Investment in Northeast Ohio is outpacing the nation….at least in startup IT and biomedical companies. Venture capital and angel investor cash went up by 34 percent in 2012. For the rest of the nation it went down 10 percent. Ideastream’s Brian Bull takes a look at some of the beneficiaries.
Like many startup internet companies occupied by mostly 20-somethings, the atmosphere at eFuneral in downtown Cleveland is loose.
There’s a huge bean bag chair, a sumo wrestler figurine wearing fuzzy dice, a Sasquatch carrying an American flag and a life-size cutout of Humphrey Bogart greeting you at the door.
“He was here when we got here," says eFuneral co-founder, Mike Belsito. "We like him, it’s a nice familiar face to see for when you come into the door.”
Belsito's company offers online resources to help with end of life planning.
“It is very much a start-up type feel. But at the same time, we feel really good about what we’re doing, we’re helping people.”
eFuneral has been around less than two years. It really got off the ground with a half-million dollar outside transfusion from local and out-of-state investors.
Those investors are going to have to wait a while to get their money back.
“By the end of next year, we can be at the point where we’re a positive cash flow company," says Belsito. "And so five years from now, we see eFuneral being a company that’s earning over $20 million in annual revenue. Of course, there’s a lot that needs to happen for us to get to that point.”
Investors in Cryothermic Systems are also waiting for their profit. It’s a Broadview Heights medical device company that landed $720,000 from investors last fall.
What they’re developing is what’s called the Excel Cryo Cooling System.
CEO Mike Burke says it’s a unique, patented collar used by emergency responders…
“That will immobilize the neck and head, also add a cooling element that will cool the brain very rapidly, so that during a cardiac arrest or stroke, it will slow the metabolic rate, which will reduce the amount of oxygen that the brain needs.”
Two things really got them moving: empirical research that demonstrated the device’s effectiveness; and help finding investors.
Part of that came from JumpStart, a non-profit development organization.
“JumpStart not only provided funding at critical stage, but also provided marketing services, advice across board on number of areas, help and support with due diligence they did in getting angels excited to invest in us as well,” adds Burke.
We’re talking about two types of investors. One group is venture capitalists. They’re usually fund managers who expect a high rate of return within 7-10 years.
Another type, angel investors, are more ambitious and willing to take greater risks. They understand they may have to wait even longer, and everything could go bust.
Lynn-Ann Gries, Chief investment Officer of JumpStart, says both types played a part in last year’s investment boom.
“$200 million was put into startups by venture and angel investors in the Northeast Ohio region in 2012. It’s certainly an uptick from last year’s number, which was $160 million.”
Health care and IT startups are attracting the most capital in the region.
And more and more, startups are relying on angel investors more than venture capitalists.
“There’s just a conundrum in the venture community, because funds historically promised their limited partners that they would have, say, a 10-year life," says Gries. They would invest the money, the companies would grow, they would harvest the investments and return the money all in 10 years. And that timeline has become way stretched out, thanks to the great recession.”
Gries says that while venture capital is harder to find, angel investors are filling the gap.
In 2006, only 11 percent of deals involved angels. Last year, over half of the deals did.
As to why Northeast Ohio saw start-up investment rise where other parts of the U.S. saw it drop last year, Todd Federman of the North Coast Angel Fund has one idea.
“We have 180 people in Northeast Ohio who are associated with our group. 180 people have decided to invest their own capital, rolling up their sleeves, looking at companies, making some direct investments themselves…and people wouldn’t do so unless they cared, unless they wanted to be part of something bigger. Unless they wanted to win.”
Clevelanders really want to win. And between the manufacturing industry, the Indians, and the Browns, they’ve often been disappointed. But staking money on fast and powerful horses like biomed and IT seems as good a risk as any.