Sam Gerace is now on his fifth business startup: Convey.io, whose software replaces business cards with a digital service that updates contact information in real time. Before Convey, Gerace led teams that built and then sold tech firm Veritex, which operated the digital ticketing business Flash Seats and was sold in 2015 to AXS. His earlier firms were PCXIS Inc., PCX Consulting Inc. and BeFree Inc.
That kind of work history may be old hat in Silicon Valley, but it’s the kind of résumé that Gerace and others believe Northeast Ohio needs more of to build its economy in the 21st century.
The region has been fortunate to have a number of successful, long-lived companies. Firms such as the Sherwin-Williams Co., founded in 1866, and the relatively younger Progressive Corp., founded in 1937, continue to be important employers and anchors of the economy here.
Increasingly important, though, are the entrepreneurial companies that get swallowed up by or receive ownership-changing investments from larger companies after a year, two years or even 10 years. While the identity of a company such as Explorys Inc., a Cleveland Clinic spinoff that analyzes health data, may now be buried in IBM Corp.’s organizational chart, the sale of that business, called an “exit” in the investment world, is part of a vital entrepreneurial recycling process that can stimulate a region’s economic growth.
Gerace sees exits having three important impacts on the region. The process begins when company founders, initial employees and their early financial backers — often called “angel investors” — collect their profits, either through an outright sale or through a significant strategic investment.
“I see a) money to reinvest in companies, b) people gaining the experience to either start their own companies or join new startups,” he said. “And then c) I watch people take the benefit of the exit and educate themselves or their children. All of those provide real and lasting economic benefit.”
Michael Goldberg, associate professor of design and innovation at the Weatherhead School of Management at Case Western Reserve University, and an investor and startup supporter, said exits matter to the region and that Northeast Ohio has a growing band of angels, people who understand that early investing in startups, while risky, is crucial for the region.
“What you’re seeing is people that are investing because they want to make money and they want to sort of help the region,” he said.
These investors know that most startups don’t succeed, but believe that careful investing can make the ones that do succeed cover the other losses and then some. “Angel investors know that most startups fail, and no one likes being wrong 10 out of 10 times, Goldberg said. “You like to be right one of 10 times.”
While risk-taking angel investors are important to the entrepreneurial cycle, the employees of a successful startup may be as important as recycled cash, said Todd Federman, managing director of North Coast Angel Fund (NCAF), a Cleveland investment group. “Having gone through a successful exit, startup employees gain a powerful experience that adds to their capabilities and the startup culture in general,” he noted.
Gerace said he can count at least 12 businesses spawned by team members of his startups, all of whom had shares in those businesses. He considers that important to keep the cycle going strong. In addition, several alumni of earlier companies have joined him at Convey.
“I’ve always made sure that every team member had equity,” he said. “And so when we have an exit, it is financially beneficial to not just investors and not just a small team of founders, but every employee.”
North Coast, which is like similar organizations across the country, has 220-plus investors who have invested more than $30 million over the past dozen years to help launch and nurture 55 companies, most in Northeast Ohio. But building that entrepreneurial ecosystem takes time. Of its 55 investments, Federman said, it’s seen only four exits, though most of its companies continue to operate.
NCAF’s four exits include one local company: OnShift Inc. The other three are based in Columbus or Cincinnati.
BioEnterprise, a Cleveland-based nonprofit that assists client bioscience companies with management guidance and access to venture capital and private equity firms, has helped entrepreneurs complete 70 exits since its inception in 2002. Some of those were by people who recycled their returns into new ventures, noted Aram Nerpouni, BioEnterprise’s CEO.
“When you look at the progress of the sector over the last decade or two, we’ve gotten pretty good at, as a community, feeding fish. We’ve got to get better at reef-building,” Nerpouni said. “It’s not just solving for individual companies, but it’s creating an environment where ideas and talent and capital can come together. If you look at places like Minneapolis, which is the No. 1 region in the Midwest in terms of deals and dollars, they have not only a vibrant startup community, but they have all these big companies that are shedding talent and (intellectual property) all the time.”
JumpStart, a Cleveland business accelerator that provides support and investment capital to startup and young businesses in Ohio and New York state, has invested more than $57 million into 120 Ohio tech startups. According to Pitchbook.com, the nonprofit has had 57 exits from its portfolio. Among those are CoverMyMeds, a Columbus medical software company that began life in Twinsburg before building a headquarters in Columbus, and Wireless Environment, a Mayfield Village maker of LED lighting products under the Mr. Beams product name.
Ohio’s Third Frontier economic development program got the ball rolling for JumpStart’s investment activity beginning in 2004.
“Early on, money came from the Ohio Third Frontier program,” said Rem Harris, a JumpStart senior partner who directs investment activity. “And that required a match, and we raised match from the foundations here in Cleveland.”
JumpStart now can fund investments from the proceeds of exits. Harris said that after the accelerator’s first decade of investing, returns from exits have allowed it to put significantly more capital into young companies. In its first 10 years, the organization invested $28 million in 76 companies. Now, it has $57 million deployed in 120 companies.
“So, we look at our first $28 million deployed, and that has returned a little bit more than two times capital deployed,” Harris said. “It’s approximately $60 million that is the total return from that funding.”
That doubling of invested capital is what keeps early investors in the game. Of course, it takes a few big winners to double the invested capital in a total portfolio where most investments don’t pan out.
NCAF, a private investor that also invests beyond Northeast Ohio, has had similar success, though it reports it in a different way.
“It’s part of why we’re very optimistic,” Federman said. “The exits we’ve had as a fund have been a low of four (times invested capital) and a high of seven times. But we expect that we have some stronger returns than that in development right now.”
Those kinds of returns also attract individuals who might be approached directly by an entrepreneur or through an entity like NCAF. Lee Zapis, who invests through his Zapis Capital Group in Westlake, has been investing in young businesses for 20 years, even before his family sold its radio station business (its flagship was 93.1 WZAK).
“I always had an interest in technology,” he said. “And it’s always interesting to work with very smart people who have a vision. It got me excited.”
Zapis added that he learned what to expect early on, comparing the situation to being a baseball player.
“It’s not a high batting average kind of situation,” he said he learned early. “It’s like you play the whole game and when you’re up to bat, you strike out one or two times and get a single one or two times. But then, you know, in your last at-bat you get a grand-slam home run.”
Zapis recently had what may be described as a home run. He was an investor in Scout RFP Inc., a San Francisco-based firm started by two Case Western Reserve University graduates that was sold for $540 million late last year.
But Zapis would like to see more of Northeast Ohio’s institutions and wealthy individuals get involved in local risk investing, although he understands why it doesn’t happen more often. He said many investors, who rely on money managers, expect their money managers to follow two rules: “One is, ‘Don’t lose money.’ The second rule is ‘don’t forget rule No. 1.’ “