Ohio Venture - OVA Review Newsletter
News from the Ohio Venture Association meeting on March 1, 2013

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Keynote Address:

Venture Capital Summit VIII:
Unearthing the Entrepreneurial Economy

Northeast Ohio has a far richer entrepreneurial ecosystem than ever before, with a broad array of players to help nurture promising start-ups and early stage ventures, from traditional venture groups and a growing number of angel investors to a handful of thriving business accelerators. On the other hand, that's led to significantly stiffer competition for funding.

That was one of the main themes to emerge from OVA's eighth-annual Venture Capital Summit, held at Corporate College East on March 1st.

The flip side of the rich ecosystem of entrepreneurial support in the region, said Jumpstart President John Dearborn, is that "...the bar has been raised. If you went out today with a plan to raise $3 million without a beta, you wouldn't make it very far. So the bar is rising quite significantly based on all the support and the competition for money. While the money is increasing, the deal flow is increasing along with it." In 2004, he noted, $103 million was invested in 36 deals throughout the region. In 2012, the money doubled to over $200 million, but the deals had tripled, to 105. Similarly, in 2004, 10% of the deals had significant angel money at the start, but by 2012 it was 50%.

Angel activity has increased partly because venture capital is contracting. Less money is moving toward later-stage deals, he explained. "So thankfully, folks are stepping up to fill that void," Dearborn said. In 2004, he noted, just four investors in the region made their first equity investment. Eight years later, there were 32.

In fact, Howard Bobrow of the law firm of Taft, Stettinius & Hollister, argued that, "On a per-capita basis, I think we probably have more angel investors than in the (coastal) tech hubs. I think the issue is more about tolerance for risk in general. People invest in things they know, and if there were big tech exits in this region, more investments would flow into those deals... Once you get some big tech exits, it's like a follow-the-leader mentality in the angel community."

Serial tech entrepreneur Chuck Stack, whose new startup accelerator, Flashstarts, makes multiple smaller investments, argued that there's still a big piece missing from the region's entrepreneurial ecoystem. "If start-ups are the building blocks for the new economy, who's building the start-ups? ... We have 600,000 college students in 300 universities in Ohio. That's the raw material for start-ups. What Flashstarts does is take a very tiny bit of cash and force them to focus. That's what an accelerator does, and get them to iterate through as quickly as possible."

He likened angel investing to the satisfaction of watching grandchildren prosper. "It's like being a grandparent—you share in the thrill of their success. The single most important thing many of you can give back to the community is a little bit of time ... think about giving eight hours to the start-up community and respond to their inquiry about ‘is this a good idea?' "

But those grandchildren often need significant coaching before they can turn an idea into a real company. Nick Barendt of LeanDog, which focuses on lean software development for custom mobile and web applications, explained how the company launched LeanDog Labs about a year ago to help take startups to market. "A lot of people walk in the door and they're really excited. They say, 'Hey, this is going to be the next Facebook.' We say, 'Let's slow down a bit. What are the most important set of features that we can focus on that's going to get you to a better position, to start demoing your product and then going out and raising additional capital?' "

George Buzzy, an entrepreneur in residence with Jumpstart and the Youngstown Incubator, who one way or another reviews most of the technology start-ups in the region, agreed with that approach. "I see it every day; people building a solution and then going around looking for a problem to solve. They just don't do enough market research to determine what the pain point is. Is there really a problem? Do people want to stand in line to pay for that solution? And they don't do the homework first. They jump right to development."

Meanwhile, Diane Mulcahy, a former VC and now the director of private equity at the Kauffman Foundation, outlined some myths about venture capital that emerged from a ten-month effort she led in analyzing Kaufmann's own portfolio of more than 100 capital funds over a 20-plus-year period.

"The first myth I'd like to challenge is that VC generates great returns," she said. "The industry data is very clear. The median and the mean returns have been poor since the late 1990s." She also challenged the notion that the larger the fund, the better the return (not true, she asserted). And she argued that the fabled J-shaped (or hockey-stick shaped) curve of venture returns actually looks more like the letter N.

"Myth number 4: VCs are paid for generating great returns. Well, we know there's a flaw there. There's a misalignment of incentives. As a limited partner, I'm really not paying them to generate great returns. I'm (just) paying them to raise big funds."

Webcasts from the Meeting:

Click on the image below to view the entire presentation as video.

Video Webcast from Recent Meeting
Topic: Support: Cultivating the Next Generation
Moderator: John Dearborn, Jumpstart
Panelists: Marcia Hales, Goldman Sachs 10,000 Small Businesses; Nick Berentz, Lean Dog; George Buzzy, YBI; Charles Stack, FlashStarts

Also see OVA Venture Capital Summit VIII:

Webcasts produced by Tom Kondilas.

OVA's New Video Archive is Online:

OVA is pleased to have recently added an archive of program videos to its website. You'll find the full video record of most OVA formal programs since 2008 at www.ohioventure.org/video-archive.html.

Upcoming Meeting Dates:

  • June 14, 2013
    Venture of the Year

See complete details and registration for these events.
 

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