2015 marked the third year of growth for venture capital investments in the state of Ohio, totaling $373 million, a 14 percent increase over 2014, according to a report from VentureOhio.
The organization serves to ensure startups in Ohio have adequate access to capital, and to help foster a collaborative startup ecosystem and tell Ohio’s story. The VentureOhio report details the improving state of venture capital in Ohio – a process that has taken a collaborative effort many years in the making.
“In general, it is better entrepreneurial resources that have come from private and public partnerships through the Ohio Third Frontier, JobsOhio and our partners across the state,” says VentureOhio CEO Falon Donohue of the increase of investments in Ohio. “Venture is a contact sport and the increasing availability of capital and connections in Ohio increases the chances for entrepreneurs to succeed.”
The report breaks down Ohio’s venture investments by stage and industry. The $373 million was distributed across 167 companies broken down into:
- 106 seed stage investments
- 42 early stage investments
- 19 growth stage investments
The amount of money invested by stage was inversely proportional to the number of investments. By the dollars, Ohio saw:
- $51 million in seed stage investments, a 46 percent decrease from 2014
- $142 million in early stage investments, a 13 percent increase from 2014
- $180 million in growth stage investments, a 78 percent increase from 2014
Looking at the average investment by stage, the numbers are to be expected. Seed stage investments typically range from $100,000 to $2 million, early stage cap at $5 million, and growth stage range from $5 to $7 million (and sometimes much more).
Donohue and Calvin Cooper of NCT Ventures see several factors that contributed to the swing in venture dollars between stages.
On the growth stage end, “We’re starting to see companies that have real traction, that are ready to grow, that can handle a large investment and are ready to take it to the next level,” says Cooper.
He’s seen the quality of deal flow at NCT increase over the last decade as a more collaborative ecosystem forms.
Some of the early to growth stage investments were made in companies that could be Columbus’ ‘big exit,’ like Crosschx or Aver. An exit would potentially serve to further improve the venture capital landscape in Columbus.
“It’s a virtuous cycle of success breeds more success,” Cooper says. “Having a big exit returns capital into an investment community, which attracts more capital to invest into startup companies.”
And an exit doesn’t mean an end – it means a bigger company that’s employing more people and investing more in research.
“Ecosystems spring up around winners,” Cooper says.
As for the decrease in seed stage investments, “Seed investing was down last year, likely due to the fact that many of Ohio’s seed investors were raising capital in 2015,” Donohue says. “We expect this number to increase in 2016 and 2017 with the new availability of seed funding thanks to the Ohio Third Frontier and matching dollars raised by Ohio seed investors.”
The report states that nearly $500 million is being raised by investors during the first half of 2016.
Given venture capital’s high-risk, high-reward nature for startups with explosive growth potential, IT and science-related sectors saw the highest number of dollars and investments. In Ohio in 2015:
- $224 million was invested in 111 IT sector companies
- $112 million was invested in 27 life science sector companies
- $36 million was invested in 29 other companies
Calvin says there are two main reasons to seek venture capital, and different sectors of IT companies generally fit the model for both.
The first reason to seek funding is when there’s a ‘land grab opportunity.’ In the market there will only be a few major winners, and to be one of those winners, a business has to scale quickly.
“A lot of software companies fall into that bucket,” Cooper says.
The other time to seek capital is when the barrier to entry is high. A business needs money for research and development.
“Over time the barriers for entry for IT companies have come down,” Cooper says.
With lowered costs, more tech companies are popping up. These businesses are often applying software solutions to make industries more efficient, Cooper notes.
“In Ohio we see a lot of those deals, specially in enterprise software companies,” he says.
Ohio’s high concentration of large businesses can serve as the first customers for some of these b2b software solutions.
The state also made enormous strides in attracting investors from outside of Ohio. Out-of-state investors outpaced in-state investors, with 77 and 29 respectively.
The 29 Ohio-based investors showed an increase from 18 in 2014. Previous reports did not tally the number of out-of-state investors, but notes an increased effort to attract such investments in 2015.
“That’s part of what VentureOhio is seeking to do in their efforts,” Cooper says. “Not only is it a good thing, we need more investors and we want to work with more investors.”
Attracting these outside investors has been a major focus for Donohue. It’s part of the reason the report now includes cultural highlights about different areas around the state.
“I realized that investors were equally interested in the city itself,” she says. “To most investors from the coasts, all Midwestern states look the same. One investor from London put it this way, ‘If I am going to invest my time, I want to spend it in a place that I enjoy. If each city or state looks the same on paper, I am interested in the food scene.’ With that understanding, we began discussing the culture and vibrancy in Ohio cities as well as the investment opportunities that lie within them.”
Outside investors not only provide capital, but connections and support.
“We are excited to see an increasing number of VCs get on a plane to Columbus to check out our successful growing companies and vibrant city life,” Donohue says.
As the entrepreneurial ecosystem continues to grow and access to capital improves, there’s still a gap to be filled – a billion dollar gap to be exact.
The report created a benchmark by estimating the number of investment dollars needed per capita to put Ohio in the top 10 states for venture investment, and estimated some $1.5 billion dollars is needed. Subtracting the $500 million in the works, that leaves a $1 billion gap.
Cooper explains why it is so important to chip away at that amount.
“There are game-changing companies yet to be built,” he says. “We want to have the resources to fund them.”
He notes another report that found, for a company to reach a billion dollar valuation, it typically takes about $200 million across five rounds of capital.
“Right now we don’t have enough in the region to get that done,” Cooper says.
Both Cooper and Donohue are optimistic about the future, though.
“As Ohio’s nascent entrepreneurial ecosystem continues to grow, we expect to see larger and better deals for investors,” Donohue says.
Thanks to the community and the collaboration, “Over the next couple years we’re going to see more game-changing companies being built and succeed, we’re going to see some incredible exits,” Cooper says.
Fore more information on VentureOhio, visit ventureohio.org.
To download the 2015 VentureOhio report, click here.