Q&A: Ray Leach explains Ohio's bullish venture capital climate
Gene Monteith |
Thursday, November 05, 2009
For every entrepreneur with a great idea, for every young company that wants to expand, the same question looms large: Where will we get the money to gain traction? Until a few years ago, the answer for most Ohio firms was "not here." Since then, the landscape for Ohio seed funding and venture capital has changed dramatically. One of the organizations making a difference is JumpStart, Inc., a nationally recognized venture development organization in northeastern Ohio that accelerates the progress of high potential, early-stage businesses through public and private resources. hiVelocity spoke with JumpStart's Chief Executive Officer Ray Leach about the turnaround in Ohio's venture capital environment.
What have been the biggest changes in Ohio's venture capital environment since you've been involved?
When I started (at JumpStart), you could describe the venture capital environment in Ohio as scorched earth. There was nothing going on in northeastern Ohio -- there were two venture funds and a few initiatives, but not much else. The purpose of creating organizations like JumpStart was to rebuild the entrepreneurial ecosystem, to identify ideas, incentives, to prepare companies to be invested in by the for-profit sector. The Ohio Third Frontier was just getting started, and the Ohio Venture Capital Authority was a huge engine for entrepreneurial growth. It aggregated money that could be invested in venture funds that now exist and attract funds that had never been in Ohio.
The Fisher College of Business recently presented its 2008 Ohio Venture Capital Report, which found that early stage investment increased 67 percent from 2007 to 2008, compared to a 20 percent decrease nationally. And even though total investment in Ohio declined, it fell at about half the rate reported nationally. What are we doing right?
The state is building an ecosystem for entrepreneurial growth. If you'd told me five or six years ago that we would be where we are now, I would have said no way. That's why renewal of Third Frontier funding is so critical and why the expansion of the Ohio Capital Fund is so important.
JumpStart and others talk about "the ecosystem of capital" in Ohio. What is that?
If you look at places like Silicon Valley, the people who live there know how to start a company, take other people's money and not only grow jobs, but increase their return on investment. In Ohio, it hasn't been that way in over 100 years. When the state started to lose global, multi-national companies, we had forgotten how to create new companies that could create jobs. The key is not just capital -- it's people and their knowledge. The state of Ohio (through its Third Frontier initiative) said we need an ecosystem -- if it doesn't exist in the private sector today, let's create it, whether in partnership with universities, or organizations like JumpStart, but let's create these intermediaries.
The largest share of investment in Ohio seems to be in the biosciences. Why is that segment attracting so much money?
That's where people can make money. Investors invest where success can generate a very large return on investment. JumpStart invests in companies where we believe we can create the greatest number of jobs in the shortest amount of time. Our investments are 35 percent in bioscience, 25 percent in energy and 20 percent in IT, with other investments in areas such as advanced materials.
What are the biggest barriers new companies face when attempting to raise funds?
When dealing with a set of entrepreneurs who are inexperienced, most have not gone out and raised money. Investors want you to be able to show how you've made money before. Investors can have the pick of the litter, and like to invest in serial entrepreneurs. In California, you have entrepreneurs who are starting new businesses every five years. So, one of the biggest barriers is to be able to show you have a compelling business proposal with a significant prospect of return. JumpStart and other organizations spend a lot of time helping new companies articulate the value proposition, often helping them find a CEO and others who can lead them to success.
What are the biggest mistakes new entrepreneurs tend to make?
Having unreal expectations of the business -- how fast it will grow and the skills that person needs to run the company. They don't know what they don't know. And they almost don't know everything.
Let's say I've got a great idea for a new business, but no money to get it off the drawing board. What are the most important things I need to know before coming to an organization like JumpStart for help?
All you have to know is who we are. You don't have to have a business plan or a patent. You need to have an open mind, an open ear and be coachable. You need to be able to process a new set of jargon and soak it in.
What does Ohio need to do to stay ahead of the curve?
Ohio is the best in the country at doing this. The only state that's done a better job is Pennsylvania, and they've been at it for more than 20 years. We've been doing it for eight. We started in a weakened position because so much of our economy was tied to manufacturing, rather than to innovation and investment. That is why renewal of Ohio Third Frontier funding is critical to Ohio, as well as expansion of the Ohio Capital Fund. Without that, Ohio's long-term economic competitiveness is at risk. It's worth asking the question, "if we hadn't done this then (when the Ohio Third Frontier was authorized), where would we be now?"