Creating a Seed Stage Investment Fund in Your Community: The Northeast Ohio Story
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If you are here, you've indicated an interest in starting a seed fund in your community. You are probably wondering if there’s already enough pre-seed / seed capital in your community (likely not) and whether or not there is enough deal flow to warrant creation of a new fund. These are the things we were contemplating back in the early 2000s...
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Creating a Seed Stage Investment Fund in Your Community: The Northeast Ohio Story
- 1. Creating a Seed Stage Investment Fund in Your Community: The Nor theast Ohio Stor y October 2014
- 2. You Are Probably Wondering … Is there suf ficient unsatisfied seed stage deal flow in your region to support a new fund that would invest in 10-20 deals annually? – What is a good way to estimate current and recent pre-seed/seed deal flow? Is your region lacking suf ficient seed capital resources to fund existing, high-quality seed stage deal flow? – How can we quantify the amount of pre-seed/seed capital available for investment now?
- 4. Cleveland Needed More than Infrastructure
- 5. In the past 30 years, all net new job growth stemmed mostly from high growth entrepreneurial companies.
- 6. And Then … There was JumpStar t
- 7. Practical Considerations COMMUNITY BUY-IN PATIENCE METRICS EXPECT FAILURE FIRST
- 8. Funding Government, Philanthropic Foundations & Individuals
- 9. FUNDING SOURCES VARIOUS SOURCES GRANTS NON-PROFITS GOVERNMENT ANGELS VC AND ANGELS VC AND PRIVATE EQUITY TYPICAL FUNDING $25K-50K $25K-250K $250K-500K $500K - $3M $3M - $50M COMMERCIAL DEVELOPMENT Identify the market opportunity Define the business model and market opportunity Validate the commercial concept with test market sales Validate the opportunity through growth of sales, margin, and customer satisfaction Achieve profitability, sales growth, and expanded distribution TECHNOLOGY & PRODUCT DEVELOPMENT Prove the functioning of critical components of the technology or product Prove the performance of the technology or product against market specifications Develop a market-ready product, proven by customer tests, at cost and quality targets Introduce the product with manufacturing, quality, service, and distribution capabilities Implement a comprehensive product line strategy Investment Thesis and Guidelines DEMONSTRATING GROWTH & SUSTAINABILITY JumpStart’s Focus
- 10. Talent
- 11. No Risk, No Reward
- 13. Ongoing Mentoring / Coaching / Oversight
- 14. JumpStar t’s Nor theast Ohio Results
- 15. JumpStar t: Annual Deal Flow 4.4M People Populate Northeast Ohio
- 16. JumpStar t Por tfolio: # of Investments YEAR # NEW INVESTMENTS # MINORITY/WOMEN LED 2005 6 2 2006 9 3 2007 8 1 2008 8 2 2009 9 1 2010 9 2 2011 6 2 2012 11 2 2013 11 1 Total 77 16 21%
- 17. JumpStar t Por tfolio: $ Invested FISCAL YEAR (ends June 30) FUNDS INVESTED AVERAGE FOLLOW-ON RAISED 2005 $1,555,000 $2,380,000 2006 $3,867,442 $2,990,410 2007 $3,365,000 $13,894,123 2008 $3,849,991 $29,549,837 2009 $3,160,000 $22,284,731 2010 $3,178,000 $41,987,879 2011 $3,200,000 $53,994,921 2012 $3,875,000 $73,855,223 2013 $3,200,000 $100,356,174 2014 0 $97,176,285 Total: $29,250,433 $438,469,583 Average: $3,250,048 $43,846,958
- 18. JumpStar t Por tfolio: Company Status INITIAL INVESTMENT (FISCAL YEAR) NUMBER OF COMPANIES THAT CLOSED NUMBER OF COMPANIES THAT EXITED NUMBER OF COMPANIES STILL OPERATING TOTAL 2005 2 1 3 6 2006 3 1 5 9 2007 5 0 3 8 2008 4 2 3 8 2009 3 2 4 9 2010 1 3 5 9 2011 0 1 5 6 2012 0 0 11 11 2013 1 0 10 11 Total 19 10 48 77 25% 13% 62% 100%
- 19. Contact • Lynn-Ann Gries Chief Investment Officer, JumpStart Inc., Cleveland, OH 216.363.3403, lynn-ann.gries@jumpstartinc.org
Notes de l'éditeur
- Introduction and welcome. Thanks for your interest in learning about local seed investment funds.
- If you are here you’ve indicated an interest in starting a seed fund in your community. You are probably wondering if there’s already enough pre-seed / seed capital in your community (likely not) and whether or not there is enough deal flow to warrant creation of a new fund. These are the things we were contemplating back in the early 2000s.
- By 2002 Cleveland had spent a lot of money investing in large infrastructure project…stadiums, museums, office towers etc. But little attention had been paid to fostering “technology based economic development” (TBED); assisting entrepreneurs and building a robust ecosystem in which they can thrive.
- A subsidiary of the Cleveland Chamber that focused on TBED took the initiative to convene local stakeholder in a conversation around entrepreneurship. Involved in this effort was the local office of McKinsey (acting in a pro bono capacity as the “project staff”) and anyone and everyone currently involved in assisting, working with and funding very early, seed-stage companies. Local entrepreneurs were a very important part of the dialogue.
- Realizing that high growth, entrepreneurial companies generate most new jobs, the purpose of the work (led by Nortech/McKinsey) was to come up with recommendations on ways to improve the local environment (“ecosystem”) to support entrepreneurs in their quest to build great companies.
- Although there were several recommendations in the final report…one of the key recommendations was to create a dedicated pre-seed fund. This recommendation was made after the consultants studied different models across the country and found a great one just two hours down the road from us in Pittsburgh. That organization, InnovationWorks, was taking economic development money from the State of PA and investing it in pre-seed stage companies.
- As we look back on the ten years since we began investing, it’s important to highlight a few things that we’ve learned along the way. First, funds that use public and philanthropic funding to make equity investments need significant community buy-in. Everyone has to agree that it’s the right move at the right time…because waiting for these companies to mature and create jobs will take a long time…hence patience. The average time from investment to exit for traditional VCs these days is ~8-9 years. For our model, it’s about 12-15 years, given how early we invest. Stakeholders must understand and be okay with this. Likewise, it’s important to decide upfront exactly what metrics should be measured. Follow on funding is what we used…noting that it was a proxy for progress on the way to an exit. We specifically shied away from talking about jobs…as some of our companies stay small for a long time. Finally, the fund needs to prepare the community and the local media that failure will come before success. If papers cover every new investment that you make, tell them that it will a long time before they’re talking about a successful exit, but not such a long time before they hear of companies closing down.
- JumpStart was fortunate to receive money from the State of Ohio to use for operations and investments. For every dollar we received from the State we had to match it with money from other sources, such as foundations or corporate philanthropy.
- This is the rubrick provided to us by the State of OH to highlight where we should be focusing our efforts. While it’s a bit of an eye chart, the red shaded area represents the stage of company development where most of our investment are focused.
- One very important part of the model in addition to the investment capital we provide is the talent that provide, free of charge, to each portfolio company. We employ EIRs who are typically former entrepreneurs who are “between gigs” who are happy to spend time working with new companies. They are on the JS payroll and take responsibility for 4-6 companies at any one time. They are there to coach, oversee, help in many ways, usually with fundraising, business model, setting up a board etc.
- Reiterating exactly where a pre-seed fund needs to be…taking the risks that no one else in the community is willing to take…this means we generally invest after friends and family, but before angels and VCs.
- At JumpStart we refined our process over the years…starting with a 2x per year intake schedule to a 12x (once per month) intake schedule. We would work with applicant companies to get them ready to apply, once approved to present to us, we’d help them refine their “pitch” and if they were not selected to move forward into due diligence we provided extensive feedback as to why. Our high velocity investing model is something we’re proud of and enabled us to close bewteen 8-12 deals per year, deploying approximately $2 million annually.
- Again, referring back to our cohort of EIRs, each one has a small portfolio of companies to work with post-investment. Our investments are doled out in tranches as milestones are met and EIRs are responsible for this go/ no-go decision.
- To provide some perspective I thought it would be helpful to show you the results that we’ve achieved over the past 10 years.
- Deal flow stats plus population.
- Investments per year and how many are minority/female led.
- Follow on funding raised (includes VC, Angel, Gov’t Grants, Loans)
- Success metrics…how many companies have gone out of business, exited, etc.
- Thanks for listening. Happy to take any questions you have. Please call or email.