The Ohio Innovation Fund was created two years ago with the idea that the Midwest is uniquely positioned to become a leader in venture capital activity. Backed by three state universities, the $40 million VC fund focuses on early stage funding to bridge the gap between Silicon Valley and the Midwest.
I spoke with Managing Director Bill Baumel, who has more than 20 years of experience investing in such areas as SaaS, big data, cybersecurity, and med tech – resulting in four public companies, nine acquisitions between $100 million and $800 million, and one private autonomous-driving company currently valued at $1.2 billion.
Many startups – and local governments – preach the cost advantages of moving away from Silicon Valley to the Midwest. You’ve seen firsthand how the Midwest startup economy is evolving, and have contributed to that evolution with your investments in your Ohio-based portfolio companies. Do you think the Midwest VC market is hitting its full stride yet?
Overall, great progress has been made in the Midwest, but the VC market hasn’t hit its full stride yet. I believe the Midwest is in its second phase of market growth. There is an increasing number of innovative and growing startup investments that are potential IPOs and acquisitions in the $100 million to $1 billion-plus range that make investment in Ohio and Midwest companies more than worthwhile. Hot sectors in the region include data science/artificial intelligence/machine learning, cybersecurity, SaaS, medical technology/pharmaceuticals, and advanced manufacturing, often in the med tech field. As long as Ohio and the Midwest continue their current trajectory, the region will transform into a truly robust VC market within the next decade.
You mentioned phases. What are the other phases of VC market growth and how do you know the signs of the phase you are in?
The first phase in developing a strong VC market is gathering the elements required for innovation. In Silicon Valley, it meant groundbreaking research from institutions such as Stanford University, the University of California, Berkeley, NASA Ames, and Xerox PARC. Indicators a market is in this first phase include university and lab researchers increasing research on targeted commercializable areas, and angel investments from high-net-worth individuals increasing in frequency and amount. Local funds are formed and commit to deals while funds outside the area begin to enter the market on a one-off basis.
Once the elements for research and innovation are in place, the next phase sees greater resources allocated in the form of dedicated programs and centers at universities that focus on innovation for growth industries. Local venture funds begin to establish a track record of sustained success, with IPOs and exits in the $100 million to $1 billion-plus range becoming more frequent. Formal university and research labs commercialization efforts grow, and venture capitalists and startup lenders outside the region prospect the market for new startups on a regular basis.
A region or market has hit its VC stride when the market is self-sufficient and has strong interest of national (and international) venture capitalists as they realize there are huge opportunities and massive returns to be made. Students, professors, and those at larger corporations focus on joining startups, and repeat entrepreneurs are the norm. In the United States, Silicon Valley is the clearest and most obvious example of a VC market that has thrived for decades in this third phase. While there have been various success stories in markets across the Midwest, the region needs more proof points to attract more VCs and funds in order to scale the market and reach full potential.
What advice would you give to entrepreneurs in a region that is currently in an early phase of growth?
- Distill your value proposition to one or two sentences. If you can’t deliver a concise and impactful message, your potential customers or partners won’t understand why you matter.
- Be aggressive. Only risk-takers making bold moves create and win in new markets. Avoid conservative go-to-market plans. Instead, focus on moving as fast as possible to achieve significant market penetration, with a market feedback loop and quick adaptations to this market feedback. If you don’t move quick, another company will leave you in its dust. There are a lot of smart people out there, and no monopoly on good ideas.
- Give equity to all your employees, even if they don’t ask for or immediately appreciate it. They eventually will, and it will align everyone on one common goal — maximizing the value of the company.
- Practice radical transparency. An open and communicative environment quickly exposes problems that are preventing you from growing and keeps you one step ahead of the competition. No one ever makes a change too early. If people or strategies aren’t working, it’s time to make changes and shake things up.
Finally, working with experienced, knowledgeable VCs who have built successful companies can make all the difference. People who have had previous success and also learned from their mistakes are an invaluable resource for emerging entrepreneurs and can offer the knowledge it takes to succeed.
M.R. Rangaswami is co-founder of Sand Hill Group and publisher of SandHill.com.