Right now, Greater Cleveland is doing some very appropriate economic soul-searching. We’re asking ourselves some hard questions about what it’s really going to take to “win the future.”
This soul-searching extends to our startup ecosystem, which is why our absence from the list of rising startup hubs in a recent Center for American Entrepreneurship study made headlines in Crain’s Cleveland Business.
Not being included on this list might confuse some, since there are many statistics and success stories showing how far this startup ecosystem has come since the early 2000s — when it barely had a pulse. But we’re not the only ones who have spent the last decade-plus growing. In fact, some of our peer regions have grown much faster in the same amount of time.
To improve, we must understand why that is. And to do that, we need to reexamine what makes world-class startup ecosystems tick. Because, while these ecosystems are stubbornly complex and difficult to build, their fundamentals are well-documented.
When you boil it down, you can see three key elements working together. The first two are the critical ingredients startups need to survive:
Risk capital — Meaningful amounts of equity capital to give local startups the runway they need to start and quickly scale their operation.
Entrepreneurial talent — The presence of, and support for, the kinds of experienced founders and talented team members who build fast-scaling startups.
The third element is the required outcome of the first two:
Significant profits — Large financial returns for founders, team members and private-sector investors (larger than they could generate by taking on less risky endeavors such as working for an established company or investing in the S&P 500).
Of course, there are many important subsets within these larger elements, especially when it comes to supporting entrepreneurial talent (mentorship, marketing, strong talent pipelines, connections to customers and corporate partners, etc.).
Much of our daily work at JumpStart involves some of these subsets, but it all builds up to one of the three key elements above, none of which work in a vacuum. They are codependent — like fuel, air and oil in a car’s engine. Blending them consistently over time, and at scale, is what generates the momentum that will guide more entrepreneurs, talent and capital into the ecosystem, making it self-sustaining.
This is simple enough to understand, but very difficult to control in the real world, where regions like ours face a historical myriad of economic challenges and more established startup ecosystems maintain a huge advantage because of the forward-momentum they have already built up.
In truth, there are only a small handful of U.S. regions that have managed to consistently blend all three of these elements over time to create truly self-sustaining startup ecosystems. Most other regions are still trying to balance one or more of the three key elements. Here in Cleveland, I believe our most significant challenge continues to be the shortage of risk capital. As it stands now, our collective venture capital firms would need to stretch to reach $300 million in assets under management. Compare this to Columbus, where venture capital firms have assets under management totaling more than $700 million.
This should take nothing away from the many regional investors (including JumpStart) who work hard to ensure that we do have some material capital to work with. However, we clearly still lack the amount needed to make significant progress when measured against other successful regional startup ecosystems.
JumpStart alone invested a record amount of $8 million in tech startups over the last year, and recently hit $50 million in total capital invested since 2004. Of course, we are proud of this activity, but Greater Cleveland’s ecosystem needs to be investing at least $30 million per year into startup companies in the future if we hope to build a truly self-sustaining ecosystem.
Otherwise, we get fits and starts in our ecosystem, as local investors get involved, then have to hold back from making more investments since they are out of risk capital, leaving entrepreneurs and their teams to work day-to-day in an under-resourced environment.
We know we have strong entrepreneurial talent in Greater Cleveland, and we know this talent can generate significant financial returns for investors. CoverMyMeds, CardioInsight, Explorys, TOA and many others have proven this. But like any engine, our startup ecosystem won’t run correctly unless we provide it with fuel — and that fuel is risk capital.
I’ll leave you with this quote from the author of the study mentioned above. “The establishment of startup hubs must be thought of in terms of decades, not years.”
As we enter the second decade of our journey, it’s important to remember our ultimate outcome will not be determined by some other region, or some abstract macroeconomic force outside our control. It will be determined by how well we aggregate the three key elements that power all successful startup ecosystems.
At the end of the day, we must find a way to aggregate enough capital to invest substantially more local funding into Greater Cleveland startups if we hope to build the forward momentum required to break out from our peer regions in the next 10 years.
That’s why I hope you will join JumpStart and myself in the coming months to find new ways to address this challenge and provide our startup ecosystem with the key elements it needs to be successful and self-sustaining — today, tomorrow and for generations to come.
This article originally appeared on Crain’s Cleveland Business.