Jerry Frantz knows he’s in a risky business.
“Any way you cut it, deploying capital into young companies is an inherently risky proposition,” says Frantz, senior managing partner, entrepreneurial services and investing, at JumpStart Inc.
“There are ways to mitigate investor risk through deal terms or by spreading more modest investments across multiple companies, but any tactic that lessens risk often reduces the upside potential for returns.”
Frantz has been at JumpStart for more than a decade, helping Cleveland’s startup entrepreneurs manage through the risks and maximize their potential. Since his arrival in 2004, JumpStart and its partners have engaged more than 10,000 tech companies through the Northeast Ohio Startup Network, and helped participating companies raise more than $2 billion in capital, generate more than $2 billion in revenue and create more than 10,000 jobs.
In this Q&A, we talk with Frantz about the role of early-stage capital in economic health and managing risk as a startup investor.
Who are the main players contributing capital to Cleveland startups?
JumpStart provides venture capital to early-stage companies and has three funds that target high-tech startups: the Evergreen Fund, NEXT Fund and Focus Fund. These funds and others like them make equity investments in startups, and they’re different from private equity funds, which fund later-stage, established businesses that typically have established revenues and customers. In other words, they’re typically further along in their maturity and represent investments that have less risk.
In JumpStart’s space, there are a number of sources of capital providing equity investment to startups. A major funding source is the Ohio Third Frontier Pre-Seed program, which offers up to $5 million per fund. These awards require matching dollars, which can be secured from corporations, philanthropic foundations, private individuals, asset managers, etc. There are 12 such early-stage venture funds around Ohio that have received money from the Pre-Seed program, including JumpStart’s three funds.
High-net-worth individuals represent another source of capital targeting the startup market. ‘Angel investors’ can provide capital directly or through an organized group of angel investors. North Coast Angel Fund is an example of the latter, where a group of up to 99 individuals creates a fund that decides collectively to make investments.
How can investors boost their odds of success?
Early-stage investors understand they’re taking a risk with their investment and expect many of their investments will provide zero return. Others may provide a modest return of capital, but hopefully, there will be a few tremendous success stories. This is why investors in this space should take a portfolio approach and make numerous investments — because in the early stages of a startup’s development, it’s not easy to identify the firms that will have significant financial success.
Also, many investors in early-stage companies in Ohio and beyond are doing so because they want to support individual entrepreneurs and/or economic development initiatives and want to help grow companies that can create jobs.
What are some misconceptions about early-stage investors?
One is that they don’t care about getting their money back. While there may be other important motivators to funding companies, no investor is looking to lose money. Even the state, via Ohio Third Frontier’s Pre-Seed program, is seeking financial returns. That’s why the money they provide is in the form of a loan, not a grant. The state expects to, at a minimum, get their money back, and hopefully see some upside.
How important is a healthy PE/investment capital pool to a region’s overall economic health?
Having early-stage capital in a region is essential. Startups need capital to grow and because there’s tremendous inherent risk in any new venture, traditional funding sources such as bank loans are typically not a fit. As much as it’s important for there to be risk-oriented seed stage funds, there’s also a need for the next stage of capital, or venture capital funds focused on Series A investments.
As a startup demonstrates progress in the marketplace, it continues to need capital to grow. And while market traction is evidence of future success, there’s still considerable risk from an investor perspective in these growing companies. Often, a company needs $3 million to $5 million dollars or more at this stage to accelerate. In the Midwest, there’s still a shortage of capital to invest at that stage. Filling that funding gap is critical to the future economic health of our region.
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