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Cleveland+ Region Attracts $318 Million in New Venture Investment in 2007

Wednesday, January 23, 2008

Last year the NorTech Venture Capital Advisory Task Force reported in its inaugural 2006 Venture Capital Report that the region would need to generate and attract over $1.2 billion in venture capital by 2011 in order to meet the capital needs of companies located in Northeast Ohio. According to the findings from the recently completed 2007 Venture Capital Report of the Cleveland+ region, to be released in print mid February, Northeast Ohio has made significant progress toward reaching this goal. With $318 million in new investments, compared to $157 million in 2006, the region saw a doubling in the amount of capital invested into its growing companies as well as a 40 percent increase in the total number of investments made during 2007.

The most noteworthy industry sector detailed in the Report was bioscience, comprised of biopharmaceuticals, medical devices and healthcare services and IT, which accounted for approximately 75 percent of the capital raised. In particular, biopharmaceuticals accounted for just over 50 percent of all capital investment for the region. Deal size for this sector was exceptionally large, with an average deal of $15.4 million. Significant wins for companies such as Athersys ($70 million), Franklin & Seidelman ($25 million), as well as Ricerca, contributed to much of the total. Other average industry-sector deal sizes ranged from $1 to $7 million.

“2007 was a record year for the region’s bioscience start-ups. The companies are achieving major milestones and thus continue to draw significant investor attention. In addition, the number of seed and early-stage financings demonstrates that the pipeline of developing biosciences companies remains robust,” commented Baiju Shah, President of BioEnterprise.

A rise in the number of investments was also noted, with an increase from 48 in 2006 to 71 in 2007. While most industry sectors saw growth in the number of deals, the fastest growing sector overall for 2007 was advanced materials. The Report also shows that Information Technology (IT) remains a strong sector. When all IT-related companies, both bio and non-bio-related, are viewed in combination they comprise 39 percent of all investment dollars since 2004.

The Report also examines the type of companies that received funding by stage of investment and business maturity in the following categories: seed, early and growth. The Report reveals that dollars invested in early and growth-stage companies have more than doubled since 2006 while the number of investments made in these companies has nearly doubled. At the same time the seed-stage has remained a robust area for investment as a result of the support of Ohio’s Third Frontier Program and the activities of venture development firms, angels and risk-friendly investors.

“Seed investments are critical to the formation and growth of new companies in an innovation economy,” said Ray Leach, President and CEO of JumpStart Inc. “The increased rate of investment at the seed level is encouraging news. We need to continue to encourage the support of current activities that focus on this segment as well as the creation of new and expanded angel, seed and early-stage funds to ensure that we maintain capital in NEO that has the appropriate appetite for risk at the earliest stages of company formation and development.”

In 2007 there were a number of successful exits in the Northeast Ohio. Two of the most significant wins were the exits of MemberHealth ($630 million) and Hyland Software. The Hyland Software exit is of particular interest as it is among the largest IT company deals that Northeast Ohio has seen in recent years. Private equity firm Thoma Cressey Bravo agreed to acquire 58% of Hyland in a deal valued at $266 million. Hyland Software is a strong example of a Northeast Ohio-founded company that has reached a successful transition point with its founding and early investors receiving a significant return on their investment. Another benefit of this transaction is that Hyland and its new investors remain focused on growing the business in Northeast Ohio.

“Exits like MemberHealth and Hyland help demonstrate that this region has competitive, high-return investment opportunities” said James D. Ireland III, Managing Director of Early Stage Partners LP and Chair of the NorTech Venture Capital Advisory Task Force. In 2002-2004 the Task Force led efforts to pass legislation that resulted in the creation of the $150 million Ohio Capital Fund, which is now actively investing in regional venture funds around the State, including investment commitments to date of $48 million to eight funds that are headquartered or have offices in Northeast Ohio.

Another encouraging finding of the Report is that while regional fund investors are consistently making investments, they are being supplemented by an increasing number of venture capital funds that are making investments in Northeast Ohio companies for the first time, some of which have also opened offices in the region. Since 2004, almost 70 investors from outside the region have invested in Northeast Ohio companies. In 2007 four investment firms, including iNetworks, LLC of Pennsylvania and RiverVest Venture Partners of Missouri, opened new offices in Northeast Ohio.

“We are pleased to see that local asset managers are expanding their allocation of assets to regional venture capital, which facilitates the raising of new funds by local firms, while investors from outside the region and state see potential in the innovative ideas coming out of Northeast Ohio and are partnering on deals,” said Ireland. “These continued market trends demonstrate that our regional and state strategies to increase equity investments in local companies are working.”

From 2004 to 2007, Northeast Ohio companies were able to raise $856 million in venture and private equity investments. In the 2006 Report, it was determined that the capital needs for companies through 2011 equaled $1.2 billion – assuming that the investment amounts would increase over subsequent years. With $318 million raised in 2007, the Report affirms that Northeast Ohio has made positive strides towards meeting its capital goals.

“This is great news for the region. It is extremely important that in the coming years, the region continues to build on the momentum and do our best to close the funding gap that exists for innovative, high-growth companies,” said Dorothy Baunach, President and CEO of NorTech. “Company growth and Northeast Ohio’s competitiveness in the national venture landscape, depends on stable, strong, and growing seed, early, and growth-stage investing,” she added.

“This year’s findings demonstrate that regional economic development initiatives focused on venture capital are moving the needle and regional companies are making progress in accessing the capital they need to grow their business and to create opportunities,” noted Leach of JumpStart.

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About JumpStart Inc.
JumpStart (www.jumpstartinc.org) accelerates the growth of innovative early-stage businesses and ideas into venture-ready companies by delivering vital, focused resources to entrepreneurs and the community of Northeast Ohio. JumpStart identifies and invests in early-stage companies that have strong potential in the marketplace, solid prospects for high growth, and are likely to qualify for later-stage funding. Beyond investing, the JumpStart team provides a continuum of business development services to its client companies to help ensure their success.

About NorTech

NorTech (www.nortech.org), the Northeast Ohio Technology Coalition, is a technology-based economic development organization and catalyst for making Northeast Ohio a global leader in technology, innovation, and entrepreneurship. NorTech works closely with regional technology leaders to build a globally-competitive, innovation driven, technology economy by: Leading technology projects that have an impact on the region's innovation infrastructure; Linking together regional technology leaders and innovation assets to spur collaboration and commercialization; and Leveraging public and private investments to revitalize Northeast Ohio's economy. Through its Venture Capital Advisory Task Force, NorTech seeks to promote increased availability of seed and early-stage capital and greater professionalization of its management.

About BioEnterprise

BioEnterprise (www.bioenterprise.com) is a business formation, recruitment, and acceleration effort designed to support the growth of bioscience companies. Located in Cleveland, BioEnterprise provides management counsel and support services to health care companies. BioEnterprise's partners are Case Western Reserve University, The Cleveland Clinic Foundation, University Hospitals Health System, and Summa Health System. Additional technology partners include the NASA Glenn Research Center, Cleveland State University, NorTech, and BioOhio. The BioEnterprise Initiative comprises the collaborative activities of BioEnterprise Corporation, the Case Western Reserve University Technology Transfer Office, Cleveland Clinic Innovations, and Summa Enterprise Group. The combined efforts of these groups has created, recruited, and accelerated more than 60 companies in four years.