You fell for the click-bait in the title…excellent. I have your attention for the next five seconds. I’m going to throw out a number: $700 million. Still have your attention? Good. $700 million is my estimate of the cash Ohio-based startups are looking to find, but can’t find because there are not enough investors and not enough capital sloshing around in the system. So what? Here’s the so what: those are startups that would be creating jobs, inventing new stuff, taking new products to market and…wait for it…returning s#&t loads of cash to investors.
So why aren’t the well-to-do jumping at this chance to put money into these startups that have capable founders, strong go-to-market strategies and an actual market with paying customers lined up? It’s simple…you are a bunch of wimps. Complacency has made you soft. That P&G stock you have been holding onto for the past five years giving you that 1.6x return is good enough in your mind. Fine. Sit on your comfy bench as you watch the world go right on past.
However, can I interest you in a 2x return? Maybe a 3x? Or a 5x? Or if we are lucky, maybe a 10x return on your cash? But there’s one catch, these investments are a bit risky – you might lose some or all of your investment. But, you’ve seen 1,500 point swings in the market and aren’t phased in the least, so how is this any different? Oh, and the cool thing here is that you actually can take an active role in helping the startup if you want. You can call up the CEO of the company you are invested in and they will actually take your call and know who you are. Can you do that with your P&G stock? Oh, I didn’t think so.
If you’ve made it this far, you probably see what I am getting at. If you follow the media, press releases, congratulatory this and that, and the dog and pony shows masked as public industry awards, the casual observer would think everything is all hunky-dory in Ohio startup land. The fact of the matter is that it’s not. We have tremendous talent coming out of Ohio Universities. We have a smart workforce. We have state programs focusing on technology commercialization and providing what amounts to a 50 percent discount on raising capital. We have trained successful executives to be mentors and board members to these new companies. But, we are still falling way behind in the demand for capital to invest in startups. It’s a problem of too many deals chasing too few dollars.
It is estimated that there are over 10 million households in the United States that meet accredited investor status ($1 million net worth or $200,000+ income per year), which means they can be angel investors. The nation’s largest angel investor trade group, The Angel Capital Association, boasts a membership of just over 12,000 angels. If the nationwide averages hold true for Ohio, there should be about 956,000 accredited households in Ohio, controlling about $425 Billion in wealth. Let’s just say I’m off by a factor of 10, that’s still 95,000 households with $42 Billion in wealth. Where are you guys and why are you not investing in startups?
Seriously, I would really, really like to know.
I have a few theories beyond complacency and being a wimp for why more people are not in the game.
Number 1: The belief that if it’s not high-growth and high-tech, it’s not worth getting into. This is a Silicon Valley myth that has made it all the way to the Midwest and has just kind of stuck. It might have something to do with Ohio Third Frontier’s focus on technology-based companies and the carry over of that mission into the funding of regional entrepreneurial signature programs, like Rev1 Ventures (formerly TechColumbus), and putting up half the capital for funds like the Ohio Tech Angels. (Ohio Third Frontier is a state economic development initiative focused on creating new technology-based products, companies, industries and jobs.)
Despite Ohio Third Frontier being a really good program and doing a lot of good for tech, when you provide cheap capital and only give it in a limited industry vertical, there will be organizations stood up to take that cheap cash and do whatever they can to keep that cheap cash flowing. What you end up getting is a distorted narrative and the solidification of if it isn’t tech, it isn’t worth the investment.
Number 2: The belief I need to 10x or more return or it’s not worth my time. Again, a total myth. Here’s the reality: venture funds, angel funds, and even private hedge funds, on average, will do well if they just give you your money back after 10 years. If you invest in a well-managed angel or VC fund or can pick on your own, you might beat the market.
If you get out of the high-tech and high-growth space and look at other industries, you will find that they require less money to capitalize, but still return decent amounts of cash in the neighborhood of 2x to 5x. This could be that light manufacturing startup that makes MacBook protective charger cases or that coffeehouse that gives a percentage of their sales to solve a social issue and has potential to scale to other locations. And, you actually have a hand in creating local, good-paying jobs that will stay in Ohio.
Number 3: My final theory is the fear of loss. You can write a check to your broker and have them toss it into mutual fund ABC, run by a group of people buying stock in companies. If you lose money, it’s just the market, tough luck. Very rarely is the fund manager blamed or the C-level executive blamed for losing your cash. You just accept it – cost of playing the market. But, when you go to write a check and meet an entrepreneur face-to-face, that detached feeling you had with your money in the market goes away. You don’t want that guy or gal to lose your cash. You want your money back and then some. You want guarantees, a pound of flesh, and their first born. You all of a sudden become very intimate and fearful and want to protect your money from being kidnapped by this person who has the audacity to ask you to give it to them. Where, oh where, did that investor go that understood the risks of investment and accepting the costs of playing the game to win big?
If you are an accredited investor and hold the first two beliefs as true and you have some trust issues with your money, I totally see why you wouldn’t be in the game. But, as I’ve pointed out, those beliefs are totally false. There are lots of industries to play with in the startup world to help entrepreneurs build companies, create jobs, and maybe put a few more bucks back into your pocket.
There isn’t so much I can do for you about the fear, except that an investment in a startup is no different than an investment in anything else. Logic does not fly out the window, metrics still have to be hit, and companies still have to be evaluated before you put money into them. It really is that simple and there are really lots of great people out there trying to create the next great companies to be in Ohio, and they need your help.
So get off the bench and get in the game. You’ll thank me later.
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