August 19, 2010
Venture capital investment in Northeast Ohio rebounding from worst year in a decade
Tom Breckenridge, The Plain Dealer
CLEVELAND, Ohio — Venture investing in startup companies has picked up through the first half of the year, following a dismal 2009.
Venture capitalists and angel investors in the 21-county region have funneled $36 million into 39 deals through June, JumpStart Inc. reported Wednesday.
That’s up from $30 million and 24 deals the first half of 2009. For all of last year, venture investments totaled only $99 million in the 21-county region, after averaging a robust $249 million each of the previous four years.
The recession was a big factor as venture investors have pulled their horns in.
“Things are better than the worst year in over a decade,” said Baiju Shah, president of BioEnterprise, a University Circle-based incubator of health-care startups. “We are not yet back to normal levels in venture activity here or nationally. We’re nowhere close to it.”
JumpStart, a venture-development nonprofit based in Cleveland, believes venture activity for the year will eclipse $100 million. By how much is the question.
Activity is typically busiest in the fourth quarter, as startup companies and their investors sign deals before year’s end, said JumpStart spokeswoman Cathy Belk.
Nationally, venture activity is at $11.4 billion through June, up 49 percent over last year, Belk said. That covered 1,646 deals between startups and investors, a 23 percent increase.
In Northeast Ohio, the 39 investment deals through June was a 63 percent jump from 2009. While the rate of growth in regional deals was higher than the nation’s, the amount invested in each deal here is smaller.
“We’re still in the process of creating and forming new companies,” Belk said. So regional deals “tend to be at an earlier stage and require less money.”
Health-care startups drew 71 percent of the venture money, in keeping with historic trends.
There’s a “growing willingness” by health-care investors to “dip their toes back into newer investments,” Shah said. “But it’s still small and still very cautious.”
The sector faces uncertainty on a number of fronts. There’s a growing push for the U.S. Food and Drug Administration to take a fresh look at ensuring the effectiveness and safety of medical devices and drugs, Shah noted.
That could mean more time and testing before products hit the market, heightening risk and capital needs for startup companies.
But the region and Ohio enjoy at least one advantage, Shah said. There’s more seed- and early-stage funding here, thanks partly to the $2.1 billion Third Frontier program, which invests in high-tech development, Shah said.
The region has seen four startup companies acquired this year, compared with just one last year, Belk said.
Such “exits” are important because investors get a return on investment and funnel their wealth into new companies.
“Exits in general are what keep the capital engine running,” Belk said.
The region, and the nation, won’t see a return to pre-recession levels of venture investing until the economy brightens considerably, said Scott Shane, a professor specializing in entrepreneurial studies at Case Western Reserve University.
New company acquisitions and initial public offerings remain sluggish, he noted.
“It doesn’t matter how many [new company] opportunities we have here,” Shane said. “The bad economy for the investment industry will keep us from growing a lot here.”