Archive for Tech Ecosystem Update

Ohio Addressing the Capital Crunch Spurs Company Growth

Before the financial services crisis of 2008-09, money for growing companies was cheap and easy to access. Private banking options were many and those banks were generally aggressive in competing for loaning money to growing companies. Times have changed. Banks hold 117% more cash and 493% more securities in 2015 than in 2010 based upon regulatory requirements tied to the liquidity coverage ratio which creates a minimum deposit requirement according to the Federal Reserve Bank of Cleveland Fourth District Federal Reserve. Also, banks held $69.5B in cash and $79.5B in securities in 2015 compared to $32.1 B in cash and $79.5B in securities 2010 according to the Cleveland Fed. More troubling, private loan growth is up only 25% in the current economic recovery compared to 64%, 30%, and 87% in 2001, 1990-91 and 1981-82 recession recoveries according to the Treasury Department. Growing companies are facing a cash crunch as a result of federal regulations requiring American banks to keep substantial funding in reserve.

States like Ohio have an answer for this capital crunch. That answer differs based upon the stage and industry of the company seeking capital.

All companies start with an idea. Most likely early company funding starts with the owners, their friends, family and whatever fools they can find. If the idea is technology related, Ohio offers an important source of funding through the Third Frontier program. The Ohio Third Frontier Technology Validation and Start-up Fund’s goal is to create greater economic growth in Ohio based on start-up companies that commercialize technologies developed by Ohio institutions of higher education and other Ohio not-for-profit research institutions. The Technology Validation and Start-Up Fund has been designed to: support protected technologies developed at Ohio research institutions that need known validation/proof that will directly impact and enhance both their commercial viability and ability to support a start-up company, and support Ohio start-up and Ohio young companies that license validated/proven technologies from research institutions. The next round of funding through this program is in the middle of December and having a university partner is essential.

Moving into beyond the idea stage into the incubation stage offers these companies access to a wide range of Ohio regional venture capital firms. While not Silicon Valley, Ohio offers a range of venture capital firms serving all corners of the state for a diverse industry base as listed below.

  • JumpStart– focuses on an array of technology sectors, including companies founded and led by women and minority entrepreneurs;
  • Cleveland Clinic– focuses on medical devices, products and companies spun out from the institution’s researchers;
  • Lorain County Community College– focuses on tech-based companies that are in the imaging or incubating phase of development with special focus in the Northeast Ohio region;
  • LaunchDen Capital Fund– primary focus on orthopedic companies;
  • Bizdom– focuses on web- and tech-based start-up companies- Dan Gilbert, Detroit based fund;
  • Case Western Reserve University– focuses on medical technology, business software, advanced materials, fuel cells, and energy storage;
  • Mutual Capital Partners– focuses on healthcare (medical devices and diagnostics) and information technology (business-to-business and mobility software) sectors;
  • North Coast Venture Fund– focuses on biomedical, pharmaceutical, and software sectors;
  • Valley Growth Ventures– Y-town, focuses on software, energy, advanced materials, and additive manufacturing sectors;
  • Rocket Ventures– focuses on medical technologies and software applications which include imaging, surgical instruments/equipment, implant devices, regenerative medicine, and software applications developed for business and healthcare;
  • NCT Ventures– focuses on adtech, big data, enterprise software, heath information technology, logistics, and marketplace and retail technology sectors;
  • Rev1Ventures– focuses on life sciences (specifically in the areas of pharmaceutical, biological and gene therapies and spin-out companies from Nationwide Children’s Hospital’s Research Institute), software, information technology, additive manufacturing, alternative energy, and other sectors;
  • TechGROWTH Ohio– focuses on digital interactive media, biosciences, bio-agriculture, and advanced energy sectors;
  • CincyTech– focuses on a variety of Ohio Third Frontier targeted industries, including software, medical technology, life sciences, consumer digital, and other aligned sectorsin the region;
  • Cincinnati Children’s– focuses on the biomedical sector; and
  • Accelerant– focuses on advanced materials, advanced manufacturing, sensors, healthcare, information technology, aerospace, situational awareness, and surveillance systems sectors.

Companies graduating on to having an actual product or service ready to offer customers will often look to angel investors for their next round of financing. Ohio again has a diverse group of angel investor groups that operate all over the state that include:

  • North Coast Angel Fund– focuses on healthcare (medical devices and diagnostics), biotechnology and software sectors;
  • Queen City Angels– focuses on advanced materials, aeropropulsion power management, fuel cells and energy storage, medical technology, business and healthcare software, sensing and automation technologies, solar photovoltaics, situational awareness, and surveillance systems sectors;
  • East Central Ohio Tech Angel Fund– focuses on companies in rural Southeast Ohio with new proprietary, barrier-to-entry technologies;
  • Ohio Tech Angels – focuses on information technology, advanced materials and life sciences sectors; and
  • Impact Angel Fund– focuses on bioscience/medical, advanced materials, automation, energy and power management, surveillance, and information technology sectors.

Companies ready to grow in the marketplace that are beginning to produce jobs are primed for a conversation with JobsOhio. The state’s private sector economic development organization offers a wide range of economic development loan programs tied to job creation and capital investment. JobsOhio focused on industries such as biohealth, IT, advanced manufacturing and aerospace and aviation with established or expansion stage companies generating revenues. JobsOhio wants more than half of the company revenue to come from other private capital sources and they will require job creation and retention, efficiencies gained, additional payroll, fixed-asset investment commitment, project return on investment, project location, within a three year timeframe. JobsOhio Growth Loans range from $500,000 to $5,000,000 for fixed-asset investment.

For companies moving beyond the start of the marketplace and shifting into full-fledged sustainability, the state of Ohio offer the Innovation Ohio Loan Fund. The Innovation Ohio Loan Fund provides capital-funding for Ohio companies with limited access to capital and funds from conventional financing sources due to technical and commercial risk factors associated with the development of new products or services in targeted industries. They finance up to 75% of allowable project costs with loans typically ranging in size from $500,000 to $1,500,000 with a job creation and capital investment required. Again, targeted industry sectors include: Advanced Materials; Instruments, Controls and Electronics; Power and Propulsion; Biosciences; and Information Technology. Innovation Ohio Loans are focused on established Ohio companies with a minimum of two years of operating history and revenues generated developed a proven product for a proven market have customer orders and reasonable prospects for rapid sales growth have attracted third party capital and has reasonable prospects of continued backing from such investors. Allowable costs are defined as costs that can be capitalized under applicable generally accepted accounting principles (GAAP) and a 5 – 7 year loan term at a fixed rate up to 25% of the allowable project costs.

Ohio is blessed with many public financing options for growing companies facing a cash crunch. Understanding which source to gain the funding from and how to negotiate is the only challenge.

Building a Smart Community Brings Economic Success

Smart Communities embrace technology as the key to their economic future. The first step in building a smart community is defining the elements of a smart community and what the economic benefits are from achieving that status.

The economic benefits of becoming a smart community are substantial. Successful technology based economic development is a well-established, five drivers of regional economic success—along with advanced manufacturing, global trade, advanced services and energy. Successful regional technology economies are built on Science, Technology, Engineering and Mathematics occupations. STEM occupations consist of nearly 100 specific occupations consisting of 6 percent of U.S. employment counting nearly 8,000,000 jobs. STEM jobs are high-wage positions paying on average $77,880 and only 4 of the 97 STEM occupations had mean wages below the U.S. average of $43,460. The creation of smart community operating systems for cities also suggests substantial economic gain. According to a study by Accenture, Smart City solutions applied to the management of vehicle traffic and electrical grids could produce $160 billion benefits and savings through reductions in energy usage, traffic congestion and fuel costs.

Beyond the benefits of pervasive Smart City technology, the potential gains from the deployment process for such technology are also significant since telecom operators are expected to invest approximately $275 billion in infrastructure, which could create up to 3 million jobs and boost GDP by $500 billion.

The debate is over—high technology regions produce communities with high income jobs. Developing the high-tech region is the goal for most communities and getting there involves three clear steps: build a Smart City wireless network to transform local government services; create a STEM workforce; and develop capital access sources for high-tech start-ups.

Building and recruiting technology companies is more credible if the local government embraces technology. On the backs of state of the art 5G wireless technology, the development of wireless, small cell networks are creating economic and public service benefits for taxpayers across the nation. Smart Community networks flow over a 5G wireless telecommunications system built on a series of small cell sites and the network serves a range of government and utility services typically through sensors built on streetlight or utility poles throughout a community. This wireless network provides real time public safety and traffic data that helps big and small communities create safer streets and better flows of traffic. Accenture again notes substantial traffic benefits from smart community networks—that includes reducing traffic congestion by 40% saving drivers and operators in medium-sized cities approximately $100 million annually. Traffic management systems can help deliver these benefits and, thanks to 5G’s ultra-fast speeds, cars will be able to “convoy” or “platoon” in groups, increasing road vehicle capacity, while providing substantial energy savings for vehicle owners. And if autonomous cars are supported by Smart Traffic Management systems, congestion could decrease and deliver additional productivity and quality-of-life improvements to residents. Parking applications and energy savings through smart meters through this network offer substantial public benefit as does public safety. Chicago currently uses its 4G network to provide real time video which allows first responders to assess a scene before arriving. Deployment of 5G in a Smart City will enable the integration of all video surveillance, with access to specific locations, pole by pole, in ultrahigh definition. This capability would allow responders to use facial recognition to identify known criminals or spot missing persons before arriving on the scene. More importantly, the collection of this new data source provides a potential private sector revenue model that makes its deployment financially possible for most communities. Communities seeking to develop smart community networks need to embrace the location of private telecommunications company’s smart networks, adopt right of way ordinances supportive of this smart network and permit and encourage the building of a sensor network throughout the city that enables the community to run a smart community network.

STEM workers constitute about 5 percent of the U.S. workforce but accounts for more than 50 percent of the nation’s sustained economic growth. STEM workforce strategies start early in the educational process and increase the number, rate, and diversity of undergraduates in STEM disciplines and align undergraduate education with STEM industry workforce in targeted areas. They also build STEM alliances among business, education and government. Colorado’s STEM strategy is a national model. STEM-EC is a Colorado based coalition of business and education leaders connecting industry and the K-16 academic community to graduate more STEM students. Industry partners include Qwest, Lockheed Martin Space Systems, BB2e.com, Sun Microsystems, Hewlett Packard and CH2M HILL. Colorado’s STEM effort illustrates that it starts with the leadership of the business and education community. The link to industry is an essential element as the academic community needs assistance in identify specific STEM fields in which jobs are available and what specific training and curriculum structure prepare students for STEM jobs.

Finally, developing regional capital access funds is another important step in building a smart community. No one is Silicon Valley—who has half the venture capital in the United States. That being said, even small communities can build a regional capital access fund by leveraging local business, government and bank assets to spur innovation and the creation of start-up companies. Start-up, technology oriented companies struggle to gain financing from typical sources. Small and large communities alike bring government, not for profit, foundations and financial institutions together to develop regional community capital access funds. A Regional Community Investment Fund provides capital to small business and entrepreneurs and encourage investment and development of underutilized and underused assets in the community, including downtown revitalization by providing gap financing for small business and entrepreneurs, and redevelopment project investments. National models for regional Community Investment Funds are based upon the success of the Nebraska Community Foundation and its Hometown Competitiveness Network, West Carrollton, Ohio’s Community Investment Fund and the Community Capital Fund in the Pioneer Valley of Western Massachusetts. The goal will be to raise funds over a 2-year timeframe and should tap into local wealth to make investments in the fund, and those individual’s needs and desires to give back to the community. These regional investors should be approached to bring value and protection to their investment. Investors should be given options of expected return: 1% annual return for a one-year commitment, 2% annual return for a three-year commitment, and 3% annual return for a five-year commitment. There should be no “promise” of return as risk is inherent in these investments but investors should be given some expectation about the potential return on their investment. To ensure proper operation of the community investment fund, an outside financial advisor should be hired to help it attract investments into the fund as well as manage the fund, the investment, and the assets moving forward. Investments should focus on local companies considering company creation or new real estate development projects by providing unsecured loans, subordinated loans, convertible debt, royalty finance, and the right to purchase stock at a specified price.

Building a smart community has big economic and public benefits. The economic reality of technology and innovation is driving economic success to regions embracing this change and will likely leave behind communities that fail to succeed in this new world.

Robinson to Speak at Innovate New Albany – September 29, 2017

Dave Robinson will be speaking at Innovate New Albany on September 29 from 11:30am to 1pm. His topic, “Addressing the Capital Crunch,” gives helpful information to entrepreneurs and small- and mid-size businesses regarding the types of capital they can access. This is a free event (lunch included), but registration is required. For more information, visit innovatenewalbany.org.

Ohio Venture Capital Firms with a Regional Focus

In the highly competitive and ongoing work of the investments industry to help redefine the U.S. economy, venture capital firms have expanded their focus beyond what opportunities are right next door to include those of a larger regional strategy.  Key economic sectors and technologies require a broader-based resources approach in order to grow companies, industries, and jobs.  Such investment activities include not just access to funds but also resources that encourage innovative new companies, entrepreneurship, and venture capital formation.

In Ohio, four firms having a strong local presence and a regional focus are Central Ohio’s Drive Capital; Southeast Ohio’s Athenian Venture Partners; Northeast Ohio’s North Coast Angel Fund; and, Southwest Ohio’s Cintrifuse.

  • Based in Columbus, Drive Capital was founded in 2012.  The firm raised an initial $250 million fund and then added a second $300 million fund in 2016.  Investments are targeted towards innovative technology, healthcare, and consumer companies in Ohio and the Midwest.  For additional information about Drive Capital, see www.drivecapital.com.
  • Based in Athens, Athenian Venture Partners was founded in 1997.  Investments are targeted towards information technology, digital health, and health care companies.  With a presence in three states, Athenian is able to pursue opportunities in Ohio, the Midwest, and the Southeast and Southern West Coast regions of the U.S.  For additional information about Athenian Venture Partners, see www.athenianvp.com.
  • Based in Mayfield Heights, North Coast Angel Fund, was founded in 2006.  Investments are targeted towards information technology, bioscience, advanced materials, and electronics and controls companies.  For additional information about North Coast Angel Fund, see www.northcoastangelfund.com.
  • Based in Cincinnati, Cintrifuse was founded in 2012 and its initial fund was $57 million.  Cintrifuse was created by Cincinnati’s business community, including stalwart companies Procter & Gamble, Kroger, and Western Southern who depend on Cintrifuse to help them source innovation for their business and to grow the region’s start-up ecosystem.  For additional information about Cintrifuse, see www.cintrifuse.com.

In addition to venture capital funding, these entities have a network of resources for start-up and existing companies.  And, each has extensive connections to assistance and support funded through Third Frontier, Ohio’s $2.1 billion tech-based economic development initiative to accelerate the creation and growth of investable and scalable technology and tech-enabled companies.

AT&T Creating $200 Million VC Fund

AT&T recently announced that it has formed a partnership with venture capital firm Coral Group to invest up to $200 million in a new venture fund. The fund will seek to identify technology start-ups focused on connected services and platforms and to more quickly develop solutions for AT&T and other carriers.

AT&T’s venture capital fund will provide investments into technologies that are running on the Open Network Automation Platform, an operating system for software-defined networks. ONAP is rapidly becoming the standard for virtualized networks and is the result of a platform created in AT&T Labs and an open source existing effort.

AT&T and Coral Group will work together to identify other companies to potentially invest in the fund and to share connected services and platforms solutions developed through their partnerships. Coral Group, based in Minneapolis and the fifth largest VC firm in Minnesota, will run the fund.

This new $200 million fund represents AT&T’s latest innovation program and builds on the company’s current AT&T Labs and Foundry innovation centers.  Launched in 2011, the Foundry innovation centers work closely with the start-up and open source communities to develop solutions for a host of technology-driven businesses and industries, including automotive, healthcare, and sensors. AT&T’s centers include the IoT Foundry in Plano, Texas; the Drive Studio in Atlanta; and, the Healthcare Foundry in Houston.

JobsOhio Targets Funding of Middle-Market Companies

Growing and prosperous companies in the middle market, defined as those companies with annual revenue between $100 million and $1 billion, face numerous challenges as they decide to expand their business and market. The two most often sited challenges to growth by these companies is:

  1. Financing their expansions
  2. Recruiting and retaining talent

JobsOhio, the private sector economic development corporation for the state of Ohio, has helped many middle market companies solve the first challenge, and grow in Ohio through its JobsOhio Growth Fund Loan. From June 2016 through May 2017, JobsOhio invested $37,700,000 of loan proceeds into 12 projects that leveraged $453,551,994 of private capital investment. Because of these investments 1,632 jobs will be created with a cumulative payroll of $59,204,836 and the retention of 814 jobs. The average loan size was $3,140,000.

Through the JobsOhio Growth Fund Loan Program, middle market companies can utilize other sources of capital, from both internal (cash) and external (banks) sources to generate more jobs and capital investment than would otherwise be possible without funding from JobsOhio. Through this program JobsOhio is helping to solve one of the main issues that middle market companies have experienced since the Great Recession, access to capital.

First Quarter 2017 Venture Capital Investments Grow

Access to venture capital is a critical measure of a region’s success with technology based economic development as early stage technology companies struggle to gain funding from traditional sources such as banks. U.S. venture capital investments saw signs of growth in First Quarter 2017 versus investments in Fourth Quarter 2016 based upon reports from PricewaterhouseCoopers LLP, the National Venture Capital Association, and PitchBook.

In Quarter 1 2017, venture capitalists deployed $13.7 billion to start-up companies through 1,104 deals, up fifteen percent in dollars and two percent in deals over Quarter 4 2016. An increase in mega-round funding (investments over $100 million in size) helped contribute to the growth in quarterly dollars invested, although the $13.7 billion is the second lowest quarterly total over the past two years. Regional trends were mixed, with LA/Orange County being one of the few major hubs experiencing an increase in both dollars and deals from Quarter 4 2016. Seed investments continued its two-year decline as a proportion of all deals, coming in at 25% of all deals in Quarter 1 2017, while later-stage deals were at eleven percent of all deals. Additionally, the Internet sector deal share decreased to a two-year low of forty-four percent during Quarter 1 2017 while Healthcare increased to a two-year high of seventeen percent and surpassed Mobile and Telecommunications as the second place sector for deal activity.

A summary of Quarter 1 2017 shows:

  • Regions – The Midwest came in eight out of the eighteen regions, preceded by San Francisco in first ($3.47 billion), Silicon Valley, New England, New York Metro, LA/Orange County, Southeast, and the DC Metroplex. In order, Colorado, Northwest, Southwest, Texas, San Diego, North Central , Upstate New York, Philadelphia Metro, Sacramento/Northern California, and South Central rounded out the rest of the regions.
  • Sectors – Internet, Healthcare, Mobile and Telecommunications, Industrial, and Computer Hardware and Services comprised the top five investment sectors. The additional twelve investment sectors include Business Products and Services, Software (non-internet/mobile), Electronics, Automotive and Transportation, Consumer Products and Services, Energy and Utilities, Food and Beverages, Leisure, Financial, Media, Agriculture, and Risk and Security.
  • Development Stages – Expansion Stage led with investments of $5.352 billion followed by Later-Stage ($4.844 billion), Early-Stage ($2.47 billion), Other ($760 million), and Seed ($433 million).
  • States – Top 10 investment states were California ($7.379 billion) followed by Massachusetts, New York, Colorado, North Carolina, Maryland, Texas, Washington, Virginia, and Utah. Ohio came in at nineteenth, with $81 million (down from $142 million in Quarter 4, 2016).

Exit activity continued to be slow, with 169 VC-backed exits during Quarter 1 2017, with corporate acquisitions and buyouts continuing to be the leading exit routes. Software, biotech, and commercial services sectors accounted for approximately seventy-three percent of the total exits. Finally, venture capitalists raised $7.9 billion across 58 funds in Quarter 1 2017, down approximately twenty-four percent from last year’s Quarter 1. Nine first-time funds were closed during this quarter, the most in the last five quarters.