ohio's angel investors answer the prayers of early stage companies
Every fledgling business needs a support network to pull ahead of the pack and succeed. In Ohio, startups that are ready to move beyond resources from friends, family and the founders (FFF) may find a source of support from the state's angel investors.
On the other hand, angel investors are continuously seeking out fresh, promising startups with the same excitement with which entrepreneurs seek them. The collaboration can end up as a boon for both parties. Queen City Angels (QCA
) out of Cincinnati, for instance, backed a development team from Proctor and Gamble that spun off to form Blue Ash Therapeutics. When Forest Laboratories purchased Blue Ash, QCA investors enjoyed a ten-to-one profit on their original investment.
Angel investors stem from two camps, funds and groups. QCA is a private investing group whose members invest on a project-by-project basis. The East Central Ohio Tech Angel Fund (ECOTAF
) in Southeast Ohio and the Ohio TechAngels Fund (OTAF
) in Central Ohio manage finite funds to which investors contribute at least $25,000 of their own money in order to participate.
Although QCA has partnered with Third Frontier
on some of their projects, the state's economic development initiative matched ECOTAF and OTAF members' investments via a two to one ratio. Hence, each private $25,000 investment translated to $75,000 in the respective fund's pool. OTAF has already exhausted three individual funds, while ECOTAF is just now winding down its first.
"One of the great things that Ohio's figured out is that the real way to do this is to use the state money to incentivize private investors to invest more, but let the decision making be done by the private investors who have their own money at risk," says OTAF founder John Huston. "You use the state money as the honey to get investors active and to invest more than they would without the state money."
Angel organizations often require some formal involvement with the projects they fund, such as a board seat, but their requirements are usually more relaxed than those of venture capitalists, which are the next step up in the funding continuum.
"We're the farm team for the venture capital industry," says QCA's operation manager Jim Cunningham, adding that angel investors fill the gap between FFF and venture capitalist funding. About half the projects angel investors finance will go on to seek venture funds while half will stay in the "minor leagues," according to Cunningham. Queen City Angels, which now boasts 49 members, started with just six in 2001. And while angel investors will often offer mentorship and guidance, unlike venture capitalists they usually do not get involved with management.
"We like to know what's going on with the company," says ECOTAF member Don Linder. "We like to help steer decision making, but we're not in a controlling majority." Founded in 2009, ECOTAF currently has 32 members.
"The angel investor ends up feeling like an aunt or uncle to the entrepreneur," adds Cunningham. Most angel funding ranges from $100,000 to $1 million, he says, while venture capitalists look for projects in the $5 to $10 million range.
While investors agree that money is an obvious motivation and that all potential projects are thoroughly vetted, other factors play into the works of an angel funding operation. Linder, who is a realtor in the Athens, Ohio area, argues that investment motivations can be self-serving while benefiting the community.
"Our members have a commitment to giving back to the community and helping proliferate the creation of jobs," says Linder. "As business people, obviously job creation and good economic stability in the region are generally going to come back to you. I own a real estate company. If there are jobs created in the area, that's going to help the housing industry and the commercial property industry."
Linder has also used his involvement in ECOTAF to nurture a project that is close to his heart. When ECOTAF opted to fund Ecolibrium Solar
, which designed a unique, flat roof solar panel mounting system and is now manufacturing its product in Athens, Linder volunteered to serve on the company's board.
"I've had an interest in the solar field personally for 30 years," says Linder. "I was in the Peace Corps in 1980 where I did alternative energy projects for my job."
"I don't think our 282 members are motivated whatsoever by the money," adds Huston. "I think that's secondary. That's not why we do this. We do this because we think that the greatest contribution we can make to the Ohio economy is to build entrepreneurial wealth." Huston founded OTAF in 2004 and serves as a director with four of the 37 portfolio companies that the fund has invested in.
With professional baby boomers entering retirement in good health, Cunningham says forays into angel investing answer many boomers' desires to stay active in the business community post-retirement. The Great Recession, he also notes, has fostered distrust in the financial industry and fueled more self-reliant investing.
"Most people lost trust in their brokers in this last crash," says Cunningham. "They feel more comfortable making their own investments."
All three organizations focus on Ohio projects that are largely part of the tech industry, although they dabble in other opportunities and offerings. For instance, QCA funded Safeway Safety Step (a bathtub door product) and also hosts an annual entrepreneur "Boot Camp," wherein 43 attendees learn the ropes and have unprecedented access to a host of mentoring and network opportunities.
In addition to QCA's investment in Blue Ash Therapeutics and subsequent sale, other angel successes include Arkovi
, which archives and monitors social media communications for marketing purposes. Its imminent sale will yield the first fruits—in the form of checks—for ECOTAF members. OTAF's portfolio includes Znode
, which facilitates e-commerce by providing unique Internet storefront space. OTAF, in collaboration with Tech Columbus and Innovation Ohio, invested in the firm in 2008. The Yell Group
purchased Znode in 2011 for over $19 million.
Ohio has much to offer the investor/entrepreneur relationship, with a number of established colleges and universities that can conduct research and development, a robust entrepreneurial ecosystem, and healthy public/private collaboration.
"There isn't another state in the country that has forged the public/private partnerships that we have here in Ohio," says Huston. "Other angel groups across the country covet what we have here." He cites programs such as the Ohio Technology Investment tax credit, the Innovation Ohio loan fund, the Ohio Capital Fund, Third Frontier and the collaboration between angel funding groups as elements that create a unique and dynamic funding environment in Ohio.
"No place has done all of the things we've done. That's what's unique," says Huston of the funding continuum. "We have the mosaic. Other people have a tile or two."