Start-up investments at 10-year high in Ohio

Venture capital investment in Ohio

Source: National Venture Capital Association, based on data from Thomson Reuters

After falling sharply during the recession, Ohio’s venture capital investment has seen two consecutive years of growth, and the amount invested in the first quarter of this year was the highest quarterly total in a decade, according to new data.

Venture capital is a high-risk investment in early-stage companies with promising potential. Some large and successful companies in Ohio were once financed by venture capitalists, and some venture-backed companies in the Dayton region are thriving.

Industry experts said venture investments in Ohio will likely continue to increase because the state has implemented programs that provide effective resources and funding to entrepreneurs that help develop their business plans to become attractive to venture capitalists. Venture-backed companies are a major source of job creation and technological innovation in the state and across the country.

“We have made this a better place to start and build a company,” said Lisa Delp, executive director of the Ohio Third Frontier Commission.

Companies in Ohio received 14 venture capital deals in the first quarter of this year worth $122.7 million, according to a recent report by the National Venture Capital Association and PricewaterhouseCoopers, based on data from Thomson Reuters.

The amount invested in the state was the most in any quarter since 2002, and one of the deals this year was the 12th largest ever in Ohio, said Bob Saada, managing partner of PricewaterhouseCoopers northeast Ohio practice. PricewaterhouseCoopers is the largest professional services firm in the world.

After plummeting in 2009, venture investment in the state has steadily risen. There were 71 venture capital deals worth $205.2 million in 2011, up from 59 deals worth $178.3 million in 2010, according to PricewaterhouseCoopers and the association.

“It is a really good time to be an entrepreneur in Ohio,” Saada said. “Ohio has a much more positive trend than what we are seeing nationally through the first quarter.”

Venture capital investment in the United States in first quarter fell by double-digit percentages in both the number of deals and the amount spent.

Ohio has seen a sizable injection of venture capital because the state has resource programs that attract and retain early-stage companies and help them get off the ground, said Ray Hagerman, vice president of investments with the Dayton Development Coalition.

The coalition assists companies in the region that are usually in pre-revenue phases by evaluating their business plans and providing guidance and funding to bring breakthrough technologies and products “out of the lab and into the market,” Hagerman said.

He said the pre-seed funding and developmental services are provided through the Ohio Third Frontier’s Entrepreneurial Signature Program, and this assistance helps companies reach the point where they can attract venture capitalists. The coalition paid $1 million to fund seven new companies in 2011, and it paid $1.3 million to provide five companies with additional funding.

“It helps the companies get to the next milestone,” he said. “Our objective is to hand the companies off to a venture capital investment or some other developmental capital.”

Dayton-based Commuter Advertising was one of the benefactors of the program.

Founded by Katie and Russell Gottesman, the company sends announcements over bus annunciation systems that inform passengers of products, services and sales at nearby businesses using the vehicles’ GPS technology and software created by the company.

The Greater Dayton Regional Transportation Authority was the first agency to employ the company, but it now reaches 100 million riders per year and serves markets including Toledo; Chicago; Seattle; Kansas City, Mo.; Jackonsville, Fla.; Champaign, Ill.; and Rockland County, N.Y. The transit agencies receive much-needed advertising revenue, and businesses get access to consumers who travel near their stores.

Russell Gottesman said the coalition provided money that bridged the gap between the initial capital his company raised from angel investors and the next round of funding that eventually came from venture capital. The coalition’s funds helped cover some developmental expenses, including the cost of filing the necessary international patents, he said.

Commuter Advertising eventually agreed to a seven-figure deal with Pittsburgh, Pa.,-based Draper Triangle Ventures. Russell Gottesman said his company has grown from a handful of employees into a staff of 22, many of whom are University of Dayton graduates.

“When venture capital is able to target local companies and invest in them, it puts a spotlight on all of the innovation that is a driving force for this economy here in Dayton,” he said. “And it allows us to attract and retain talent from the local university system that otherwise might leave the region.”

The Entrepreneurial Signature Program provides money at an important stage in the “funding continuum” that is too early for venture capital, but generally past the point where friends and families can afford to assist the entrepreneur, said Mike Stubler, managing director and co-founder of Draper Triangle Ventures.

“They provide that critical funding at a time in a company’s life when there are not many other places to go,” said Stubler, who is also the director of the Ohio Venture Association.

Stubler said this and other early-stage development initiatives are bringing and keeping start-ups in the state, and that is attracting more out-of-state investors who are pumping money into these companies.

Ohio accounts for only a tiny fraction of U.S. venture investments, but Stubler said it is outperforming other comparable states. He said its economy and job market will benefit greatly from the growth.

“In all but just a handful of years since the 1970s, all of the net new job growth is created by start-ups,” he said.

Public companies headquartered in Ohio that were once venture-backed accounted for 164,265 jobs and $28 billion in U.S. revenue in 2010, according to a Global Insight study cited by the National Association of Venture Capital Association.

Companies need help evolving to attract venture capital. Venture capital then allows companies to expand faster, and in the case of Commuter Advertising, the company grew by building an inside sales center in Dayton and hiring more employees to improve the sales model, said Katie Gottesman.

“We wouldn’t have been able to grow as aggressively without the investment,” she said. “In addition to capital, the venture firm provided advisement, leveraging their experience building their own businesses and working with other portfolio companies.”

Delp, with the Ohio Third Frontier Commission, said the state’s six Entrepreneurial Signature Programs are succeeding at promoting innovation, entrepreneurship and commercialization of research activities in the state. She said the rise in venture investment is directly linked to the achievements of these programs.

“The ESP started actively working with companies in 2007, so what you are seeing now is the result of those earlier stages of activities,” she said.

Contact this reporter at (937) 225-0749 or cfrolik @DaytonDailyNews.com.