Seeds of Change

By Dennis Read
From the August 2013 issue of Columbus CEO

Last year, according to the National Venture Capital Association, Columbus ranked 41st among 85 U.S. cities in venture capital, originating nine deals worth $69.95 million.

According to Dow Jones VentureSource, venture investment for the state in 2011 was $176 million. California, with a population 3.3 times Ohio’s, amassed 96 times that amount.

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For far too long, Columbus has languished in attracting high-potential, high-risk companies. The biggest reason, industry watchers say, has been insufficient seed and startup money. Angel and venture capital dollars have been in short supply. But new faces and new money are bringing about change—and in a potentially big way.

For starters, there’s TechColumbus. The public-private partnership was established seven years ago to provide access to capital, incubator space, expert mentorship and connections to industry resources for Central Ohio startup companies in the information technology, biosciences and advanced materials industries.

CEO Tom Walker, who is just wrapping up his first year at the helm, says TechColumbus, supported with a $7.7 million grant from the Ohio Third Frontier Program, intends to distribute $40 million in seed money to startups in the Columbus region. He anticipates the investments will help establish “something north of 50 new companies.”

To move companies ahead, TechColumbus offers a robust program of support as well as a new mentors and advisors network. Ray Shealof Founders Factory, a local accelerator and angel investing group, says Walker “has the kind of experience that we need.”

Additionally, TechColumbus has hired Wayne Embree as head of investments and venture acceleration to identify and generate entrepreneurial opportunities. Embree is furthering collaboration among such community institutions as Battelle and Nationwide Children’s Hospital to create “a good breeding ground for startups,” Walker says.

Another asset is the Ohio State University Office of Technology Commercialization and Knowledge Transfer, headed since June 2012 by Brian Cummings. The office, which had a staff of only two in 2001, now has more than 20 people dedicated to finding applications for OSU research in such areas as biology, medicine, agriculture and software. Customer Assisted Start-Up Training (CAST), a 12-week program pairing an inventor and an OSU graduate student, is designed to be a business incubator. Funded entirely by the university, the technology office budget is about $3 million.

Cummings says the office has started nine companies in Central Ohio so far this year, with another three in the works before year’s end. Another 30 companies “are in our tech pipeline that have startup potential.”

Cummings notes that while free-market startups sustain a failure rate of up to 90 percent, university-generated startups have a failure rate of half that. The difference, he says, comes from the caliber of research coming from university laboratories and finding viable applications of that research.

Vic Thorne, a partner in Broadline Principle Capital, a private equity firm, sees much potential in the OSU office. “Ohio State has made a significant investment,” he says. “Brian has brought a lot of energy to the community.”

‘Venture Capital Superhighway’

Perhaps the most successful story so far belongs to Ohio TechAngels, a nearly 10-year-old investment group on the verge of launching its fourth fund, valued at $8 million. With 335 members, most from Central Ohio, it is the largest angel group in the United States. CEO John Huston says Ohio TechAngels “only invests in Ohio-based, very early-stage technology ventures. One-third of our portfolio companies are life science ventures, the rest being mainly IT ventures.”

The record of Ohio TechAngels has been impressive. Its three previous funds have raised a total of $316 million, most of which has come from venture capital groups. “Angels typically invest before venture capitalists,” Huston explains. “We’re on the on-ramp to the venture capital superhighway.”

Huston says that other funders, including 28 venture capital groups, have invested $12.60 for every $1 Ohio TechAngels has invested in its 40 portfolio companies. The 26 active portfolio firms have created 311 jobs in Ohio, generating an annual payroll of $23.1 million.

Wil Schroter, a veteran of the Ohio entrepreneurial scene who has started nine companies in the last 20 years, credits the role Huston has played. “John Huston has done more for investing in Ohio than anyone else,” Schroter says.

Another positive sign is Draper Triangle Ventures, which is based in Pittsburgh and has offices in Cleveland and Cincinnati; Draper opened a Columbus office earlier this year. Managing director Will Indest—a TechColumbus veteran—says the timing is right for Central Ohio investment. “The opportunities for new companies have really exploded in the last several years. A lot of experienced entrepreneurs who have done well over the years are getting back in the game again,” he says.

But the funding development that’s creating the most buzz is Drive Capital, still in its formative stage and headed by Mark Kvamme and Chris Olsen, who worked together at Silicon Valley’s Sequoia Capital. The venture capital firm is building a $300 million fund to invest in Ohio-based businesses. Schroter calls Kvamme, who was recruited by Gov. John Kasich in 2011 to run JobsOhio, “a gift to Columbus.” Schroter adds, “A year ago, I would never have guessed that two partners of the most influential venture capital on the planet would start a fund here. It’s damn near a game-changer for us. Great entrepreneurs will move here.”

Olsen writes in an email to Columbus CEO that U.S. Securities and Exchange Commission regulations prohibit them from talking about Drive Capital until after the firm has launched. A May 2013 monthly economic update from Columbus 2020 says they are “reaching out to limited partners” to raise the $300 million. “Based in Columbus, the firm will look for deals in the Midwest which, according to Kvamme, is often underappreciated by firms on the East and West Coasts. Drive Capital’s new fund would be one of the larger funds in the Midwest, where the average size is $54.5 million.”

Drive Capital, Draper and Ohio TechAngels augment the investing work of such established local venture capital businesses as Reservoir Venture Partners, CID and NCT Ventures. Together, industry watchers say, it all adds up to a new synergy.

In the coming months, Thorne estimates that NCT Ventures, Drive Capital, Draper and other funds will amass well beyond $300 million to invest in new companies. “I don’t think Central Ohio has ever had that much capital available before,” he says. “It will totally change the landscape of the community. Next year, when everyone is fully operating, there will be more activity than in all of the past 15 years in Central Ohio.”

‘Risk-Averse Mentality’

No doubt that would be a welcome change. Last year, according to the National Venture Capital Association, Columbus ranked 41st among 85 U.S. cities in venture capital, originating nine deals worth $69.95 million. Metropolitan Cleveland, in contrast, recorded 29 deals totaling $147.51 million. Metropolitan Cincinnati was behind Columbus, but not by much, investing $59.91 million in 18 deals. Ahead of Columbus were comparable-size cities such as Austin, Texas; Boulder, Colo.; Raleigh, N.C.; Pittsburgh; Detroit; and Nashville.

Ohio generally has not been fertile ground for venture capital investing. According to Dow Jones VentureSource, venture investment for the state in 2011 was $176 million. California, with a population 3.3 times Ohio’s, amassed 96 times that amount.

The picture would be even worse, entrepreneurs say, without state programs such as the Ohio Third Frontier and the Ohio Capital Fund. The latter was established in 2005 to provide seed money to venture capital funds; as of March, the program had invested $529 million in 66 Ohio companies employing more than 2,200 people with a combined annual payroll of $140 million.

But an infusion of money alone won’t win the day. Those in the industry say certain entrenched attitudes also need to change.

Christopher Celeste of Hatch Partners says one factor holding back more vigorous investment is a Midwestern risk-averse mentality. He cites investors’ tendencies to place restrictive terms in agreements, to have a paternalistic gate-keeping attitude and to be averse to a “fail forward” philosophy. Such postures, he says, restrict the vitality of venture capitalism.

Indest attributes the mindset to a difference from the financial cultures found in Boston and Silicon Valley. However, he says risk aversion here is diminishing as more startups find success. With the addition of the Silicon Valley transplants behind Drive Capital, Indest says, an attitude shift may occur. Kvamme and Olson “bring a wealth of successful experience with them,” he says.

Thorne says additional venture capital funds will provide more activity from early-stage investment sources. “When you’re one of only several venture capitalists, you’ll be more conservative,” he says. More players will invite a more experimental atmosphere.

Peter Kleinhenz, managing director of CID Capital, says another recurring problem has been the time it takes to realize a return on a position in a company. It used to be that venture capital could be recouped six to 10 years after the initial investment. “Now,” Kleinhenz says, “it’s typically 13 years.”

Bill Frank, principal of NCT Ventures, succinctly summarizes the venture capital story of past and present. “A few years ago,” he says, “the complaint was, ‘We need some startups.’ Then it was, ‘We need some wins.’ Now it’s, ‘We need some finishes.’”

Keys to Success

In order to yield more timely returns, Shealy says, startups need “successful people running them.” That’s what the 10xelerator program (10x), a collaboration between TechColumbus, OSU, Columbus 2020, Ohio’s New Entrepreneurs Fund and managed by Founders Factory, aims to deliver. The Founders Factory website describes the program as “a mentor-driven accelerator focused on converting promising entrepreneurial ideas into viable businesses and, ultimately, sustainable companies.”

Embree of TechColumbus cautions that too many startups worry too much about initial investment and getting the product off the drawing board. “They need to think about their customers,” he says. “They need to consider who will buy their product when it’s ready.”

Entrepreneurs also need to have the means to make their products ready. Matt Armstead of Founders Factory says startups can benefit from “product acceleration—a very short burst of energy to bring it to the market.” Using the right mentoring and finding the right niche enables the company to “fast-track to validation,” Armstead says. That ability is key to the basic concept of angel and venture capital: finding companies that employ technologies which can generate high commercial returns at an early stage.

The jackpot—for both entrepreneurs and investors—is a product that is not just innovative, but disruptively innovative. Simply put, it effectively replaces an entire market with a new one, displacing one technology for another—such as what the cellphone has done to the landline telephone and how digital photography has made film cameras nearly obsolete. It’s not just thinking out of the box. It’s creating a whole new box.

“There’s never a shortage of good ideas,” Indest says. But most of them never get further than that. Those in angel and venture capital funding are looking for a return on their investment. But they are also looking for opportunities to create products and services that benefit society and make a difference in the market. “This is a really hard business to be in,” Indest says. “Most who are in it have that second motivation.”

Celeste notes Columbus is “adding jobs at a good pace.” It is growing consistently without interruption, unlike Cleveland and Cincinnati, which are recovering from years of setbacks. But he doesn’t minimize the challenges that any startup faces. “There are plenty of hurdles,” he says. “But the hurdles don’t mean that you shouldn’t run the race.”

If the investment upturn continues, perhaps the hurdles won’t be quite so high in the near future. If that happens, high-tech entrepreneurs should take a greater interest in what Columbus has to offer. “The availability of high-quality technologists is just incredible,” says Randy Smith, former CEO of ClearSaleing and CEO of the new startup Smartcrowdz. He adds that their salaries are significantly less than on the East or West Coasts. “This is a great place to grow a business,” he says.

In order for Columbus to become a bigger player in this high-risk, high-reward world, those in the industry agree, more hoopla is in order. “This whole area is under the radar. We’re very humble about promoting ourselves,” Shealy says.

 

Entrepreneur Success Stories

While many entrepreneurs dream of landing angel or venture capital funding, few achieve that goal. Here’s a quick look at four Central Ohio companies who have secured seed funds.

While many entrepreneurs dream of landing angel or venture capital funding, few achieve that goal. Here’s a quick look at four Central Ohio companies who have secured seed funds.

Nanofiber Solutions

Nanofiber Solutions is an engineering and manufacturing firm producing three-dimensional scaffolds that company officials say are superior to flat surfaces for growing living organisms.

The technology was developed from research at Ohio State University. The scaffolds have applications in cell culture, cell-based therapy, regenerative medicine and engineered artificial tissues.

Nanofiber Solutions applied to TechColumbus for pre-seed money in November 2011. Due diligence took about three months, an investment committee reviewed the application and in March 2012 Nanofiber was awarded $500,000.

Ross Kayuha, CEO of Nanofiber, says he is pursuing additional funding from grant-giving agencies, angels, venture capital funds and strategic partners. The company is approaching other companies that make medical devices, “trying to match our technologies with their products,” Kayuha says. He adds, “I’ve modified our corporate plans so we need less capital.”

ClearSaleing Inc.

ClearSaleing Inc. devises software products that enable Internet advertisers to measure customer interaction.

Randy Smith, who co-founded the company and served as its CEO until May 2012,says ClearSaleing received $825,000 in initial funding 2006 through an angel round that included Ohio TechAngels. At the end of 2006, NCT Ventures participated in an investment round that totaled nearly $1 million. Another venture capital round in 2010 raised $3.75 million with a significant increase from NCT Ventures. The company was sold to the global marketing services division of GSI Commerce Inc. in January 2011; was subsequently sold to eBay in March 2011. Terms of the deals were not disclosed.

Sprout it

Sprout it is a Web-based application for home gardeners that provides customized guidance for planting, growing and harvesting vegetables and herbs. Conceived in late 2011, it was mentored and provided seed money by Founders Factory.

In December 2012, Sprout it found a partner in ScottsMiracle-Gro, the publicly traded lawn and garden company based in Marysville. “They saw how it was going to work,” says Matt Armstead, co-founder and CEO of Sprout it. “We were still in the design phase then. We hadn’t even built the application.”

The app launched in April. “The metrics are showing very well,” Armstead says. He adds that ScottMiracle-Gro is “a great partnership” for Sprout it especially because the company has “a significant consumer awareness.

While Armstead isn’t sure about future developments, he says Sprout it may seek a venture capital infusion and “expand out of Miracle-Gro to pursue tremendous opportunities in the media.”He declined to talk funding specifics.

Venueseen

CEO Brian Zuerchersays Venueseen began as FlyMuch, an app for travelers. But in February 2012 it morphed into a marketing application for businesses that aggregates and organizes photos, interactions, check-ins and other content from social media sites such as Instagram and Foursquare.

In February 2011, the company was awarded $400,000 from Ohio TechAngels and $450,00 from private investors. Between January 2012 and January 2013 it securedanother $600,000 from angel investors.Zuercher says he is now seeking venture capital funding.