News

Venture Capital in Cleveland

Aired October 19, 2001

Some business leaders say the region has sat on the sidelines while other parts of the country have cashed-in on high tech economy. Many experts insist a lack of venture capital is to blame for the failure to attract more new companies. 90.3 WCPN®'s Mike West looks at what it takes to match good ideas with money from investors.

Mike West–Venture capital is money that is spent on new or small companies. The funds are used to buy part of a business. The pay-off comes when the company is sold to larger corporation or goes public and collects a windfall of cash by selling stock. The venture capital investor is typically someone who turns money over to a fund manager, who looks for business opportunities. David Glickman is just such a person. He works at Raulston Venture Capital in Cleveland. He says venture capital dollars are hard to find in northeast Ohio, but insists money is tight everywhere, especially since many investors "lost their shirt" when the dot-com bubble burst.

David Glickman–Meaning a year ago you had deals funded on the basis of "We'll take a million dollars now and a year from now we'll take $100 million out of the public markets" which obviously caused a lot of companies to crash and burn. So commercially viable products with a good management team behind it.

MW–Glickman says now that money is tighter, fund managers are more careful of where they risk their cash. He says the best way to attract venture capital is simply a good plan that makes business sense.

DG–You need to obviously hit every potential investor you can find, you need to work to put your idea together in a cognitive and reasonable plan and present it that way and hope to find somebody that agrees with you one your vision for what your product is going to do.

MW–But that can take years. Hyland Software has been around for a decade. It's the type of "new economy" information technology company cities want to attract. Conventional wisdom says IT companies will attract further computer related and bio-tech businesses. Leaders of the Rocky River software maker have spent a lot of time on the road looking for venture capital in order to expand. Spokesman Chris Hyland.

Chris Hyland–In order to get them interested you've gotta prove to them that you have the potential to, or you are a leader in the field. They want to invest in somebody that's capable. Also having them know your environment or at least having had some investment or interest in the kinds of things that your doing helps.

MW–Hyland says his company now has the attention venture firms because they already have a thriving business and plenty of customers. However, the owners are looking for partners that won't force them to give up more of the company than his family wants to. To help others searching for partners, Hyland says the city needs more local venture capital firms, that way the fund managers can be closer to the growing companies they should be investing in.

CH–I think it's very important. I think success breeds success, so if you get some venture capitalists with some success here in Cleveland, they're going to want to invest in some other Cleveland companies and do a lot for the local economy.

MW–So where do the venture capital dollars live? They apparently like to spend time at the beach. Cities on the east and west coasts are finding it easier to get venture money than Ohio. David Deeds is a professor of entrepreneurship at the Weatherhead School of Management. He says Cleveland is in a bad spot for venture managers because they don't have a lot of time to visit prospects, and that makes Cleveland's location a negative.

David Deeds–One of the disadvantages Cleveland has is if you're in the silicon valley, you're in San Diego, if you're in Seattle or you're in Boston. These guys can hit, a board meeting can take a half day they're investing in Cleveland, they lose a day maybe two by the time you include travel, back and forth, et cetera.

MW–Another issue is whether Cleveland is suffering from a lack of money making ideas, or stingy venture capitalists.

DD–The venture capitalist tells you we have plenty of money, there's no good ideas, and entreasures tell you we have great ideas and no money the reality is somewhere in-between. It's very hard to tell a good idea from a great idea. Everyone thinks he has the great idea but very few of them actually do. And if you really look at it, for every 10 investments they make their are only 3 or 4 that are really successful.

MW–The region apparently needs to make some big changes before we have any hope of expanding more venture capital investment. Once again, Fund Manager David Glickman.

DG–The first thing we need to do around here is create a business environment that lures small existing businesses that spin off other ideas. Business climate that's very friendly to company that want to locate operations here. The more business people you have in general in the community the better it is for all aspects of the community.

MW–But what exactly is a "business friendly" area? Northeast Ohio ranks at the bottom when it comes to venture capital. Could that mean our climate is bad for investors? Glickman stops short of saying that Cleveland is un-friendly.

DG–I think it's all aspects of the community both government in terms of taxes, aid, utilities. The ability to get things done, zoning the communities ability to educate it's workforce. It's across the board things you hear virtually every community, even the national economy talk about doing.

MW–Professor Deeds says exposure is also an element that will be needed to reverse the tide of venture dollars and new companies flowing to other parts of the country.

DD–You've got to have public companies. So if you get companies that go public in an area you become visible. Then the venture capitalist will pay attention and they'll look the area over. So until you get some visibility. It's almost a chick and egg thing. We can't get any money we can't get any big hit because we can't get any money. On the flip side you can't get money because you can't get any big hits.

MW–He also says venture dollars find winners very attractive.

DD–We need some successes. If we get some successes we have a local capital venture industry we have some local players already. That do a good job and are involved. But we need more. We need a reason for the larger national players to put an office here. To put a body here and some support staff so that they're really paying attention to this Great Lakes region.

MW–Chris Hyland of Hyland Software agrees.

CH–I think it's very important I think success breeds success so if you get some venture capitalists with some success here in Cleveland there gonna to want to invest in some other Cleveland companies and do a lot for the local economy.

MW–Ohio is ranked number 33 out of the 50 states in number of venture capital dollars invested here. That is despite the fact that northeast Ohio is the 7th largest economy in the United States and there already least 26 companies in the area that provide venture capital. In Cleveland, Mike West, 90.3 WCPN® News.