Charities Work to Lure More Start-Up Businesses to Cleveland

Ceramics that can withstand 3,300-degree heat, a nutritional additive that boosts the flavor of low-fat foods, online purchasing of health insurance for dogs and cats — those are just some of the diverse products and services that fledgling companies in Ohio sell.

What the start-up businesses behind those varied offerings have in common is that, along with more than 35 other new companies, they turned to JumpStart, a Cleveland charity, for money and advice to help them get off the ground.

In northeast Ohio, where long-established manufacturing industries are fading and unemployment is swelling, the charity world is taking on an expanding role in efforts to retool the region’s economy with new jobs in new industries.

Fighting ‘Market Dysfunction’

JumpStart, founded in 2004, helps entrepreneurs turn ideas into businesses.

To coach young companies, the charity uses a staff of “entrepreneurs in residence” who have real-world experience developing business plans and attracting investments.

BioEnterprise, another Cleveland charity, does similar work with entrepreneurs in the medical and biotechnology fields.

JumpStart also offers promising young companies loans that range in size from $50,000 to $800,000.

To bolster those efforts, the charity has received almost $6.8-million from the Fund for Our Economic Future, a philanthropic collaborative that pools grant money for economic development in northeast Ohio.

JumpStart’s president, Ray Leach, says direct philanthropic involvement in for-profit business ventures is necessary to revise entrenched economic patterns that date back to the 19th century, when the region began its focus on large-scale industries, creating “market dysfunction.”

“Over the last 100 years we became a big-company town, and the people who thought out of the box or had radical ideas were more likely to leave this area to start their ideas than actually start businesses here,” Mr. Leach says.

Another factor fueling that trend: Much of the nation’s venture-capital investment money has been based on the coasts, Mr. Leach says, in places like Boston and California’s Bay Area.

JumpStart steps in to fill the void, offering loans that are designed to be converted into equity, thus giving the charity partial ownership in a company if it takes off or is sold. Any profits made is returned to the pool of money JumpStart uses to invest in new companies.

The charity has invested a total of $12.5-million in 37 companies engaged in a range of ventures, including energy technology, health care, and information technology.

JumpStart’s leaders say the charity is still several years away from seeing a direct financial return on any of the group’s investments, and they acknowledge that as many as 30 percent of the companies it supports will ultimately fail. The loans made to those companies would have to be written off, or treated like a grant instead.

JumpStart officials say they will consider the group’s efforts a success if within seven to 10 years they see:

• At least 30 percent of the companies survive as small businesses (providing a total of 1,000 jobs for the region).

• At least 25 percent become midsize businesses (with total annual revenue between $15and $30-million and 2,000 Ohioans employed).

• Fifteen percent or more grow to collectively employ 5,000 workers and post revenue in excess of $30-million.

Early Successes

Many of the young companies that received money from JumpStart are already beginning to thrive.

Rexorce Thermionics, an Akron company that is developing technology to make electricity from wasted heat — such as that given off by industrial plants or large collections of computer equipment — received $400,000 from JumpStart in September 2007.

Philip Brennan, the company’s chief operating officer, says JumpStart’s services and support, as well its ability to directly invest in promising companies, was a “big factor” in why the company got its start in Akron, instead of Chicago, where the chief executive, Michael Gurin, was based.

“They really challenge your rationale, and in that process help you refine your message, and in some cases, your entire approach,” Mr. Brennan says of JumpStart. “You come out of the process more versed in succinctly explaining your business and why you can justify funding.”

The company has since attracted more than $4-million in additional investments, including more than $1-million from a European venture-capital firm. Rexorce now has 16 employees, mostly researchers with advanced degrees. Mr. Brennan says it plans to double the employee base every year, through 2010.

For JumpStart, the quality of the jobs created is just as important as the quantity. The charity does not work with or invest in restaurants or mom-and-pop retail stores.

The focus is innovative start-ups with growth potential, often involving emerging technologies.

“We don’t want to just create a lot of low-paying jobs,” says Christopher Thompson. “We also want to see both job growth and per-capita-income growth in the region.”

BioEnterprise — another nonprofit lynchpin of the region’s economic-development efforts — works closely with emerging medical-device, biotechnology, and health-care-services companies to help them build their businesses and find investment capital.

While the number of companies starting or relocating to northeast Ohio has grown because of the fund’s efforts, the work is far from over, says Baiju R. Shah, BioEnterprise’s chief executive. The charity has received $8.6-million from the Fund for Our Economic Future.

With such successes, however, comes the related challenge of keeping the new companies in the area as they grow.

“The life cycle of these startups is they’re playing to be acquired,” says Mr. Shah. “Very few of them will be stand-alone businesses long term.”

Acquisition by a larger company is obviously a good thing for the entrepreneur and the investors, and it provides the jolt required for rapid expansion, says Mr. Shah.

But, he says, the acquiring company then faces a decision: whether to keep its new purchase where it is and expand, or move operations to its headquarters.

In December 2007, Affymetrix, a Santa Clara, Calif., company bought the USB Corporation, a Cleveland company that produces biochemical reagent products and that at the time employed about 90 people.

BioEnterprise, Team NEO — a joint business-development project of the largest chambers of commerce in northeast Ohio — and the Ohio Department of Development worked together to try to persuade Affymetrix to keep USB’s operations in the region. They assembled an incentive package that included state tax credits and grants worth over $500,000 that the company can use to train workers.

Not only did Affymetrix decide to keep the current jobs in Cleveland but also the company says it plans to add 60 more positions over the next three years.