The Greater Cleveland Venture Capital Report by kvc89466


									      The Greater
Cleveland Venture
    Capital Report
      The 2006 Annual Survey of
       Venture Investing Activity
          Across Northeast Ohio
                                                    CleVelANd         A ReGION’S eCONOmIC SuCCeSS IS dRIVeN by The                       ‘ The Economist Magazine recently ranked Cleveland as

                                                    The Nation’s      Supply Of CApITAl: human capital in the form of the
                                                                      education and skill levels of its citizens, intellectual capital
                                                                                                                                            the “#1 livable City in America,” based on such factors
                                                                                                                                            as cost of living, housing, quality of suburban schools

                                                    New hotspot for   in the form of research and innovation, and investment
                                                                      capital, in all of its forms. Where Capital in all of its forms
                                                                                                                                            and commute times.

                                                    Venture-backed    is in plentiful supply, regions thrive. Where it’s lacking, an
                                                                      area’s economy is doomed to underperformance.
                                                                                                                                         Our region is once again a thriving area for
                                                                                                                                         entrepreneurship due to the collective, collaborative,

                                                    Innovation        In this report, we endeavor for the first time to present
                                                                                                                                         and coordinated efforts of many. A key driver of this
                                                                                                                                         change has been the State of Ohio. We can’t emphasize
                                                                      an overview of the region’s venture capital environment,           enough how crucial the state’s support has been to our
The 2006 Greater Cleveland Venture Capital Report

                                                                      an important driver and indicator of a region’s level              region’s entire effort to nurture and develop high-growth
                                                                      of innovation and entrepreneurship. Through the                    companies. Over the last five years, the Cleveland
                                                                      evidence marshaled here, we think you will see that a              area has received over $300 million from the State of
                                                                      critical mass of talent and investment-grade ideas and             Ohio’s Third frontier program. This funding represents
                                                                      innovations has emerged in Greater Cleveland and its               important support for translational research and
                                                                      surrounding region. In recent years, Northeast Ohio                commercialization, business accelerators, as well as
                                                                      has truly become a national hotspot for innovation and             start-up companies, and also provides leverage for the
                                                                      entrepreneurship.                                                  private capital markets in catalyzing deal flow.

                                                                      Still skeptical? Perhaps you’ll consider these salient facts:      The region’s funding and entrepreneurial-support
                                                                                                                                         community have in recent years developed a continuum of
                                                                      ‘ Between 2004-2006, 97 companies across this region               support through the entire spectrum of company growth—
                                                                         received equity investments of more than $500 million           from the seed stage to the exit event.
                                                                         from venture capital firms or private equity groups.
                                                                      ‘ An unprecedented number of equity investment                     The good news is that all of this activity has created a
                                                                         groups from outside the region—no fewer than 41                 pipeline of venture-quality companies in various stages
                                                                         national firms—have made follow-on investments in               of development. The corresponding challenge, however,
                                                                         companies based in this region since 2004.                      is with so many promising companies in the region, a
                                                                      ‘ Institutions in the region annually conduct more than            funding gap has developed.
                                                                         $600 million in research, and more than 550 clinical
                                                                         trials for new therapies.
Over the next five years, we expect that the region will              NORTeCh VeNTuRe CApITAl AdVISORy TASk fORCe
                                                                      Dorothy Baunach, NorTech
need to generate and attract over $1.2 billion in venture
                                                                      Robert Baxter, BioEnterprise
capital to meet the market’s needs.
                                                                      Tim Biro, Reservoir Ventures
                                                                      Melford Carter, Ohio-Midwest Fund
The evidence strongly suggests that venture-backed                    Chris Coburn, The Cleveland Clinic Foundation
companies enjoy an edge in the marketplace simply as a                Mark Coticchia, Case Western Reserve University
result of the greater discipline built into the organization          Lorelei Davis, Frantz Medical Ventures
                                                                      Steve Girouard, Oakwood Medical
from the beginning. The National Venture Capital
                                                                      Michael Goldberg, Bridge Fund
Association has documented the fact that venture-
                                                                      Lynn-Ann Gries, JumpStart
backed companies, on average, have about twice the

                                                                                                                          The 2006 Greater Cleveland Venture Capital Report
                                                                      William Grimberg, Consumer Innovation Partners
economic impact as their counterparts. They contribute                Zev Gurion, New Global Ventures
disproportionately to revenues, exporting activity, technical         Steve Haynes, Glengary Ventures
innovation, research and development, jobs and wealth.                Jack Harley, MAGNET
                                                                      Jamie Ireland, Early Stage Partners
                                                                      Ray Leach, JumpStart
By any measure, the level of venture investments in a
                                                                      Chris Mather, NorTech
region is a meaningful barometer of its success and                   Kevin McGinty, The Peppertree Fund
its future prospects. We are thrilled about our recent                Joe Michael, The Peppertree Fund
successes, but even more excited about what is on the                 Trevor Jones, BIOMEC
horizon over the next few years. We hope you’ll take a                Bill Mulligan, Primus Venture Partners
                                                                      Don Murfin, Development Capital
closer look at why this region is increasingly a great
                                                                      David Morgenthaler, Morgenthaler Partners
destination for serious investors.
                                                                      Jonathan Murray, Early Stage Partners                           3
                                                                      Clay Rankin, North Coast Angels
                                                                      Scott Roulston, Fairport Asset Management
                                                                      Gordon Schorr, Akron ArchAngels
Dorothy Baunach,                     James D. Ireland III             Baiju Shah, BioEnterprise
President and                        Managing Director,               Chris Sklarin, Chrysalis Ventures
Chief Executive Officer,             Early Stage Partners, LP
                                                                      Mike Stubler, Draper Triangle Ventures
                                     Chair, NorTech Venture Capital
                                     Advisory Task Force              Ted Theofrastus, Beta Partners
                                                                      Bill Trainor, Mutual Capital Partners
                                                                      Eric Von Hendrix, MWV Pinnacle Management Company
                                                                      Brad Whitehead, The Cleveland Foundation
                                                                      Wayne Zeman, MAGNET
Baiju R. Shah                        Ray Leach
President,                           Chief Executive Officer,
BioEnterprise                        JumpStart Inc.
                                                    The Venture Economy

                                                               In the last century, businesspeople,                created in a region. New ideas and innovations     Regions with thriving entrepreneurial cultures
                                                               government officials and citizens understood        attract premium talent and investment capital      have an appreciation for the necessity of
The 2006 Greater Cleveland Venture Capital Report

                                                               that a region’s economic health is best             to form start-up companies. A pipeline of fast-    continuous innovation and creation, and a
                                                               supported through investments in its physical       growing, venture capital-financed companies is     collective appetite for the business risks.
                                                               infrastructure—such things as roads, bridges,       developed.                                         Importantly, despite the high risks of any single
                                                               water systems and ports.                                                                               venture, dynamic entrepreneurial regions
                                                                                                                   These high-growth companies account already        are economically robust as the portfolio of
                                                               In the new century’s knowledge economy,             for nearly 10% of all American jobs, and           emerging companies provides a solid and
                                                               a region’s capacity for creating wealth will        contribute approximately one in seven new          growing economic base for the community.
                                                               increasingly be a function of the strength of       jobs to the American economy. These jobs
                                                               its innovation infrastructure: talent, research     are well-paying positions with benefits at all
                                                               universities, technology transfer offices,          levels of the employment ladder, and are high-
                                                               business accelerators, and regional seed and        knowledge and service positions that are at less
                                                               venture capital investors.                          risk of being transported overseas in the near
                                                                                                                   term. Some of these companies are destined to
                                                               When this collaborative network is established      become the large companies of the future, while
                                                               and operating at full capacity, a virtuous, self-   others will becoming the breeding ground for
                                                               perpetuating cycle of entrepreneurship is           the next generation of emerging companies.
The Venture Capital Continuum


Venture economies require a robust and comprehensive           ‘ Early-stage investments are typically $1-5 million and     ‘ Exits are the final stage of investment in venture
capital continuum to fuel the development of innovations         is usually provided by regional venture capital firms or     opportunities, and typically involve some element of

                                                                                                                                                                                        The 2006 Greater Cleveland Venture Capital Report
into companies. The life of high-growth ventures can be          angel investors. At this stage, the company is focused       return of capital to the original venture backers and
broken into four stages of investments along the venture         on producing a commercial offering, validating it            management teams. At this stage, strategic acquirers
capital continuum: seed, early-stage investments, growth         with initial customer sales and developing a broader         typically take on enterprises and provide the resources
equity and exits.                                                industry advisor network                                     necessary for widely distributing the offering.

The first two stages of the continuum tend to be provided      Companies that continue to prosper will typically find the   As companies grow through these stages of development,
by regional capital sources:                                   next two stages of capital from national capital providers   they must attract strategic financial partners that can
                                                               as well as strategic industry partners:                      provide increasing amounts of capital and wider industry
‘ Seed investments and funding is typically $250,000-                                                                       networks to support that growth, in the same manner that
   $1 million and provided by friends & families of            ‘ Growths financing span a range from as low as $5           companies develop operating infrastructure and systems
   the entrepreneur, nonprofit venture development               million to more than $50 million for companies. The        to position that the firm for sustainable success.
   groups, and grant funding sources. The company is             funds are provided by a range of equity sources,
   focused typically on building or testing its offering and     regional and national, as well as strategic investors
   assessing early customer interest in that offering.           and mezzanine/debt capital sources. Companies at this
                                                                 stage are focused on accelerating market adoption of
                                                                 their offerings and scaling infrastructure to support
                                                                 their continued growth.
                                                                                           Cleveland Area Venture Investments
                                                    SNAPSHOT OF SUCCESS                       $ Millions                                                                                          Companies Financed
                                                    Numbers have a way of telling vivid
                                                    stories. Over $500 million has
                                                    been invested in regional start-
                                                                                                123          259           156                                                                        43           56                       51
                                                    ups over the last three years.
                                                                                               2004         2005          2006                                                                      2004           2005                  2006
                                                    Even among those who work in             Source: Dow Jones Venture Wire; Venture Source; BioEnterprise; JumpStart; ODOD

                                                    Greater Cleveland’s investment
                                                                                           Investments by Sector
The 2006 Greater Cleveland Venture Capital Report

                                                    and innovation communities the
                                                    statistics may be an eye-opener.                                                            Other                                                                       Business &
                                                                                                 COMPANIES                          Advanced
                                                                                                                                    Materials            Medical Devices
                                                                                                                                                                                               EqUITy                       Consumer
                                                                                                                                                                                                                                                    Medical Devices

                                                    Collectively, these numbers                   By SECTOR                                                                             INVESTMENTS                                   Advanced Other
                                                                                                                              Business &                                                                                              Materials
                                                                                                     Number                   Consumer                                                     By SECTOR               IT, Communica-                            Biopharma-
                                                    demonstrate an increasingly vibrant                                       Services                           Biopharma-
                                                                                                                                                                                            Percent of
                                                                                                                                                                                                                   tions & Software                          ceuticals

                                                    regional venture economy.                                                       IT, Communications
                                                                                                                                    & Software
                                                                                                                                                         Health Care IT
                                                                                                                                                         & Services                       2004-2006 $                                    Health Care IT
                                                                                                                                                                                                                                          & Services

                                                                                           n medical devices 23                  n business & Consumer                                n medical devices 20%              n business & Consumer
                                                    The data suggest the region is         n biopharmaceuticals 11
                                                                                                                                   Services 14
                                                                                                                                                                                      n biopharmaceuticals 15%
                                                                                                                                                                                                                           Services 10%
                                                                                                                                 n Advanced materials 12                                                                 n Advanced materials 5%
                                                    beginning to reach a critical mass     n health Care IT &                                                                         n health Care IT &
           6                                                                                 Services 11                         n Other 5                                              Services 28%                     n Other 1%
                                                    of entrepreneurship and venture        n IT, Communications &                                                                     n IT, Communications &
                                                                                             Software 21                                                                                Software 22%
                                                    financing across multiple technology
                                                    sectors, a new level from which even   Investments by Stage
                                                    larger success will be achieved.
                                                    After all, nothing breeds success                                                  SEED                                   EARLy                        GROWTH

                                                    like earlier success.
                                                                                                             $ mIllIONS                    49                                 173                           315
                                                                                                             # Of deAlS                    71                                 57                              22
                                                                                                             AVG. deAl SIze            0.7                                    3.0                          14.3
                                                                                                             $ mIllIONS
National Investment

                                                                        Ampersand Ventures
                                                                        Eastward Capital
    Apex Ventures
                                                                        Norwich Ventures
    Beecken Petty
                                                                        Polaris Ventures
    Blue Chip Venture
    CID Equity
    Hopewell Ventures
    Reservoir Ventures

                                                                                                    The 2006 Greater Cleveland Venture Capital Report
    Talisman Capital
    Thomas McNerney Partners
    Triathlon Medical Ventures

                                                                      New yORk/eAST COAST
                                                                        Behrman Capital
    Angiotech AAdvance
                                                                        Columbia Capital                        7
    Chevron Technology Ventures
                                                                        Domain Associates
    Compass Group
                                                                        GMG Capital
    Hambrecht & Quist
                                                                        Halyard Capital
    Morgenthaler Ventures
                                                                        Investor Growth Capital
    Palo Alto Investors                       SOuTh
                                                                        Johnson & Johnson
    Panorama Capital                            Cordova Ventures
                                                                        LSKW Investments
    Parker Price Venture Capital                ExOxEmis
                                                                        New Enterprise Associates
    Sierra Ventures                             MB Ventures
                                                                        StarVest Partners
    Vivo Ventures                               River Associates
                                                                        Sunrise Equity
    Western Technology                          Texas Pacific
                                                                        Welsh Carson
                                                    STAGEK Seed // EARLY // GROWTH // EXIT

                                                       As a region, Northeast Ohio              opportunities. They have been
                                                       in the last few years has committed      aided greatly by the Third Frontier
                                                       to the identification, development       Program, through which the              Build & test
                                                       and acceleration of high-potential       State of Ohio has invested over
                                                       start-ups. The collective efforts        $300 million in Northeast Ohio’s        intellectual
                                                       are bearing fruit: the region has        research institutions, capital          property
                                                       averaged just over 20 opportunities      funds, development groups, and          Measure
                                                       that have attracted seed funding         companies since 2002. The Third         customer
                                                       each year from 2004 through 2006.        Frontier funds have been invested
                                                                                                in centers of distinctive and
The 2006 Greater Cleveland Venture Capital Report

                                                       New ventures in this stage of            translational commercialization in
                                                       development have a number of             medicine such as neurostimulation,
                                                       critical hurdles to negotiate. They      atrial fibrillation, regenerative
                                                       must assemble their initial business     medicine, and medical imaging,
                                                       case and craft a compelling              and in other technology areas such
                                                       business plan. Depending on their        as fuel cells, sensors and controls,
                                                       underlying product or service,           and advanced materials. In addition,

                                                       they may need to build and test a        the Third Frontier has catalyzed
                                                       prototype or demonstrate proof           the development of a number of
                                                       of concept in a lab. They will be        pre-seed and seed-stage funds and
                                                       required to protect their intellectual   investment groups in the region
                                                       property. And of course they all         through its grant programs.                            Regional Seed Funds
                                                       must harvest expressions of real
                                                       customer interest to present to any      These investments, along with
                                                       potential investors.                     the increasingly interconnected                        Friends & Family
                                                                                                efforts in these areas of distinctive
                                                       The region’s world-class research        innovation, will produce an
                                                       institutions, technology offices,        increasing stream of high-quality,
                                                       and venture development groups           seed-stage opportunities for years
                                                       are working in concert to increase       to come.
                                                       the pipeline of funded seed stage
Selected Deals

 CARdIOINSIGhT                         CONTAINed eNeRGy                       GReAT lAkeS                          OVATION pOlymeRS
 CardioInsight is commercializing      Contained Energy is a Cleveland-       phARmACeuTICAlS                      Ovation Polymers, based in
 a novel electrocardiographic          based company building a               Great Lakes Pharmaceuticals          Medina, is in the business of
 imaging technology developed          direct carbon fuel cell based          is focused on the development        leading-edge, nano-engineered
 at Case Western by two doctoral       on technology from Lawrence            of antimicrobial systems and         polymer compounding innovation.
 students and their engineering        Livermore National Laboratory in       devices to guard against catheter-   The company’s specially-designed
 professor. The technology non-        California. Initial applications are   mediated infections. The company     and proprietary processes
 invasively images electrical          being developed for the mobile-        recruited an experienced biotech     enable the creation of high-

                                                                                                                                                         The 2006 Greater Cleveland Venture Capital Report
 activity on the surface of the        power and distributed-power            CEO from San Diego to lead the       performance engineered materials
 heart, pinpointing the nature         generation markets. The company        effort. The company received seed    for electronics, aerospace, and
 and location of abnormalities.        will develop products with support     funding from Case Technology         industrial applications, as well as
 In 2006, the company closed a         from the Wright Fuel Cell Group, a     Ventures and JumpStart, as well      consumer and health products.
 Series A funding round from           public-private partnership funded      as support from Ricerca and          The company was launched with
 Draper Triangle Ventures,             by the State of Ohio. JumpStart        BioEnterprise. Product testing is    financial backing by Early Stage
 JumpStart and Case Western, and       and a group of angel investors         being conducted in collaboration     Partners. The firm now has eight
 is receiving additional support       provided the seed funding for the      with the Case Western, MD            product platforms, eight patents
 from BioEnterprise. The capital is    company.                               Anderson Cancer Center in            and 22 active programs spread out
 being used to develop an advanced                                            Houston, and Ricerca, a Cleveland-   among 15 clients.
 prototype of the device and conduct                                          area contract research company.
 clinical trials.                                                                                                                                                    9
                                                    STAGEK SEED // eARly // GROWTH // EXIT
                                                       The growth in seed-stage                 promising early-stage technology        business plan
                                                       investments has naturally resulted       ventures. They have done so             Validate
                                                       in a similar growth in early-stage       through professional investment         offering

                                                       investment opportunities. In 2006,       funds as well as professional angel     Prepare
                                                       Northeast Ohio had 25 companies          investment groups. For many young       prototype
                                                       that received early-stage venture        companies, these investors provide
                                                                                                                                        Plan for profit
                                                       support, similar to the two previous     a crucial bridge between early
                                                       years which had 21 and 25,               financing supplied by friends and       seasoned
                                                       respectively.                            family members and the national         advisors
                                                                                                venture capital market. In addition
                                                       At this stage of business                to providing capital, these investors
The 2006 Greater Cleveland Venture Capital Report

                                                       development, venture-quality             are a prime source of contacts and
                                                       companies are typically focused          guidance to emerging companies.
                                                       on expanding their management
                                                       teams and clinical or industry           The region also benefits from a
                                                       partnerships, producing a market-        professional and comprehensive
                                                       ready product, and demonstrating         business accelerator network that
                                                       initial market adoption that validates   spans industries and geography.

                                                       the company’s offering.                  These intermediaries, supported
                                                                                                by progressive philanthropy,
                                                       Two crucial ingredients that are         institutions, and corporations, and
                                                       needed to support a large number         the State of Ohio, have worked in a
                                                       of emerging companies are                concerted fashion to nurture these                        Regional
                                                       investors dedicated to early-stage       firms into viable enterprises, by                         Venture
                                                       opportunities and professional           introducing mentoring management,
                                                       business accelerators skilled at         connecting these firms to market                            Angel
                                                       supporting these opportunities.          resources and preparing them for                          Investors
                                                       In the last few years, the region is     and introducing them to national
                                                       witnessing the emergence of these        investment funds.
                                                                                                Northeast Ohio now has a bevy
                                                       Seasoned regional investors have         of venture-backed, early-stage
                                                       begun concentrating on supporting        technology and service companies.
Selected Deals

 CSf TheRApeuTICS                       AyAlOGIC, INC.                        fIVe STAR TeChNOlOGIeS                  SyNApSe bIOmedICAl
 CSF Therapeutics, a spin-off           Ayalogic is an Akron-based            Five Star Technologies is               Synapse Biomedical, based in
 from the Cleveland Clinic, is          business-communications               an advanced materials                   Oberlin, is developing minimally
 developing medical devices to          software company. The company’s       nanotechnology provider of high-        invasive neurostimulation
 restore cognitive function in          product—qmunicate—uses a VOIP         performance powders and other           devices to diagnose and treat
 patients affected by trauma and        Network to merge voice and text       solutions for the electronics           patients with various forms
 neurodegenerative disorders            data and messaging into a single      industry. The company’s unique          of neurological impairments.
 such as stroke and Alzheimer’s         customer solution. The company        technologies and processes can          The company was formed on

                                                                                                                                                            The 2006 Greater Cleveland Venture Capital Report
 disease. The company, a part of        has closed initial customers in       deliver custom dispersions with         technology from Case Western,
 the BioEnterprise Initiative, is the   multiple industry verticals, and in   exceptional speed and quality. In       University Hospitals of Cleveland,
 Cleveland Clinic’s 18th spin-off       2006, closed a venture-round of       2006, it closed a $7.1 million Series   and MetroHealth, and is a partner
 since 2002. The company received       investment led by Draper Triangle     B round of funding from Early           in the Ohio Neuromodulation &
 its venture round of funding from      Ventures, Early Stage Partners and    Stage Partners, Morgenthaler            Neurostimulation Partnership, a
 Boston-based Norwich Ventures.         JumpStart.                            Ventures (Menlo Park), Cordova          State-funded collaborative that is
                                                                              Ventures (Atlanta), Reservoir           supporting several Cleveland-area
                                                                              Venture Partners (Columbus) and         neurostimulation start-ups. The
                                                                              Chevron Technology Ventures             company has been funded by two
                                                                              (California).                           Palo Alto based venture funds, Vivo
                                                                                                                      Ventures and Palo Alto Investments,
                                                                                                                      as well as JumpStart and angels,      11

                                                                                                                      and also receives support from
                                                    STAGEK SEED // EARLY // GROwTh // EXIT

                                                       From a broad base of promising             Over the last three years, Northeast                         Attract growth
                                                       emerging companies with innovative         Ohio has seen a significant influx
                                                                                                                                                               Fill demand
                                                       products, services and new ideas,          of growth capital from across the
                                                                                                                                                               Secure strategic
                                                       Northeast Ohio’s business and civic        country. Investment firms from                               partners
                                                       leadership has, in recent years,           the east Coast capital centers of
                                                       given special attention to those           New york and boston to Silicon                               profitability
                                                       companies which show promise of            Valley on the west Coast and
                                                       one day growing into much larger           to all parts in between have
                                                       entities, the kind that do business        made significant investments in
                                                       around the world, attract the best         Cleveland area firms.
The 2006 Greater Cleveland Venture Capital Report

                                                       talent and help anchor a region’s
                                                       economy and its reputation.                And the amounts they invest are
                                                                                                  significant, representing over 60%
                                                       During this stage, companies               of the capital invested in the region
                                                       are typically trying to accelerate         over the last three years. With the
                                                       and scale the adoption of their            growing pipeline of funded seed and
                                                       products or services. They are             early-stage ventures, the number
                                                       adding infrastructure and attracting       of deals and the dollar amounts

                                                       broader professional management.           attracted to the region should
                                                       All of which takes money, which            continue to grow substantially over
                                                       is sometimes supplied by public            the next few years.
                                                       capital markets, but in most cases
                                                       through the investment of growth
                                                                                                                                          Venture Capital                       Mezzanine and
                                                       equity and strategic capital. In a truly                                               Firms                              Debt Funds
                                                       vibrant region, much of this latter
                                                       funding will come from outside
                                                                                                                                              Private Equity
                                                       investments from national venture
                                                       capital firms and other private equity                                                                                  Strategic Investors
Selected Deals

 TRek dIAGNOSTIC SySTemS               TuRNING TeChNOlOGIeS                   SImbIONIx                             whOle heAlTh
 Trek Diagnostic Systems is            Turning Technologies, a company        Simbionix is the leading developer    Whole Health is the leader in
 a global manufacturer and             supported by the youngstown            of interactive medical simulators     quality and service for the on-site
 distributor of automated systems      Incubator, develops interactive        and simulation software to train      health care industry. The Whole
 in the clinical, pharmaceutical       response systems utilizing the         physicians in a wide array of         Health program enables employers
 and veterinary lab markets. Its       latest software and hardware tools     minimally invasive therapies. The     to provide self-insured health care
 products are designed to provide      available and transforms them into     medical device company originated     to employees ranging from primary
 cost-effective improvements in        state-of-the-art applications for      in Israel, and established its        and urgent care to preventative

                                                                                                                                                          The 2006 Greater Cleveland Venture Capital Report
 workflow efficiency, ergonomics       audience response. The company’s       headquarters in Cleveland in          health and wellness programs
 and test-result performance.          flagship products, TurningPoint®       2002, led by an investment from       while also reducing costs and
 Ampersand Ventures of Boston          Software and Responsive                Early Stage Partners and with         increasing employee productivity.
 and Hambrecht & quist of San          Innovations ResponseCard®              the support of the Cleveland          Founded in 1991, it now serves a
 Francisco completed a growth-         (Keypads), integrate with              Clinic, University Hospitals and      number of high-profile clients—
 stage financing of the company        Microsoft’s PowerPoint® software,      BioEnterprise. Simbionix is one       including Continental Airlines,
 and merged it with Magellan           providing the most advanced            of nearly a dozen venture-funded      Sprint/Nextel, Intel and Capital
 Biosciences, a clinical diagnostics   combination of knowledge and           Israeli health care companies that    One—under long-term contracts
 company, another portfolio            technology currently available in      now have significant collaborations   and currently serves more than
 company.                              the field of audience and student      and presence in the Cleveland         200,000 individuals. The company
                                       assessment. The company                area. The company completed           recently completed a growth
                                       received a significant growth equity   another financing round in 2006.      financing round.                      13

                                       investment in 2006 from Talisman
                                       Capital of Columbus.
                                                    STAGEK SEED // EARLY // GROWTH // exIT

                                                       All economically healthy regions         is now itself becoming a major
                                                       boast their share of signature           company) to Steris, a major player
                                                       companies that drive innovation          in the sterilization-supply business,
                                                       and attract investors and premium        the region in recent years can
                                                       managerial and operational talent.       point to having been the incubator
                                                       These companies capture healthy          of a number of America’s most
                                                       market share in their industry, and      innovative companies.
                                                       eventually capture the interest of
                                                       larger companies intent on acquiring     In addition, the region’s historic
                                                       them. At a certain point in their        technology companies such as
The 2006 Greater Cleveland Venture Capital Report

                                                       organizational lifecycle, these smart,   Philips Medical and its polymer
                                                       nimble companies also become the         companies such as BF Goodrich are
                                                       source of spin-off innovations, as       still driving new start-ups through
                                                       some employees leave to begin their      their spinoffs and alumni. One
                                                       own companies, thereby refreshing        study traced the lineage of nearly
                                                       the cycle of company formation.          80 medical device companies to the
                                                                                                success of Picker and Technicare,
                                                       The companies that reach this stage      predecessors to Philips Medical.
                                                       are thus magnets for talent and          And the region’s many orthopedic
                                                       capital, drivers of job and wealth       companies trace their lineage to
                                                       creation, and also, through the          AcroMed, now a division of Johnson
                                                       cycle, sources for new innovation.       & Johnson.
                                                       Northeast Ohio is blessed to have an
                                                       increasing supply of these kinds of      In 2006, the Cleveland region             Strategic Acquisition
                                                       companies. From Office Max, which        witnessed a few very successful
                                                       went from start-up to the number-        exits through acquisition. In addition,                           Public Offering
                                                                                                                                                                                    Launch New Ventures
                                                       two player in the office supply          one of the region’s promising                                                           and Spinouts

                                                       industry in a relatively short period,   bioscience companies completed a
                                                       to Progressive Insurance (whose          successful IPO on NASDAQ.
                                                       spin-off, Comparison Market,
Selected Deals


 flAShlINe                             flIGhT OpTIONS                           Tmw SySTemS                            CleVelANd bIOlAbS
 Founded by Cleveland-based            Flight Options is the world’s            Founded by a Cleveland-area            Cleveland Biolabs, started
 serial entrepreneur Charles Stack,    second-largest provider of               entrepreneur, Tom Weisz, TMW           in 2003 as a spin-off of the
 Flashline focused on developing       fractional ownership of medium to        Systems has grown into one of the      Cleveland Clinic, successfully
 reusable Java software code. It       large private jets, with 200 aircraft    world’s most trusted suppliers of      completed an initial public
 allowed client IT operations to re-   and more than 2,000 owners.              dispatch and logistics enterprise      offering on NASDAq in July 2006.
 use, reduce and remix software        Founded in October 1998, the             software for the trucking industry.    The biotechnology company
 assets. The company received          company quickly emerged as a             For years, it has been among the       is developing drugs offering

                                                                                                                                                              The 2006 Greater Cleveland Venture Capital Report
 significant venture funding from      leader in the fractional jet industry.   fastest-growing companies in the       protection from radiation and
 Adams Capital of Pittsburgh. The      Flight Options was the first             region, and it was selected by the     cancer based on the work of Dr.
 company was acquired by BEA           company in the industry to offer         U.S. Army as a prime logistics         Andrei Gudkov. Cleveland BioLabs
 Systems, a prominent Silicon          fractional shares in previously          software supplier. In late 2005, the   has established a technological
 Valley-based enterprise software      owned aircraft, which translated         company was acquired by a pair         pipeline for the development of
 company.                              into a cost savings of as much           of private equity groups, Wachovia     new pharmaceuticals and their
                                       as 35%, thus opening private             Capital Partners of North Carolina     rapid preclinical evaluation. The
                                       jet travel to a broader audience.        and Peppertree Capital Fund of         company, which had received
                                       The company had an estimated             Cleveland.                             venture investment from Sunrise
                                       $700 million in revenues in 2005.                                               Equity of New york, sold 1.7 million
                                       Raytheon recently acquired                                                      shares in its offering.
                                       controlling interest in the company.                                                                                   15
                                                    The Regional Venture Landscape
The 2006 Greater Cleveland Venture Capital Report

                                                    Ohio, and especially the Cleveland area,              fund of funds that has made investments to help        companies, as they fulfill the important roles
                                                    has benefited from a blossoming of angel, seed        capitalize a number of regional and national           of local validation as well as local investment
                                                    and venture investors interested in financing new     funds. The Ohio Capital Fund is jointly managed by     syndicate management for the opportunities.
                                                    regional technology companies. In addition to the     Peppertree Capital and Fort Washington Partners.
                                                    many regional firms created over the last five        In addition, Ohio’s Public Employees Retirement        Angel investors and networks have also played a
                                                    year, the Cleveland area attracted offices from       System launched the Ohio- Midwest Fund. That           crucial role in developing good ideas into viable
                                                    four national venture firms in 2005-06—Oakwood        Fund, managed by Credit Suisse First Boston, has       companies. Northeast Ohio is increasingly rich in
                                                    Medical Investors (St. Louis), Chrysalis Ventures     invested $51 million in eight groups focused on        these supportive networks, yet another piece of
                                                    (Louisville), Draper Triangle Ventures (Pittsburgh)   early-stage investments in Ohio-based companies.       the comprehensive capital continuum. The North
                                                    and Bridge Fund (Cleveland and Tel Aviv)—and                                                                 Coast Angel Fund and the Akron ArchAngels
                                                    saw the activation of two new angel networks—         Active, well-capitalized regional venture firms have   Network, both supported by experienced
                                                    North Coast Angels and Akron ArchAngels. The          been a vital element in developing the region’s        entrepreneurs, were organized this year. And The
                                                    State is now home to more than 45 capital sources     high-tech entrepreneurial economy. These state         Ohio Tech Angels provides a state-wide network of
                                                    for enterprising entrepreneurs.                       monies and leading regional institutional investors    investors.
                                                                                                          have stimulated the growth of these firms in
                                                    The State of Ohio has aggressively supported          recent years. The region’s diverse spectrum            Not surprisingly, the growth in venture and angel
                                                    these efforts through its Third Frontier programs     of venture firms permits entrepreneurs to find         investors in this region is directly correlated to
                                                    to encourage angel investment, create new seed        strategic capital partners for their businesses.       the growth in high-quality technology investment
                                                    and early-stage funds, and attract national venture   In addition, these firms are critical to attracting    opportunities emerging in Northeast Ohio.
                                                    groups. The Ohio Capital Fund is a $150 million       national venture investors into regional technology
VeNTuRe CApITAl fuNdS                ANGel NeTwORkS ANd fuNdS
Adena Ventures                       Akron ARCH Angel Network
Athenian Venture Partners            Clarion Capital
BIOMEC                               CoreNetwork
Blue Chip Venture Company            Custer Capital
Bridge Investment Fund               Findaway Ventures
Charter Life Sciences                Growth Strategies Group
Chrysalis Ventures                   North Coast Angel Fund
CID Capital                          Ohio Tech Angels
Consumer Innovation Partners         queen City Angels

                                                                           The 2006 Greater Cleveland Venture Capital Report
Crystal Ventures                     RMS Capital
Development Capital                  Sycamore Partners
Draper Triangle Ventures             Symark
Early Stage Partners
Frantz Medical Ventures              Seed VeNTuRe fuNdS
Isabella Capital                     Case Technology Ventures
Key Principal Partners               Cincinnati Children’s Tomorrow Fund
Max-Ventures                         Cleveland Clinic Innovations
Miami Valley Venture Funds           Glengary Ventures
Morgenthaler Ventures                GLIDE Fund
Mutual Capital Partners              JumpStart
MWV Pinnacle Capital Fund
Nationwide Mutual Capital
NCT Ventures
Oakwood Medical Investors
Panzica Investments
Primus Capital Funds
Reservoir Venture Partners
River Cities Capital Funds
Riverside Capital Microcap Fund
SunBridge Partners
Talisman Capital
Triathlon Medical Venture Partners
                                                    The $1.2 Billion Opportunity
                                                    Since 2001, the major institutions with a stake          The burgeoning pipeline has created a new                Regional venture firms play a vital role in
                                                    in Northeast Ohio’s economic success—from                challenge and an opportunity: the Cleveland area         attracting follow-on investment from national
                                                    venture capital funds to universities and                will need to generate and attract an estimated           investors. At last count, 41 VC firms, many from
                                                    research institutions, from financial institutions       $1.2 billion in additional equity funding over           the East and West coasts, have made follow-on
                                                    and philanthropy to the State of Ohio—have               the next five years to support the needs of its          investments in Cleveland-area companies in the
                                                    collaborated in unprecedented ways to increase           emerging technology companies.                           last three years, drawn to the region in many
                                                    the pipeline of high-growth business start-ups.                                                                   cases by their peers in Ohio. That trend should
                                                    Working with a common vision, they have created          To meet this challenge, the importance of                continue to grow as regional venture portfolios
                                                    a network that can support and encourage the             Ohio-based venture firms, especially those that          continue to mature: an estimated $00 million
                                                    most promising emerging companies through                participate at the seed and early-stages of venture      of the equity requirement could be provided by
The 2006 Greater Cleveland Venture Capital Report

                                                    their entire stage of value creation, from their         financing, cannot be overstated. The region              follow-on growth equity sources, much of that
                                                    earliest stages of development to their eventual         must generate or attract $375 million in seed            from national investors.
                                                    sale or other liquidity event.                           and early-stage capital over the next five years
                                                                                                             to continue funding the stream of companies              With so many entities from within the region and
                                                    This range of coordinated collaboration has borne        emerging from the innovation infrastructure.             the state collaborating on planting the seeds
                                                    more fruit than even its architects might dare have      Efforts such as The Ohio Capital Fund and the            for innovation and then nurturing the ventures
                                                    dreamed initially. The region now boasts a robust        Ohio-Midwest Fund as well as other Third Frontier        through their early stages, the companies
                                                    pipeline of promising, venture-worthy companies          programs are a starting point to help fill that gap.     emerging from this pipeline are prepped for
                                                    in various points of development along the funding       Much more, though, will be needed.                       success. Isn’t this the kind of market in which
                                                    continuum. From 2004-2006, the region has seen                                                                    you and your institution should participate?
                                                    35-40 seed and early-stage opportunities each year.

                                                    BUILDING PIPELINE                                                                 CAPITAL NEEDS
                                                    Number of Companies by Stage of Financing
                                                                                   51                                                            SEED
                                                                43         9                                                            $75                  $300
                                                                                    9                                                                                 >$800 Million
                                                      LATER      4                                                                     Million              Million
                                                      STAGE               22       17           Pipeline
                                                      EARLy     18                              of venture
                                                      STAGE                                     quality
                                                      SEED      21        25       25                                                                Typically           Typically
                                                                                                                                                     sourced              sourced
                                                                                                                                                    regionally           nationally
                                                               2004     2005      2006
medical device               biopharmaceutical         health Care IT & Service   Information Technology &   business & Consumer      Advanced materials
AxioMed Spine                AnalizaDx                 American Safety & Health   Software                   Services                 Aria Analytics
CardioInsight Technologies   Arteriocyte               Institute                  AVE Intervision            Comparison Market        Delta Plant
Clevex                       Athersys                  Lifeline                   Axentis                    Day-Day                  Five Star Technologies
Critisense                   Cleveland BioLabs, Inc.   MDG Medical Inc.           Ayalogic                   Employ Media             FLx Micro
Early Sense                  Copernicus Therapeutics   MemberHealth               Banyan Technology          InnoDesk                 MAR Systems
Fused Multimodality          CSF Therapeutics          NCRx Optical               BlueBridge Networks        Nine Iron Innovations    MIMFlow Technologies
Imaging                      Icon Interventional       NextMed Systems            ComSense                   NineSigma                Ovation Polymers
Great Lakes                  Prognostix                PetsDx                     Embedded Planet            Pfingsten Publishing     Stanton Adv. Ceramics
Pharmaceuticals              Tolera                    ProPractica                Embrace Pet Insurance      Predictive Services      Technology Management

                                                                                                                                                                The 2006 Greater Cleveland Venture Capital Report
Imadent                      Transcutaneous            Roscoe Medical             Everstream                 PreEmptive Solutions     Thin Battery Solutions
Imalux                       Technologies              WholeHealth                Flashline                  PsyMax                   Trivum Technologies
IntElect                     Vascular Biogenics               Inspherion                 quickPayNet
Interventional Imaging                                                            IqS                        Tooling University       Other Technology
Merlot Orthopedix                                                                 Knotice                    Visual Edge Technology   Contained Energy
NDI Medical                                                                       Northcoast PCS                                      Heritage Fare
NeoMed                                                                            PsiBase                                             One Source Technologies
Ogenix                                                                            Sagequest                                           Stratum Energy Systems
Orthohelix                                                                        SamePage Solutions                                  Teraphysics
PeriTec BioSystems                                                                Sypherlink
Simbionix                                                                         TOA Technologies
Symphony Medical                                                                  Turning Point
Synapse Biomedical                                                                Unitask
Syncro Medical
Trek Diagnostics
                                     Design: Brian J. Willse / Newbomb Design; Editor: John Ettorre; Project Manager: Paul Nickels


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