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Page 1: S. Michael Camp, Ph.D.

S. Michael Camp, Ph.D.The Center for Entrepreneurship

The Ohio State University

September 25, 2007

The Ohio Capital Fund Early Stage Summit III

Ohio Venture Capital Overview

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Confusing Messages

“(Ohio) VC investing hits bottom . . .”

“Ohio venture capital plummets . . .”

“Ohio venture-backed companies have growing economic impact . . .”

“Ohio ranks best in Midwest for venture capital investment . . .”

“Venture capital flows to Midwest life sciences at record rate . . .”

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It Depends

• Source of Data– Timely, reliable and relevant

• Unit/Level of Analysis• Definitions and Selection of Metrics• Time Frame

– Sound research design and methodology

• Agenda– Regional collaboration and agreement on use

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Problems with National Data:Ohio Seed and Early Stage Investment (000)

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Collaborative Project Goals

• Ohio Capital Fund– Fund compliance– Economic impact

• State-Wide, Cross-Regional Assessment– A single reliable source for data

• Project future needs, demand, and opportunities• Measure economic impact• Promote unique investment opportunities• Inform public policy

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Regional Collaboration

• State and regional leaders take initiative– BioEnterprise– CincyTech– Dayton Development Coalition– JumpStart– Regional Growth Partnership– TechColumbus

• Focus of analysis and time frame– Seed and early stage investment activity– 2002 - 2006

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Definitions

• Stage of investment– “Seed Stage Investment” includes:

• startup, non-VC seed, seed, individual, angel and TITC funding

– “Early Stage Investment” includes:• first round or early funding

– “Growth Stage Investment” includes:• expansion, growth, “later stage” including explicitly

recorded 2nd, 3rd, 4th, 5th and later rounds of funding

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Ohio Seed & Early Stage Investment:Number of Companies

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Ohio Seed & Early Stage Investment:Total Dollars Invested

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Ohio Seed & Early Stage Investment:Total Dollars Invested by Stage

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Ohio Seed & Early Stage Investment:Total Dollars Invested by Stage

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Ohio Seed & Early Stage Investment:Percent of Dollars Invested by Industry (2002-2006)

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Ohio Seed & Early Stage Investment:Percent of Investment by Geography

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Ohio Seed & Early Stage Investment:Weighted Moving Average Investment per Stage

Stage of Financing

Average Annual Investment per Company per Year

Average Total Investment per Company

Seed $530,000 $1.06 million

Early $2.47 million $4.94 million

Growth $6.89 million $13.78 million

• Weighted moving average weighted heavier for 2004-2006• Data have been scrubbed for outliers (e.g., Sky Bus)

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Ohio Seed & Early Stage Investment:Estimating Future Capital Demand

• 2 year development cycle per stage• 50% attrition rate from seed to early and early to growth stages• conservative 5% annual growth in average investment per company• conservative 6% annual growth rate in deals• no other investment activity considered (only new seed deals)

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Ohio Seed & Early Stage Investment:General Outlook

• Seed level funding is accelerating in Ohio, suggesting a surge in new deal flow

• Better accounting of deal activity• New influx of risk capital• Deal quality and aggressive grassroots networking• Solid technological advancements in key technologies

(e.g., life sciences, IT, materials)• State/regional policies/programs designed to encourage

seed & early stage investment (e.g., Third Frontier, ESP)• State programs designed to encourage advanced R&D in

select target industries (e.g., Wright Centers)

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Ohio Seed & Early Stage Investment:General Outlook (cont.)

• Four to six year lag from lab to market, suggests a pending acceleration in idea/deal flow in Ohio

• Will require focused commercialization strategies

• Two year lag in the need for follow on funding for surviving seed deals suggests a pending surge in early and growth stage funding over the next 4 to 5 years

• Including deals in the pipeline in 2007 and new activity between 2007-2011

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Ohio Seed & Early Stage Investment:General Outlook (cont.)

• Ohio’s seed-level funding needs in next five years could easily exceed $330 million

• Focus only on new activity (2007-2011)• Assumes 6% annual growth rate in number of new deals• Assumes 5% annual growth rate in company investment

• Additional funds necessary to take surviving new seed companies through growth in 5 to 7 years could easily exceed $2.1 billion

• Assumes 50% attrition from seed to early stage• Assumes 50% attrition from early to growth stage

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Ohio Seed & Early Stage Investment:General Outlook (cont.)

• For every $1 in seed funding, Ohio needs approximately $7 dollars in follow on funding to adequately fund surviving ventures

• Assumes an average of 2 years per company per stage

• Funds will have to come from:• New independent funds• New sponsored funds (e.g., OCF, Third Frontier seed

and validation funds)• Non-domestic funds

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Ohio Seed & Early Stage Investment:General Outlook (cont.)

• Rate of investment in Ohio by funds from outside Ohio is increasing

• Less competitive climate (i.e., better valuations)• Access to unique technologies and talents• Increase in qualified deals through angels

• More research needed on attractiveness of VC investing in Ohio

• Valuations and returns

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Ohio Seed & Early Stage Investment:General Outlook (cont.)

• The future is ours and we must be the champion of our own story

• New regional funds are difficult to raise• Convince LPs to put money in Ohio• Partnership is in place through OCF

“You teach people how to treat you.”

Dale Carnegie