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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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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PROCEEDINGS 129 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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PROCEEDINGS 131 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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PROCEEDINGS 133 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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PROCEEDINGS 135 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.