Part 2: Financing
Aired September 3, 2002

When it comes to investing in new Cleveland area businesses, this region has a major problem - hardly anyone is doing it. In fact, less than half of one percent of everything that the area produces comes from venture capital investment. Entrepreneurs say local money is scarce, while venture capitalists say there aren't enough good ideas that are worth the money. As part of our ongoing series, A Quiet Crisis, ideastream's Shula Neuman reports on the difficulties funding the region's entrepreneurial spirit.

  

A-ha! That's the way Don Knechtges describes the initial moment when someone has an idea for a new product or business. Knechtges is managing director of Great Lakes Innovation and Development Entreprise - or GLIDE - a Lorain County incubator. He says between the "a-ha" stage and the "on-the-road-to-success" stage the entrepreneur frequently has to deal with the task of raising money to keep the venture going. But there's a difference between raising less than $250,000 for start-up, or seed money, and raising $5 million from Venture Capital firms to help a business grow. In fact, Knechtges says, so-called "angel investors" and venture capital is relatively easy to find. It's that middle ground that causes problems.

Don Knechtges: Many good companies who have started have gone through the seed and angel investors then have found a hole in the financing on the equity side and can't get financing. NOT because they don't have a good idea, but because they don't fit the size and as a result, they grind to a halt in their development.

Knechtges and his colleagues at GLIDE are trying to find ways to make sure that no business falls through the financial cracks. That's all fine and well, says investor Daniel Kellogg. He's managing director of Crystal Internet Ventures, a Cleveland firm that throws its money behind high-tech companies all over the world. Kellogg says he's based in Cleveland because he lives here, but he hasn't seen many worthwhile local ideas. Kellogg says he's opened offices in Palo Alto, California and Singapore so his business is closer to where the action is.

Daniel Kellogg: In the year 2001, I believe we received more unsolicited business plans-before we opened up our Singapore office - from Shanghai, China than I received from Northern Ohio. Now you explain why somebody writing in another language, translating it, shipping it to a fund that's in Ohio in order to get funding, why that should happen at a higher rate than somebody from Cleveland.

Kellogg thinks the entrepreneurial spirit in Northeast Ohio has been stamped out by Schadenfreude.

Daniel Kellogg: And that's taking joy in the misery of others. And I sense that when an entrepreneur stumbles that a lot of people think, "They finally got their come-uppance." When our people locally succeed-especially in hi-tech, early stage transactions, I don't see the support and enthusiasm.

Kellogg says if this region wants to encourage start-ups, then they have to support them and NOT just financially but morally, as it were, by singing their praises, celebrating successes, patronizing new enterprises, and THEN, being ready with more dollars when more funding is needed.

That's not what's currently happening, according to the entrepreneurs. When Steve Belovich was ready to raise more money for his software company, SmartData, he became convinced that Northeast Ohio financiers weren't ready for hi-tech ideas.

Steve Belovich: Classic case, I had one guy tell me, one VC, he says I'd like to see more product. I say well, we're going to release a product for the PDA's, personal digital assistants - palms and everything else. He gets up, puts his thumbs in his vest. Walks around the room, sits back down and looks at me. I had my chief financial officer and somebody else and we're all looking at him. And he goes, "Steve, that comment scares me to death." And I looked at him - I didn't know what to say, I just said, "Really." He said, "You could be chasing the shorter skirt; this could be a fad." What could I say to that? In other words, Microsoft's wrong, Palm's wrong, 3-Com's wrong, Sharp's wrong, Casio's wrong, Comp is wrong. He's right. I just got up and said, "Hey I appreciate your time. Thanks for the interest we'll stay in touch". I mean that's all you can do.

Belovich says as long as the money-men lack the foresight to recognize a good investment, area entrepreneurs will be forced to either look elsewhere for money or relocate.

Of the 32 Venture Capital firms in Crain's Cleveland Business Book of Lists, less than one-third specify a preference for investing in Ohio companies. Start-up consultant and economist Erwin Bruder says this doesn't mean V-C firms won't consider the region, it's that they aren't finding the right deals.

Erwin Bruder: The common complaint of capital is that there aren't any deals around here. The common complaint of the entrepreneur is that we have a world-class deal and there isn't any capital around here. Well, actually there are both world-class deals and there is capital as well. Putting them together, that becomes the hard part and that is part of the things that I do.

Bruder says there's a lot of potential in Northeast Ohio. He points to the intellectual horsepower in the region, recent efforts on the part of universities to commercialize that capacity and a sense that Cleveland's investors are beginning to see the possibilities. If his observations are correct, it may not be long before the money and the ideas grow together. In Cleveland, Shula Neuman, 90.3.