When angel-backed startup Phenom left Cleveland for San Francisco to join the world-famous accelerator 500 Startups, a lively conversation regarding the health of the entrepreneurial ecosystem in Cleveland began to take place. It’s the type of headline we’ve all seen before – “Local startup leaves Ohio for Silicon Valley funding.” The headline isn’t new – Phenom may be the latest high-potential company to leave Ohio, but they are certainly not the first. So why did this move cause so much controversy?
Ray Leach, CEO of Cleveland-based JumpStart Inc. responded to the growing conversation with the VentureBeat article, “My city just lost a startup to Silicon Valley, tell me again why that’s a bad thing.” In the article, Leach acknowledges that Ohio’s entrepreneurial ecosystem has a long way to go, but he also recognizes the momentum that has been created.
Leach wrote, “15 years ago Cleveland’s startup culture did not even have a recognizable pulse, let alone the kind of entrepreneurial ecosystem that could spin out startups worthy of accelerators like 500 Startups.”
Leach’s point is that Phenom’s move isn’t an indicator that Ohio’s entrepreneurial ecosystem is dead but should rather be seen as both a win that a Cleveland-born company is finding support as well as a call for continued growth in our own ecosystem.
“Our lack of early-stage capital is a real challenge across the entire Midwest, and we’ll need to address it soon if we hope to create a climate where a company like Phenom can go from launch to exit without ever leaving our borders,” Leach wrote.
From the investment side, Ohio lacks a healthy number of local capital resources. This shortage makes it tough for the entrepreneur to find funding, and thus facilitate fast growth, and it makes it difficult for investors who are forced to absorb all of the risk without co-investment partners.
Phenom cofounder and CEO Brian Verne chimed into the conversation with his own VentureBeat article, “Our startup left Cleveland, and that’s a problem.” Verne, a Cleveland native, wrote that his hometown still lacks the type of risk culture necessary to build fast and grow strong companies.
“For Cleveland to succeed in building a community of innovators, it needs to believe that failure is okay and to create a level of confidence among investors and entrepreneurs alike that, in order to win big, you have to go for it all.”
Leach and Verne are both making valid, and important, points. Northeast Ohio, and Ohio in general, have come a long way. Last year, the Ohio entrepreneurial community celebrated four significant company exits totaling over one billion dollars at the VentureOhio VentureDinner, and all four of those companies hailed from Northeast Ohio.
We’re building. We’re gaining momentum. But we are not quite there, and that’s frustrating to passionate founders who understand the potential impact of building a company in their home state while having to struggle against the business climate. For a company like Phenom, the climate did not allow for the rapid growth they were positioned for; their move to San Francisco was not made out of a desire to leave Cleveland, but rather to grow their company.
So, back to my original question: why did this move cause so much controversy? I think its timing. As a community, we’re working hard to build an ecosystem that supports entrepreneurs and allows our best innovators to remain in the state:
- We’re teaching entrepreneurship and venture capital in schools
- Three of Ohio’s angel groups have grown to be among the largest in the country
- We’re raising capital in all stages.
We’re so close to closing the loop that it is frustrating to some when we lose a promising company to another state. But, what was the norm has now become the exception; a company leaving Ohio for funding is ruffling feathers and making headlines – that shows how far we’ve come.
Closing the Loop
We’re building momentum and making great progress, but to compete with the West Coast and allow our entrepreneurs the best chance of success, we need to simultaneously increase the number of local capital resources and adopt a culture of risk. We need to celebrate failure and understand that sometimes, if you’re swinging for the fences, you’re going to miss. But when you win, you win big.
Base hits are important for our economy, but it is the big wins that will put Ohio on the map. It is the big wins that allow homegrown founders the financial freedom to reinvest in the community, providing capital and unique guidance for the next wave of Ohio entrepreneurs.