It’s no secret that I’m a huge fan of the Ohio Capital Fund (OCF), a fund of funds helping to spur venture investment in the State of Ohio (read my past posts "Keep on Truckin'" and "Can You Hear the Drum Beat?"). Given my job I’m often asked about the “state of affairs” as it relates to startups, venture funding and the like. I always end up mentioned the OCF, how impactful it has been in bringing venture funding to Ohio and how, unfortunately, the initial allocation of funds ($150 million) is fully spent and was only a fraction of what was/is truly needed.
In the 1980s, 1990s and into the early 2000s, venture capitalists pretty much flew over the Midwest, never landing to check out the great investment opportunities available here. In a 2006 report for the Federal Reserve Bank of San Francisco, veteran entrepreneur, venture capitalist and economic developer George Lipper wrote about some of the ways so-called “fly-over” states were combating this challenge:
“Among the more promising approaches is a program originally launched in Oklahoma in the mid-1990s. The program, frequently called a fund of funds, uses contingent tax credits to raise funds that are, in turn, invested in established venture capital firms willing to evaluate and invest in potential Oklahoma growth companies.”
A few state venture capital funds date back to the 1970s. Some states have funds that invest directly in companies, but many of the next-generation funds–like our state’s Ohio Capital Fund—are “funds of funds.” States invest pools of money in venture capital funds that, in turn, invest in startup and growth companies, often in targeted industries.
States raise money through the bond market (Ohio raised $150 million in commitments from institutional and other accredited investors in 2005) and use instruments like tax credits to protect investors from losses. Most state funds of funds, including those in Indiana and Michigan, are managed professionally. In Ohio, Buckeye Venture Partners, LLC, an Ohio limited liability company, serves as the program administrator. (Buckeye Venture Partners is wholly owned and managed by Fort Washington Investment Advisors, Inc.)
These funds-of-funds are used to lure new VCs, typically requiring them to open local offices to qualify for state dollars. The Ohio Capital Fund has attracted ten venture firms to our state since 2005, according to Paul Cohn, Vice President and Regional Director for Fort Washington.
VCs receiving state dollars are also usually required to invest a good portion of this money in companies located in the state. Here, VCs must use a good faith effort to invest at least half of their allocation in Ohio companies. So far, the venture capital firms drawn to the state by the OCF have invested about $80 million in 25 Ohio companies, says Cohn. Add to that the investments by the Ohio-based VC funds that participate in the program and you have a total of $170 million invested in 63 Ohio companies.
These 63 companies have pulled in another $330 million in co- or follow-on investment thus illustrating the leverage achieved by the program. Simply put, for every $1 drawn down from the Ohio Capital Fund, $6.05 has been invested by investors.
As anticipated, the fund of funds has put more VC feet on the ground here. “It’s a lot easier for me to stay on top of good opportunities and track deal flow in Ohio by being here than it would be if I were in in the home office,” said Karen Spilizewski, a vice president of St. Louis VC firm RiverVest, which opened its Ohio office in Cleveland in 2008. “I also enjoy working with the principals from other out-of-state funds. We share diligence and syndicate deals, when appropriate. There’s so much opportunity in this region we’re busy all the time.” RiverVest made its first two Ohio investments with Ohio Capital Fund money last year – Securus Medical Group and Neuros Medical. (FYI, these are also JumpStart portfolio companies.)
Meanwhile, all venture capital funds are benefitting from deal flow fed by other Ohio economic development projects, namely the Third Frontier and angel tax credit program. “I’ll credit the state for putting together a capital continuum—research through seed, angel, venture,” Cohn said. “Funds are benefiting from the robust investments the state’s made in building the ecosystem.”
Those investments are beginning to bear fruit. Ohio Capital Fund-supported companies have created nearly 2,000 jobs, according to the Ohio State venture capital report. In addition, the OCF had its first two exits last year – Blue Ash Therapeutics in Cincinnati and Clear Saleing in Columbus. “Blue Ash sold for more than a ten times return to investors,” Cohn said. “Clear Saleing was also a very profitable transaction.”
Exits—primarily acquisitions or IPOs -- liquidate the Ohio Capital Fund’s investments. “Last year, we received $10 million in distributions from funds, like RiverVest,” Cohn said. “This is the first job I’ve had with a double bottom line—economic development and profit,” he said. “I’m a big believer in what we’re doing. It’s definitely making a difference.”
The good news? State funds-of-funds like the Ohio Capital Fund are creating growth opportunities for venture capital firms and high-growth companies – most without a cost to taxpayers. These state funds are building companies that create not only jobs, but profits for other investors. And these opportunities are adding strength and vigor to later stage deal flows in their respective states. The bad news? The Ohio Capital Fund is almost tapped out and is waiting for legislation to raise its second fund.
If you, like me, would like to see the OCF continued, call your legislator and encourage them to put this on the agenda immediately.