[MUSIC] Hello again, and welcome back to Beyond Silicon Valley. I am Michael Goldberg. We have just one lecture after this one, and we've covered a lot so far, including government support for entrepreneurship, the role of full philanthropy, intermediary organizations, anchor institutions, seed accelerators and angel investing. This time, we'll explore access to venture capital. Entrepreneurs who want to grow their companies, often dream of receiving an investment from a leading venture capital fund, that can provide capital and strategic advice. But where your company is located can have a big impact on access to venture capital. In the United States, venture capital funds are geographically concentrated in select markets. The majority of all venture capital investing in the U.S. occurs in Silicon Valley in San Francisco. Venture capital investors traditionally want to invest in companies that are close to their offices, so they can provide mentorship, and support on a regular basis. For entrepreneurs living in transitioning economies, it remains extremely challenging to access the venture capital funding they are looking for. This advertisement for the renewal of the Ohio Third Frontier in 2010, reminded Ohio voters of how far the state had to come in providing venture capital and support to entrepreneurs. Communities around the world have to be creative in their approach. To entice private venture capitalists, to support companies' commercialization efforts after receiving initial seed funding. Or the money that typically comes from friends and family, seed accelerators, and angel investors. The challenge that entrepreneurs face in raising venture capital, is sometimes called the valley of death. In many transitioning economies like Cleveland, government and donor funded programs have been introduced to provide the necessary funds to address this gap. One such donor funded program is the 150 million dollar, Ohio Capital Fund. Formed in 2006, and financed by the government of the State of Ohio, the Ohio Capital Fund, is a fund of funds, launched to make investment capital available for Ohio-based early stage enterprises. At a time when it was lacking. The Ohio Capital Fund money, is invested in venture capital funds, alongside other private investors, which then invest directly into companies. Line Stream Technologies and embraced Pet Insurance, are two start up companies that received investment from the Ohio Capital Fund. Dave Neundorfer from LineStream, believes this government funded venture capital investment, was important to the success of his company. >> We've benefited greatly from some of the state programs that have been put in place starting with the Ohio Capital Fund and their backer of early stage partners. Early state partners provided our series A funding and then contributed towards our series B funding. So absolutely critical to our growth was not only having the support from early stage, but also at a higher level the support from the state. >> Laura Bennett found it difficult to attract venture capital investors from outside of Ohio, who wanted to invest in Embrace. >> When we were looking for, for funding I, I went all over. I went everywhere I could go the, where people would actually open their door to me. So I did, fly out to California. I went out to New York. I spoke to extensively to venture capital in Chicago. But in the end I think, they always have the, the nagging thought that, oh, it's a bit of a pain to come out to Cleveland. Obviously California that, that is difficult and unless they had other bus, businesses here, makes it probably not practical for them. And so, you know, having local venture capital firms, who care more about the companies in the area, than, you know, other areas, is, is key for this area to grow. >> Paul Cohn, the Managing Director of the Ohio Capital Fund, explains why the Ohio Capital Fund was set up. >> The Ohio Capital Fund was set up by legislative action, actually, recognizing that there was a void in early stage venture capital in Ohio. And so, the Ohio Capital Fund was set up as a fund of funds, to invest into venture capital funds and give them an incentive to invest into Ohio companies to fill that void. >> Cohn is employed by Fort Washington Partners. which is a private investment management firm, hired by the State of Ohio to administer the Ohio Capital Fund. Elected officials in Ohio believed it was important to have an independent, experienced, professional manager, to make recommendations to the government, regarding which fund should receive an investment. Unlike many of the Third Frontier grants we discussed in earlier lectures. The government is expecting their investment in the Ohio Capital Fund, to be repaid in full. Ten years ago there was a significant venture capital gap in North East Ohio. In 2004, start up companies in Northeast Ohio, were only able to raise 104 million dollars, which paled in comparison to other regions. Lisa Delp is the former director of the Third Frontier. >> After the angel fund, the angel funds come in. There is a need for a next stage of capital, that was absent largely in Ohio. We didn't have a lot of venture funds of if we did, they were investing outside the state. So the state looked for ways to stimulate that activity as well. And the, the notion of the Ohio Capital Fund came into being. >> Suddenly, twelve venture capital funds that had never had an office in Ohio, set up a presence in the state, in order to access an Ohio Capital Fund investment. Kohn explained, how the Ohio Capital Fund insures that their funding reaches start up companies in Cleveland and other cities in Ohio. >> The Ohio Capital Fund requires every venture capital fund that receives an investment from us, to invest at least 50 cents of every dollar that we give them, at least an amount equal to that, back into early stage companies in Ohio. We also require them, generally, to have a presence in Ohio. >> Having additional venture capital funds in Ohio, has proven critical for entrepreneurs in Cleveland looking for access capital to grow their companies. Baiju Shah is the former CEO of BioEnterprise. >> What the state did here, which I think was important in something that would, you'd want to see replicated, in any region or geography. That was trying to stimulate a high growth, ecosystem, is they created a program whereby they are attracted capital providers, to the state, through an incentive in the form of an investment into those capital providers, into the venture funds themselves. >> Several of Cleveland's leading foundations, already involved in supporting entrepreneurship through grant, decided to make investment into local venture capital funds, as they were also concerned, about the lack of available venture capital for entrepreneurs. These foundations understood, that they expected return on investment in unproven and venture capital funds in Cleveland, would likely be the below of what they could achieve as limited partners or investors. In other alternative investments, such as Silicon Valley based venture capital funds. Ronn Richard is the CEO of the Cleveland Foundation. >> We wanted to invest, in local companies giving away venture capital funds. Either they have venture capital funds giving venture capital money to local firms, to grow more companies in Cleveland. Now that's called mission investing. So, a lot of foundations are trying to use their balance sheet side, not their rent money, but their corpus that they invest, they're trying to think about, you know, how can we leverage that money too. >> David Liddle is a Venture Partner at the Silicon Valley-based venture capital fund, U.S. Venture Partners. >> You need to cultivate, limited partners, a role that local philanthropic, or foundation, or government dollars can play, is to stand in the place of traditional limited partners until the ball gets rolling. >> Linestream Technology, received an initial investment from Early Stage Partners, a Cleveland-based venture capital fund, whose limited partners include the Ohio Capital Fund and a number of Cleveland's foundations. Shortly thereafter, U.S. Venture Partners made an investment in as well. >> Northeast Ohio was a region that I think benefited from the, the priming of the pump if you will. In terms of providing some capital through the state, through the government. To get the flywheel turning, right? And there were some very, very early firms in, in the venture capital space, Early Stage Partners being one of them that kind of helped in parallel. And benefited from that, that priming from the state. >> Government and donor intervention to increase access to venture capital in Cleveland, has created more funding opportunities for entrepreneurs. In 2013, 118 Cleveland companies raised 259 million dollars from venture capitalists, as well as corporate and angel investors representing an increase of 115% over 2004. And during that same time frame, the number of companies attracting venture capital, more than tripled from 36 to 118. Several acquisitions of starter companies, have occurred over the past several years, but Cleveland's investors have not benefited from a large IPO or acquisition on the scale of a Groupon, Nest or Instagram. Investors are still waiting to see if they will enjoy the financial returns on their investments and local venture capital, that can compete with Silicon Valley, and other more developed entrepreneurial eco-systems. Other markets outside the U.S. are also seeing significant support from the government or donors, to increase access for venture capital for entrepreneurs. Yi Zhang, of Kaiwu Capital, shares his experience in China. >> I work for Kaiwu Capital. We are a venture capital fund based in Beijing and we have a overall, one billion RMB fund under management. Shanghai government is one of our limited patners, and they invest around 100 million RMB which is equal to 50 million US Dollars into our fund. Now, their expectation is not just get a financial return as the other LP did. They are, they understand that they do not want to do the professional investment by themselves. And they want to market to select the best start-up. So, they, they understand the best way to do that, to invest in a professional firm like us. So, the expectation for them is, make sure we invest in a start-up that can drive the overall economic GDP gross in Shanghai. >> There are a growing number of international impact investors, that are deploying capital in private companies in emerging economies, and taking a similar patient view on returns. Impact investments are investments made in the companies, organizations, and funds with the intention to generate measurable beneficial social impact, alongside financial return. Allen Taylor runs Endeavor's investor network program, which is focused on impact investing. >> The funds that are most aligned with what Endeavor is doing, believes in economic development, and believe in job creation, believe in funding great companies to do that but particularly in markets where the, the liquidity environment's not very clear. Exit opportunities don't occur to be immediately available, they're willing to take a little bit of an extra risk and say, hey, I might not earn my money back in five years or seven years, but I have a good shot at doing it in ten years, and so I'll make an investment. >> So, to recap. We've seen how government and donors can help address a lack of venture capital in the community, by becoming investors in local venture capital funds, alongside private investors. Similar to many of the other programs we have discussed during this course to support entrepreneurship. Investors in venture capital, need to understand, that it could be a decade before they will see potential return on their investment. The performance of venture capitals in asset class, over the past ten years globally, has trailed the public equity market indexes. And most of the best performing funds are located in Silicon Valley, where the highest concentration of yield flow resides. In 2011, venture capital investments at the seed funding stage in the United States, declined about 48% over the prior year, and investments were concentrated in social media, and software, which are not areas of particular emphasis in Cleveland. Communities who want their entrepreneurs to avoid the fundraising valley of death, are continuing to find ways to intervene with creative, professionally managed programs, to try to make venture capital funding available. How do governments and donors measure the success of their investments and venture capital funds? Investors in Silicon Valley, are solely interested in Exit and Liquidity. In Ohio, the 71 companies that have received money from the Ohio Capital Fund, have hired over 2500 employees, and are generating almost 30 million dollars in payroll taxes. And while small, this economic development impact, matters to government and philanthropic investors. They would like to see financial returns from exits, but these realizations have been slower in the Midwest, than in Silicon Valley. The Ohio Capital Fund has fully allocated their investment capital, and it is not clear if the fund will be renewed by the government, which means that new investments may not be available. Opponents of the Ohio Capital Fund, believe that the private sector should provide the necessary venture capital to fund companies, not the government. This debate is playing out in transition economies here, and outside the U.S., and the success of these type of government or donor funded programs, remains uncertain and inconsistent. That's it for now. Next time will be our final course lecture, where we will recap our previous discussions, and look to the future. See you then. [MUSIC]
