Region Significantly Outperforms Nation in 2008 Innovation Capital
Despite challenging economic times, investments last year in technology-based companies in the Central Ohio region hit an all-time high with 57 companies receiving $172.2 million.
“This level of growth during a time when venture capital investments across the nation are experiencing downturns confirms that Central Ohio is becoming known for its pipeline of investable ideas,” says Will Indest, TechColumbus vice president of capital access and formation.
In 2008, during a time when venture capital nationally was down year-to-year by 8 percent, Central Ohio experienced a 9.1 percent growth in innovation capital investments. Central Ohio also outperformed the nation in the number of companies funded. While the National Venture Capital Association reported a four percent decrease in deal volume, the number of Central Ohio companies funded grew 54.1 percent (57 companies funded in 2008 vs. 37 in 2007).
Results of the region’s venture investment activity were recently published in the 2008 Central Ohio Innovation Capital Report which highlights the progress and growth of investments in innovation over a six-year period from 2003-2008. During this timeframe Central Ohio innovation capital exceeded three-quarters of a billion dollars, reaching $760.7 million invested in 227 companies. This represents a compound annual growth rate (CAGR) of 6.7 percent.
Investments in the information technology and healthcare sectors led the region in 2008, accounting for more than 95 percent of total investments. Over the six-year period there has been a tremendous shift in the allocation of investments per industry in the region. For the period 2003-2007, healthcare and IT accounted for 19.5 percent and 12.8 percent of total investments respectively. In 2008, IT represented 58.3 percent of total investments and healthcare 36.9 percent. In comparison, for the 2003-2007 timeframe, retail and consumer accounted for 63.5 percent of all innovation capital, while in 2008, this sector represented only 3.8 percent of total invested dollars.
“These numbers reflect the region’s deep rooted strengths in information processing and healthcare,” says Indest. “We expect to see these trends continue in years to come, especially as many exciting IT innovations and medical devices that are currently in the pipeline, begin to gain momentum.”
Investments in pre-seed and seed-stage companies were major contributors to the region’s 2008 performance. Investments in these early stage deals more than doubled, reaching $37.2 million as compared to $14.6 million in 2007.
Central Ohio venture capital and angel sources, led primarily by Ohio TechAngels, funded 28 percent of these investments in 2008.
These seed-stage investments are especially critical to the future of Central Ohio’s innovation economy according to Indest. It is during the seed-stage that ideas are validated, intellectual property is protected and market demand is determined.
“These early stage Investments fill a key funding gap and serve to help attract additional investments, particularly from venture sources outside the region,” says Indest.
As an example, in 2008, $9.6 million of Central Ohio-led investments in seed-stage deals resulted in total seed-stage investments of $35.2 million in 41 promising companies. The majority of this additional $25.6 million came predominantly from funders outside the region.
Imported capital is a major funding source for Central Ohio. In fact, over the last six years, 90 percent of the total dollars invested came from sources outside the region. The 2008 Central Ohio Innovation Capital Report indicates that 105 venture capital sources from regions across the nation have made investments in companies formed in Central Ohio over the last six years.
But imported capital alone will not be enough to sustain the region’s continued growth. According to Indest based on the tremendous growth in seed-stage deals in 2008, it is conservatively estimated that the companies represented by these deals will require more than $1 billion in next round funding over the next five years. Although imported capital will continue to provide a critical piece of these funding requirements, it is imperative that local funds provide leadership in funding local deals.
According to Indest, more Central Ohio funds will be needed to provide significant and immediate dollars to help seed-stage companies continue to develop so that they are poised to emerge post-recession as robust players in their markets and growing employers in the region.
“For the region to continue to thrive, such investment activity must carry on and commitment from stakeholders must not waver,” says Indest.
You can download a copy of the 2008 Central Ohio Innovation Capital Report: