With the end of this year's round of
Cincinnati Innovates fast approaching, a word on startups is in order.
Most have a foggy notion that newly launched companies create jobs. But jaws may drop at hearing just how crucial startups are to a healthy economy. Here's the bottom line: 100% of new net jobs created in the past 20 years have been created by companies that are less than five years old.
Sure, massive public corporations and longer established companies account for the lion's share of existing jobs. But startups are unabashedly on the forefront of job growth. There's just one problem.
"Growth takes a lot of cash," says Elizabeth Edwards, chief instigator of Cincinnati Innovates. And according to Edwards, Cincinnati's startups are struggling to secure their fair share of this precious resource.
To be fair, Cincinnati startups are by no means alone in their capital challenges. The Midwest and South, representing only 30% of total venture capital invested in the US, have been plagued by a lingering brain drain for longer than a decade.
During this time, enclaves of venture-backed startups, largely in California, where 50% of venture capital investment in the US is directed each year, have created strong clusters of innovation that have lured talent from other regions of the country en masse.
Startups, wherever they are launched, are commonly funded in a few ways: by venture capitalists, who manage the pooled money of investors through funds, through investment from the state, and by angel investors.
"Angel investors are basically baby boomers, and some younger people, who start a business, sell it profitably, and are now semi-retired and interested in investing in new companies," says Jim Cunningham, who has managed the operations of the
Queen City Angels (QCA) investment group since its inception in 2001.
While angel investing in Cincinnati is actually on the rise in recent years, a large share of this home grown angel capital is dispersed within a 150 mile radius of its source, to cities such as Columbus and Indianapolis. And the truth, while painful, is that this is natural economic selection at work.
"One of Cincinnati's core issues is that no one has really hit a grand slam at this point," says Tony Shipley, Chairman of QCA. "Many companies are positioned well, but haven't quite hit it yet. This is a problem with the entire interior of the country, while the coasts have taken the lead with startups."
Whether in Cincinnati or not, QCA has been busy funding deals. One of the top five angel groups in the country in dollars invested during 2003-2008, the last five year period that was measured, QCA's membership has grown by 25% since.
"We would like to do all our deals in the Cincinnati region," Cunningham says. "We've funded deals in Cleveland, Columbus and further away. But if there were more good deals in Cincinnati, we would fund them."
If the city's business community has struggled to produce ideas that catch the angel eye, its lack of cohesion hasn't helped secure any state money either. "We haven't had enough clarity and agreement in the past," Shipley says. "We haven't been as orchestrated as other regions, notably Cleveland."
But Cunningham, for one, is not convinced that government intervention is the answer. He sees the lack of public awareness about these issues as a more pressing problem, adding that the local media is partly to blame.
"Clearly the media has not embraced new business creation as part of the reportable culture here," Cunningham says. "Many startup funding activities stay under the radar and remain unknown to most Cincinnatians because the press does not cover them."
But these problems are not the whole picture. To be sure, some solid startups are firmly rooted in Cincinnati soil. What's more, there are world-class research centers, a diverse and highly educated talent pool, and oodles of capital in the vaults. So what's a well poised city to do?
Essentially, Edwards argues that Cincinnati needs to create catalysts that bring these three components - ideas, talent and capital - together. Cincinnati Innovates is one such catalyst. In a white paper written for
Metro Innovation, Edwards explains that this contest aims to draw on a concept known as crowdsourcing, which is basically a mass-minded approach used to generate better ideas.
In the case of Cincinnati Innovates, crowdsourcing brings together local universities and research centers to attract investment, create startups and ultimately jobs. With one year of experience under its belt, this ambitious forum shows promise.
"At the end of last year's contest, we invited the top fifteen or so entrants to present their ideas to QCA for potential funding," Cunningham says. "Working together like this is one thing that helps to increase the number of deals that get funded in Cincinnati."
So far this year
some promising ideas have been proffered by the city's best and brightest. But September 1 is the deadline to enter and compete for the eighty thousand dollars worth of prizes. So anyone one who feels inspired should not tarry.
Ideas pitched so far include a website with integrated audio software that records band practice for later review, a solar powered battery charger, even a portable composting toilet that uses sawdust to deodorize. Good ideas, all. But there's no guarantee they'll succeed.
For ideas like these to become businesses that in turn strengthen Cincinnati's economic backbone, deep changes must occur. Beyond the basics - good ideas, talented management and stronger cohesion in the business community - a more fundamental tweak needs to occur in local consciousness.
"What we need is a spirit, a culture, of local investment," Edwards says. "We need Cincinnatians to stop thinking about what kind of job they can get and start thinking about what kind of company they can start."
She applies this grass roots approach to investing as well.
"The message here is very simple," Edwards says. "Invest locally. It makes no sense that many people invest outside their own backyards when investing close to home would actually bring them more returns."
Though it may be counter-intuitive, Cincinnati startups need smaller amounts of investment to begin trickling in for larger growth to occur. Large groups like
CincyTech, QCA and the members of the Greater Cincinnati Venture association are already shelling out relatively large amounts of cash around town, even as they invest elsewhere.
"If we're going to see more growth in local investment, it starts at home, literally," Edwards says. "This means friends and family investing in their children and friends because they believe in them and in the opportunity. If you want jobs, you have to create companies. And if you want companies in Cincinnati, you have to invest here."
What's your big idea? Let Cincinnati Innovates know about it here!Photography by Scott Beseler
Photography from 2009 Cincinnati Innovates awards at the Contemporary Arts Center
Elizabeth Edwards and James Zimmerman
Tyler Davidson Fountain
Danny Stull, grant winner
The crowd at the awards ceremony