Cleveland’s “Series A” Woes – Part I. Cleveland has been on a miracle series of good luck and fine fortune recently: The “Return of the King” LeBron James, being awarded the Republican National Convention, culinary virtuoso Jonathon Sawyer winning the prestigious James Beard Award, a city benefiting from one amazing real estate development after another.
It is a new golden era in Cleveland. Well, let’s hold that thought … all the largess and national prominence means little if the city and the region do not have the industry to support it.
This region has done a marvelous job in nurturing an array of startup companies, in bringing hundreds of millions of dollars in tech investments and in fulfilling financial exits. But the region lacks serious Series A investors. Forcing growing startup companies to seek growth capital outside the region.
What is a Series A investment? Series A Capital is the name given to a company’s first significant round of venture capital investment after a seed capital round. Generally, it is an institutional round of investment, meaning the investment is made by a well-managed fund that specializes in making risky investments. Some of the key investors in such a fund typically include pension funds, high net-worth individuals, family offices (wealthy families that manage a series of investments), foundations and companies.
Four local investors and/or entrepreneurs recently shared their insights on Series A. This week, a seasoned venture capital professional and a capital advocate share their views. Next time, a healthcare startup executive and investor, as well as the leader of Cleveland’s largest business accelerator, will join in the Series A conversation.
The Seasoned Venture Pro. Jim Petras, general partner of Early Stage Partners said, “Right at the moment, (Series A capital in Cleveland) is in a state of scarcity.”
Petras should know. Since 1993, he has been president and a managing director of Capital One Partners, a Cleveland-based private equity firm and the managing general partner of the Early Stage Partners Funds. These combined funds manage a portfolio of 25 active early state companies and represent more than $100 million in venture investment.
Right at the moment, (Series A capital in Cleveland) is in a state of scarcity.”
Petras highlighted, however, the ultimate conundrum of being an entrepreneur and playing the role of an investor. “If you were to poll all the companies in the region, they would say there is too few capital. And if you polled investors, they would suggest there are too few scalable deals.
Scale is the key. A company that receives Series A has to grow revenues and cash flow quickly. For example, a venture capital fund invests $2 million in a company it expects a minimum of $20 million in ultimate returns. This is one of many reasons startups migrate to other regions from here.
Petras noted he and his team are seeing more deals now than ever before. “Entrepreneurs have gotten more sophisticated locally in asking capital,” he said. He added he thinks the region could support, at the minimum, a single $50 million dollar Series A fund.
The Great Capital Advocate. To be fair, the paucity of Series A capital is not just a Cleveland issue. It is a Midwest issue.
“Northeast Ohio has been enjoying a number of financial exits for venture investments recently – TOA Technology, Simbionix and Explorys – but the timing of the exits has been an issue,” offered Ray Leach, CEO of JumpStart, a nonprofit supporting entrepreneurs and their companies.
Raising more Series A capital is an issue Leach calls “super important.” Jumpstart is an advocate of Series A fund formations and is investing its resources to help the region solve the Series A riddle. In Leach’s opinion, Cleveland needs at least three Series A funds. I agree.