Provided by The New York Times
Written by Marci Alboher
Cities have long offered tax incentives to encourage companies to stay and newcomers to relocate. But another option is gaining currency in old manufacturing cities looking to prop up their struggling economies — homegrown nonprofit groups that nurture new businesses from the ground up.
One of the more innovative of these groups is the five-year-old JumpStart Inc., which provides seed money to entrepreneurs with promising businesses in the Cleveland area. Like a venture capital firm, JumpStart identifies companies in which to invest and advises them on their next stage of growth.
But unlike a venture firm, JumpStart relies on charitable donations, many of them from the private sector, for its financing and does not return a share of profits to those who provide the investment dollars. The return comes in the form of satisfaction for elevating a city or region’s economic standing.
Robert Litan, director of research for the Kauffman Foundation, a nonprofit organization focused on fostering entrepreneurship, is among those who see great value in JumpStart’s approach. “The traditional model for helping relatively depressed areas of the country is smokestack chasing, where a city provides incentives to attract companies or to keep them from leaving,” he said. “But the problem with that approach is that it is very expensive and it is a zero sum game from the point of the country as a whole, because if I attract a company to my city, then I win, but the city where the company used to be from loses.”
If a city can successfully spawn more businesses locally, Mr. Litan said, then they are more likely to stay at home.
Early results on the impact of JumpStart’s work are promising. According to a report it commissioned from Cleveland State University, JumpStart’s investments have generated ripple effects throughout northeastern Ohio, like the $56.3 million in goods and services produced and the creation of 346 new jobs. While the numbers are small now, JumpStart believes those ripples will spread exponentially over the years.
Similar efforts at spurring economic development have been bubbling up around the country, with varying degrees of government and private support, and they are often the biggest source of early stage financing for technology companies in their regions. They tend to be found where there is a steady supply of innovation coming out of nearby research universities.
One of the pioneers was the Ben Franklin Technology Partners in Pennsylvania, which was created in 1983 by the state’s governor at the time, Richard Thornburgh, to breathe new life into the state.
JumpStart is led by Ray Leach, a serial technology entrepreneur who says he knows what it is like to build a successful company in northeastern Ohio because he has done it himself.
After a 20-year career building companies and advising others, Mr. Leach said he was ready to turn his attention to the macroeconomic condition of his home community and to lay a foundation for his own reinvention as a venture investor. Using a team of other serial entrepreneurs, former investment bankers and a board of local business luminaries, JumpStart plays many roles.
Synapse Biomedical, a medical device company, is a typical JumpStart company. Anthony Ignani, one of the founders, encountered JumpStart when he entered a business plan competition in 2003 at Case Western Reserve University, where a JumpStart staff member was a judge. The company won $20,000 as well as introductions to people who gave valuable feedback on its business plan.
In 2005, JumpStart invested almost $300,000 in Synapse, and then worked closely with the company as it went on to raise nearly $5 million in a first round of venture financing. Just last month the company received approval from the Food and Drug Administration for a device intended to shorten the length of time patients remain on a respirator. Now that Synapse is more mature, JumpStart plays a much smaller role.
Warren Goldenberg, a lawyer who specializes in technology deals, represented several clients working with JumpStart before becoming a client himself when he assumed the chief executive’s role at CardioInsight Technologies, another medical technology company born out of research at Case Western Reserve.
“In Boston or Silicon Valley, you don’t need entities like JumpStart. But here in the Midwest, you need a little goosing, and CardioInsight is a good example of a company that would not have existed if a group of organizations had not proactively worked to pull the pieces together to form it,” Mr. Goldenberg said.
Jumpstart relies on financing from a mixture of private companies, foundations and government entities, all of whom are committed to nurturing local companies in northeastern Ohio. The region was so economically battered that in 2002 it was ranked last out of the 61 largest metropolitan areas in the United States in a survey by Entrepreneur Magazine of the best regions for entrepreneurship.
Mr. Leach likes to point out that by 2006, Cleveland had risen to the 23rd position. “My most cynical side says it’s a happy coincidence,” he said. “But clearly the momentum was starting.”
The federal government has also gotten behind Jumpstart’s efforts. Robert Sawyer, the Chicago regional director of the Federal Economic Development Administration, awarded it a $750,000 grant. Mr. Sawyer’s region encompasses six states — Minnesota, Wisconsin, Indiana, Ohio, Michigan and Illinois. “If I could seed a Jumpstart in each of those states, I would,” he said.
Innovation Works in Pittsburgh is a regional partner of the Ben Franklin Technology group and, like Jumpstart, is run by a former technology entrepreneur, Richard Lunak.
“When people think of technology entrepreneurs and venture capital, they think of Silicon Valley and that’s where they think it ends,” Mr. Lunak said. “But there is a lot going on in regions like Pittsburgh, which has over a billion dollars of federally funded research pouring into its universities annually.”
According to the Kauffmann Foundation, the most successful of these organizations are those led by a chief executive who has stood in the shoes of a start-up in that region. Mr. Lunak certainly fits the bill.
“I’m the C.E.O., but 18 years ago I helped start a medical technology company, Automated Healthcare, which was started with an $89,000 loan from Ben Franklin Technology Partners,” he said. “When I left, the company, which had since been acquired by McKesson Corporation, employed about 1,800 people. But it is still located in Pittsburgh. In that time, it has grown and acquired other businesses that have relocated to our region.”
He added that “it also drives a lot of other regional businesses, like suppliers of motors, amplifiers and sheet metal, so it has created both blue- and white-collar jobs. This is why these technology-based companies have sustainable competitive advantages.”
The Chicagoland Entrepreneurial Center, a nonprofit affiliate of the city’s chamber of commerce, has been working to expand that city’s future businesses since 1999. David Weinstein, who was Mayor Richard M. Daly’s technology adviser before starting a couple of technology companies, prides himself on knowing what fledgling entrepreneurs need. “It comes down to three things: customers, capital and mentors,” Mr. Weinstein said.
To bolster the capital part of that equation, the Chicagoland Entrepreneurial Center also started the Illinois Innovation Accelerator Fund, a $10 million for-profit venture fund that invests $250,000 to $1 million in companies that have yet to produce revenue.
Asked about the center’s results, Mr. Weinstein cites the connections it makes for its companies. “We measure how many introductions a year we make to our clients to potential customers and investors, and on average it is about a thousand a year,” he said. “It is all really tangible.”