The numbers look good — at first.
Last year, investors pumped a record $338 million into young technology companies in Northeast Ohio. That total easily eclipses the previous record: Local startups raised $264 million in 2013.
Sounds great, right?
JumpStart CEO Ray Leach is happy with the overall total, but he’s not 100% enthused when he analyzes the statistics. He’s worried that the harvest might not be so bountiful in the future.
Data from JumpStart, which works with startups throughout the region, shows why he’s concerned.
The numbers are up because a small number of more mature companies raised larger amounts of capital.
However, the number of deals that fall into the “early stage” category dropped last year. Deals in that category — which includes both Series A and Series B investment rounds — usually involve a few million dollars.
To be specific, 27 companies did early stage deals in 2014, down from 36 last year. It’s the lowest number since 2006, according to data Jumpstart collected for its annual Northeast Ohio Venture Capital Report.
So what’s up?
Leach noted that the region used to have two local venture capital firms that specialized in early stage deals. But both Early Stage Partners and Glengary have been out of money for new investments for a while now. Same goes for the Ohio Capital Fund, a statewide organization that funded venture capital firms throughout the state.
Leach has complained about the lack of local Series A capital in the past. Now he believes that the problem is showing up in JumpStart’s data.
Startups can and do raise Series A capital from out-of-state investors. That can be good for the startup, but it’s not always good for the community: Early stage investors often want to be physically close to the companies they finance. So if a given startup is far away, investors will sometimes ask that company to move closer — unless that startup has also raised money from a local investor that can keep a closer eye on the company, Leach said.
“The more Northeast Ohio relies on [out-of-state capital], the greater the risk is that the economic impact that we’re all doing this for will not be realized here,” he said.
The Ohio Third Frontier program has taken steps to increase the amount of Series A capital in the state. It recently expanded a program that provides capital to investment firms that finance companies in Ohio. As part of that expansion, it’s now offering money to companies that focus on smaller Series A deals. The program previously focused more on investors that provided smaller amounts of funding to even young startups.
The number of those seed-stage deals is down, too, but it’s still the third-best year in JumpStart’s data, which goes back to 2004.
The only really impressive statistics from JumpStart’s 2014 data? A few more mature startups raised a heckuva lot of money. Nine companies did what JumpStart describes as growth-stage deals. They raised a record $207 million.
But here’s yet another caveat: There’s a good chance that one company is responsible for a large chunk of that total. Last year, a fast-growing pharmacy software company called CoverMyMeds raised what is “widely believed to be one of the year’s largest health care IT investments nationwide,” according to the JumpStart report. The company employs 25 people at an office in Twinsburg, but most of its 240 employees work in Columbus.