepreneurship. The other is successful
community engagement in the economic development ecosystem.”
INNOVATION CAPITAL AND ENTREPRENEURSHIP IN OHIO
Ray Leach
Jumpstart
Mr. Leach began by saying that JumpStart, which was founded by
NorTech and Case Western Reserve, was “an incredibly robust and exciting
story that had help to achieve a revolution over the last decade.” The three
themes of JumpStart, he said, were Leadership, Activities, and Outcomes.
“When I came back to northeast Ohio in 2003,” he said, “a key reason
was the leadership. In philanthropy, the private sector, higher education—
everyone was organized and had the same sense that economic development was
an urgent need.” And the Third Frontier was beginning to focus on not just
providing resources for services, but also resources for capital, assisting pre-seed
and seed stage companies that typically would not be able to raise private sector
capital for another six to 24 months. So I had the good fortune of great timing.”
The Commitment and Talent of the Intermediaries
In 2002, Mr. Leach said, a total of five pre-seed stage investments were
made. “There wasn’t much going on; the region was like scorched earth.” Then
collaborators across the state demonstrated to Ohio voters the commitment and
talent of the intermediaries, NGOs, institutions, private sector, and philanthropic
community, and they approved a $500M expansion of the Ohio Third Frontier
program in 2005. “Groups had the ability to act on common interests,” he said,
“even though they did not necessarily know how they were going to execute.
But now we’ve done it, we had a vision, we executed against that vision and
then we generated not just a lot of activities—that’s easy—but a huge amount of
outcomes.”
Among the activities, he said, was an overall framework to which the
state in 2007 committed $87 million to accelerate the entrepreneurial ecosystems
in all six regions of the state. Each region identified a single leading nonprofit
entity—sometimes a university, sometimes an NGO—to coordinate
entrepreneurial development activities. That original grant, which had to be
matched by non-state funding sources and competitively scored and awarded,
propelled each region to a great start and showed that these organizations were
there not just strengthen themselves but had the mission, ability and competence
to help build out the broader innovation and entrepreneurship ecosystem—this
was especially in the case of northeast Ohio.
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Sharing Knowledge with Others
Since that set of grants in 2007, the innovation ecosystem had raised
another $50-60 million across the six regions, again through a competitive
process, that have promoted expansion of the ecosystem and helped to identify
additional market gaps and opportunities. Starting in 2004, JumpStart focused
exclusively on its own outcomes, but over the last three years it has spent more
effort and resources trying to help other organizations or funds by providing due
diligence, marketing and other back-office services at no cost. It has also
become more engaged with higher education institutions at the programmatic
level, and with a new set of incubation activities in the nonprofit and private
sectors. This kind of evolution has occurred across the state, so the level of
collaboration is high. “We meet regularly,” Mr. Leach said. “We’re excited
about the new administration’s interest in what we are doing, and in leveraging
tools in more significant ways.”
As part of this “experiment,” he said, resources from the state can be
used flexibly to “meet the regions where they are” and enable them to design
and develop their own strategies. For example, the program has been able to
take the best regional companies to Silicon Valley and other centers of capital to
encourage investors there to invest in the best of the Ohio private sector.
Feeding the Pipeline to the Private Sector
In terms of outcomes, Mr. Leach said, 2010 data from northeast Ohio
show that in greater Cleveland, an all-time high number of companies, 79, have
received investments totaling 234 million from angel and private-sector
investors and/or members of the northeast Ohio Entrepreneurial Signature
Program. Of those 79, 68 percent received capital and services from one of the
four funds in the ESP: Glengarry Ventures, North Coast Angel Fund, the Ohio
Innovation Fund, and JumpStart’s Evergreen Fund. “We anticipate, for pre-seed
and seed stage, that this percentage will exceed 85 percent starting next year. So
what we’re doing by investing in these companies that are not ready for prime
time is feeding the pipeline to the private sector.”
Of the 79 companies in northeast Ohio, he said, 57 percent were in
health care, 32 percent in IT, and 10 percent in clean tech, energy, or advanced
materials. There is also a robust pipeline in instruments, controls, and electronics
and in chemistry in the pre-seed and seed stages. In 2010, 42 of the 79 investors
were located outside Ohio. “We have an opportunity to do an even better job of
attracting capital from outside Ohio.”
Looking forward, Mr. Leach saw challenges in finding enough equity
for the financing pipeline. He said that Michael Camp of Ohio State estimated
that between now and 2018 there will be at least $500 million in seed investment
opportunities available across the state, with some 800 companies needing seed
capital. In 2010, $22 million were invested in the seed category. The universities
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136 BUILDING THE OHIO INNOVATION ECONOMY
are generating more commercialized technology, and industry is continuing to
do so, “so we have a huge amount of capital to raise, a challenge.”
Overall, he said, Dr. Camp has estimated a total need for $1.6 billion in
growth-stage capital in the state to fund about 200 companies. In the aggregate,
all these needs total some $3.5 billion, principally in private sector capital. “I am
on the board of the National Venture Capital Association,” he concluded, “and
one reason my work there is a priority is that we have to do a much better job
connecting to large amounts of risk capital, which is likely to be even more
highly concentrated on the coasts over the next 10 years.”
DISCUSSION
A questioner closed the discussion on capital needs by urging a more
ambitious target of $5 billion and greater participation of Ohio pension funds.
He said that this amount would constitute only 5 percent of the holdings of those
funds, and would constitute an appropriate and patriotic use of Ohio resources.
“It’s not too much to ask that we invest in ourselves,” he said, “because if we
don’t do that, certainly no one else is going to do it.”
Bringing the symposium to a close, Dr. Wessner once again thanked
Dr. Mary Good for her leadership of the National Academies study of State and
Regional Innovation Policies, thanked the sponsors for their support, and
thanked the participants and audience for what he deemed a very informative
and successful meeting.
