When we’re asked about Ohio’s investment landscape, we often talk about the $392 million early-stage “capital gap” that exists—and continues to grow—in Ohio. It was one of the focal points of the 2014 VentureReport and one of VentureOhio’s primary focuses for 2016.
In order to accelerate the flow of capital, though, everyone needs to know what exactly we mean when we talk about the “capital gap,” and how it negatively affects the Ohio entrepreneurial ecosystem.
What is a capital gap?
The capital gap, just as its name suggests, is a discrepancy between the available capital and the capital necessary for startups to thrive. This money is deployed to newborn companies (typically in the startup/early through growth stages) in order to fuel product development, build a team, and accelerate growth.
In 2014, Ohio’s institutional investors reported that a total of $241 million was available to startups across the state. At the same time, 115 startups reported that they will need a total of $633 million by the end of 2016 to continue growing their companies to scale. Since Ohio institutions only have $241 million on-hand, this means that Ohio startups need to look elsewhere for the remaining $392 million that they need.
Why do in-state dollars matter?
While Ohio startups can look to out-of-state funds for investment, many investors prefer syndicating with a local institution at the earliest stages. This helps the fund to protect its investment by ensuring that the startup has access to the connections and resources it needs to thrive.
If a fund does invest out-of-state without syndicating, its partners often look for companies in the growth stage: companies that already have customer traction, corporate infrastructure, and a favorable track record.
Because investing in early-stage Ohio companies may be considered risky to out-of-state investors, Ohio institutions need the ability to provide the capital that its startups will need rather than rely on outside co-investors.
Who is impacted by the capital gap?
The capital gap inhibits early-stage ventures in every industry, but in Ohio, life science companies in particular bear the brunt. This is because, while life science exits tend to be larger than exits in IT or advanced materials, life science companies often need to comply with federal regulations and conduct clinical trials—all of which require time and capital. In an already-sparse investment landscape, many Ohio institutions gravitate to IT companies over life science companies simply because of the capital infusion needed to keep the latter afloat.
How do we reverse the capital gap?
The short answer is: we need more dollars flowing into our startup ecosystem.
There are many ways we can accomplish this, but the biggest and most immediate impact would come from the launch of a private statewide fund-of-funds that invests in both local and out-of-state institutions. The Ohio fund-of-funds would provide capital for top tier local funds and incentivize outside institutions to syndicate on local deals, thus widening our network.
VentureOhio is working to assure there is adequate Ohio-led capital for high-potential companies so they may grow to their full potential in Ohio creating jobs and economic growth. At the same time, though, we need everyone who cares about Ohio innovation to understand what the capital gap is and what it means to startup growth. When we get everyone onboard—entrepreneurs, investors, policymakers, corporations—we can begin to close the gap and create an ecosystem that sustains Ohio innovation.