State of Ohio Venture Capital Report 2008

Steady Focus in Uncertain Times 2008 Ohio Venture Capital Report

center for entrepreneurship

Steady Focus in Uncertain Times

Table of Contents

Contributors

2

A Message from Ohio’s Lt. Governor

3

Executive Summary

4

2008 Ohio Venture Capital Activity

Seed-Stage Investment Activity

8

Early-Stage Investment Activity

10

Growth-Stage Investment Activity

12

Future Demand

14

Regional Highlights

West Central

18

Central

20

Northwest

22

Southwest

24

Northeast

26

Southeast

28

2008 Ohio Venture Capital Report

Table of Contents

1

Fisher College of Business Center for Entrepreneurship The Center for Entrepreneurship at the Fisher College of Business manages the Ohio Venture Capital Research Program in collaboration with the contributing state and regional partners listed below. The objective of the collaborative program is to track total venture capital investment activity, with an emphasis on the earlier stages, and to tell the true story of Ohio’s unique investment opportunities.

STATE LEVEL

Ohio Department of Development 77 S. High St., PO Box 1001 Columbus, OH 43216-1001 Phone: (614) 466-4551 Fax: (614) 644-5758 http://development.ohio.gov

The Ohio Capital Fund 41 S. High St., Suite 2495 Columbus, Ohio 43215 www.theohiocapitalfund.com

REGIONAL LEVEL

2

TechColumbus 1275 Kinnear Rd Columbus, OH 43212 Phone: (614) 487-3700 Fax: (614) 675-4101 www.techcolumbus.org

Dayton Development Coalition 900 Kettering Tower Dayton, OH 45423 Phone: (937) 222-4422, (800) 241-2469 Fax: (937) 222-1323, (800) 237-2044 www.daytonregion.com

JumpStart Inc. 737 Bolivar Road, Suite 3000 Cleveland, OH 44115 Phone: (216) 363-3400 Fax: (216) 363-3401 www.jumpstartinc.org

Cincytech 30 West 3rd Street, 6th Floor Cincinnati, OH 45202-3559 Phone: (513) 263-2720 Fax: (513) 381-5093 www.cincytechusa.com

Regional Growth Partnership (RGP) 300 Madison Avenue Suite 270 Toledo, OH 43604 Phone: (419) 252-2700 Fax: (419) 252-2724 www.rgp.org

Adena Ventures 20 East Circle Drive, Suite 143 Athens, Ohio 45701 Phone: (740) 597-1470 Fax: (740) 597-1399 www.adenaventures.com

Contributors

2008 Ohio Venture Capital Report

Steady Focus in Uncertain Times

Lee Fisher

Ted Strickland

Lieutenant Governor State of Ohio

Governor State of Ohio

To Our Valued Venture Capital Investment Community, We are encouraged by the results reported in the venture capital analysis conducted by The Ohio State University’s Center for Entrepreneurship regarding our state’s venture capital environment. Creating an overall entrepreneurial climate that supports early-stage technology companies is a key element in Ohio’s strategy to change the trajectory of our state’s economy. The collective missions of Ohio Third Frontier, the Ohio Venture Capital Authority, and the Ohio Technology Investment Tax Credit program have substantially contributed to the acceleration of investments in exciting Ohio companies—even during challenging financial times.

Ohio is demonstrating that technology start-up companies and the entrepreneurs leading them are an essential component of our state’s economy. We have developed programs and incentives to ensure that the capital investments needed to propel new companies are available. Further, we are investing in applied research and commercialization that will fuel their creation and capitalization. Finally, the state provides entrepreneurial assistance that is designed to build the strongest possible management teams in order to lead these new companies and support their growth in Ohio.

The results presented in this report demonstrate that Ohio’s strategies and programs are having precisely the impact they were designed to achieve. We look forward to renewing Ohio Third Frontier next May so we can maintain the momentum so clearly evidenced in this report.

Sincerely,

Ted Strickland Governor of Ohio

Lee Fisher Lt. Governor of Ohio

Office of the Governor

Office of the Lieutenant Governor

77 South High Street • 30th Floor Columbus, Ohio 43215-6117 • U.S.A. 614.466.3555 • Fax: 614.466.9354

77 South High Street • P.O. Box 1001 Columbus, Ohio 43215-6117 • U.S.A. 614.466.0990 • Fax: 614.644.0745

www.ohio.gov

2008 Ohio Venture Capital Report

Lt. Governor’s Message

3

Executive Summary The year 2008 marked Ohio’s highest level of total seed and early-stage investment activity on record with nearly $300 million invested in 174 companies.

Ohio’s total venture capital investment in 2008 was $446 million in nearly 200 companies, ranking Ohio 13th in total state-wide investment in the US. After removing outliers from the year-to-year investment activity, the decrease from 2007 to 2008 in Ohio’s venture capital investment was slightly less than 4 percent, while many other states realized declines of as much as 50 percent.

The US venture capital industry realized an 8 percent decline in total investment during this same time. Most of the decline in Ohio was in later-stage funding because venture capitalists invested more funds to support early-stage investments.

This disciplined focus led to one of the brighter aspects of Ohio’s 2008 investment activity. As early-stage investment increased from $143 million in 2007 to $238 million in 2008 – a 67 percent increase, the national level decreased by more than 20 percent. Even with shifting economic cycles, the compound average annual rate of growth in total venture capital investment in Ohio since 2003 has been greater than 22 percent, or approximately $2 billion in cumulative investment.

However, in 2008 Ohio’s investors were not just interested in extending the runway for their existing investments. The number of companies receiving first-time investments also increased from 88 in 2007 to 104 in 2008.

Figure No.1 This anchored Ohio’s highest Total Venture Capital Investment by Stage by Year (in millions) level of seed and early-stage $500 $464 investment activity on record $446 $417 with nearly $300 million $400 invested in 174 companies.

Later/Growth-Stage $300 $242 Given that a majority of these $240 Early-Stage new companies will require $200 Pre-seed/Seed-Stages $162 $100 $0

4

2003

Executive Summary

2004

2005

2006

2007

2008

2008 Ohio Venture Capital Report

Steady Focus in Uncertain Times

Figure No. 2 Total Number of Companies Receiving Funding (2003 – 2008) $463

$500

$446

$420

$400

Total Investment Number of Companies

$300 $242

$240

$200 $162

133

$100

124

151

170

196

70

0

2003

2004

2005

2006

2007

2008

significant follow-on funding to support future growth, Ohio’s venture capital community will have to continue its focus on the most promising new investments to ensure that adequate capital is available to support their growth and development.

Last year (2007) clearly marked a “first wave” of a new era in Ohio technology company formation resulting from several key public and private initiatives launched in the last five years. However, the investment activity in 2008 demonstrates that perhaps for several years to come, the economy will truly test the ability of Ohio’s technology entrepreneurs to manage in difficult economic times.

As usual, additional capital will be required by these young companies even if only to survive.

What evidence do we have today that Ohio’s venture capital community will be able to ensure that adequate risk capital is available in these uncertain times?

• Nearly $160 million was invested in 2008 in 104 new companies who had never previously received angel or venture capital.

2008 Ohio Venture Capital Report

Executive Summary

5

• The number of new Ohio companies receiving angel and venture capital investment for the first time increased by nearly 15 percent over 2007. Nationally, this number was down 10 percent over the same period.

• The state’s organized angel groups continue to fuel the early stages of venture investing with more than $45 million invested in 107 promising companies. Ohio’s angel investment community is one of the strongest and most active in the nation with more than $186 million in cumulative investment in the last five years.

• Ohio’s total investment in the hottest industry sectors nationally (i.e., healthcare, energy and information technology) remained strong with more than 82 percent of the total investment represented. Since 2002, Ohio’s bioscience and healthcare startups have received cumulative angel and venture capital investments of approximately $1 billion.

Figure No.3 Percent of Total Investment in 2008 by Industry

Healthcare = 45.38%

Information Technology = 21.04%

Other = 0.06% Retail and Consumer = 6.15% Advanced Specialty Materials and Chemical = 11.43% Agriculture & Environmental = 0.35%

6

Energy = 15.59%

• The percentage of total investments represented by Ohio venture capital firms increased from 25 percent in 2007 to nearly 54 percent in 2008, demonstrating the type of localized focus and commitment that is necessary in difficult times.

• The State of Ohio’s Third Frontier Program is providing the necessary programs and incentives to ensure that the capital investments needed to propel new companies are available.

Executive Summary

2008 Ohio Venture Capital Report

Steady Focus in Uncertain Times

Since 2002, Ohio’s bioscience and healthcare startups have received cumulative angel and venture capital investments of approximately $1 billion.

Table No.1 Total Investment by Sector by Year (2002-2008) Advanced Specialty Materials and Chemicals

2002 2003 2004 2005 2006 2007 2008

$4.65

Total

Energy

Agriculture and Environmental

$6.00

$6.39

GRAND TOTAL

Bioscience/ Healthcare

Information Technology

Other

Retail and Consumer

$60.70

$162.18

$51.01

$97.06

$381.60

$37.53

$59.10

$26.75

$32.27

$162.03

$17.83

$12.43

$69.37

$82.34

$28.57

$28.99

$239.54

$7.20

$0.08

$201.07

$164.67

$39.23

$4.78

$417.03

$17.96

$0.25

$141.02

$45.70

$16.91

$20.13

$241.97

$30.95

$16.04

$1.09

$285.71

$82.21

$0.10

$47.42

$463.53

$50.94

$69.46

$1.56

$202.22

$93.77

$0.25

$27.40

$445.60

$135.92

$104.25

$2.65

$997.63

$689.97

$162.82

$258.05

$1,362.06

While total investments will likely decrease in the coming years, the difference for Ohio will be in the ability to continue to attract follow-on capital in support of the most promising portfolio companies. Venture capital firms around the world are attracted to Ohio’s core strengths in healthcare, clean technology and information technology. The following report profiles the 2008 venture capital investment activity in Ohio, including highlights of a few companies and their entrepreneurial leaders who epitomize the leadership required to excel in tough economic times.

We trust you appreciate and are informed by the highlights summarized here and the unique opportunities and challenges ahead.

S. Michael Camp, PhD

Academic Director Kumar Parekh Research Analyst

2008 Ohio Venture Capital Report

Executive Summary

7

2008 Seed-Stage Investment Activity The number of companies receiving seed-stage investment, most for the first time, increased from 106 in 2007 to 137 in 2008, a 29 percent increase, marking the third straight annual increase in the number of companies receiving seed funding.

Economists are particularly concerned with annual fluctuations in the level of pre-seed and seed-stage funding in Ohio. The level of pre-seed and seed investment activity has been shown to be a reliable indicator of the level of later-stage investment activity four years into the future. Seed-stage investment activity in Ohio increased from $56.6 million in 2007 to $60 million in 2008, a 6 percent increase.

The number of companies receiving seed-stage investment, most for the first time, increased from 106 in 2007 to 137 in 2008, a 29 percent increase, marking the third straight annual increase in the number of companies receiving seed funding. This is especially encouraging when you consider that these investments were made in the face of especially difficult economic times. Ohio’s organized angel investors accounted for 50 percent of the seed-stage funding activity in 2008, investing $30.3 million up from $27.7 million in 2007 (nearly a 10 percent increase). Given that angels accounted for a greater percentage of seed-stage deals in 2008, the average seed-stage deal size was $440,000, somewhat less than the average of $530,000 in 2007.

8

2008 Seed-Stage Activity

2008 Ohio Venture Capital Report

Steady Focus in Uncertain Times Trends in Seed-Stage Investment Activity $70 $60

180 $56.59

$57.76

$55.45

$60.00

160

137

140

$50 $40 Number of Companies Total Investment

$41.59 88

99

120

106

100

82

80

$30 0 2004

2005

2006

2007

2008

CleveX, Inc. – Ohio’s 2008 Seed-Stage Investment Highlight CleveX, Inc. was founded in 2003 to commercialize novel technologies conceived by plastic surgeons and dermatologists at the Cleveland Clinic Foundation (CCF). CCF Innovations, the commercialization arm of CCF, partnered with IDx Medical, a surgical instrument “accelerator” in Cincinnati, OH, to complete the design and development of the ExiClip™ - the company’s flagship product. ExiClip™ is an innovative single-step, minimally invasive, skin biopsy, closure and repair instrument for dermatology, cosmetic surgery and primary care physicians. The product effectively excises skin lesions while simultaneously closing and repairing the excision site in a single step.

In late 2006 the company raised Series A funding to accelerate commercial entry. Today, CleveX has 510(k) clearance to market and sell the ExiClip™ and its accessories. In 2008, CleveX raised over $1.9 million from angel and venture investors. Participants included seedstage funding from the Ohio TechAngels and additional funds from Reservoir Venture Partners and Michigan-based Plymouth Ventures. The company is using these investments to complete product development, ramp up manufacturing and expand its sales and marketing efforts. As of early June 2009 almost 500 units had been shipped, and the customer response had been very positive. The company’s corporate headquarters are in Columbus, Ohio.

2008 Ohio Venture Capital Report

2008 Seed-Stage Activity

9

2008 Early-Stage Investment Activity In 2008, 45 Ohio companies received early-stage funding of more than $238 million, the most robust level of early-stage venture capital activity in Ohio’s history.

In 2008, 45 Ohio companies received early-stage funding of more than $238 million, the most robust level of early-stage venture capital activity in Ohio’s history. The number of companies receiving early-stage funding was up more than 18 percent over last year, while the total dollars invested was up more than 66 percent over 2007 and three times greater than in 2006. Between 2004 and 2008, the compounded average annual rate of growth in early-stage investment in Ohio was nearly 35 percent.

Perhaps most notable about 2008 was that the average size of the early-stage investments increased significantly to $5.3 million, nearly 40% from $3.8 million in 2007. As in 2007, a number of factors are contributing to the dramatic increase in average deal size for early-stage investments in Ohio. First, the increase is partly attributable to the improvement in follow-on valuations. Later-stage valuations are up because new venture-backed companies in Ohio are being better nurtured by the state’s active angel investors. Second, early-stage deal size is up because a greater percentage of venture investments is directed toward industry sectors where deal size is naturally larger due to greater costs and risks associated with bringing technologies to market (i.e., energy and biosciences and healthcare). Energy and bioscience/ healthcare represented 61 percent of the total venture capital investment in Ohio in 2008.

10

2008 Early-Stage Activity

2008 Ohio Venture Capital Report

Steady Focus in Uncertain Times Trends in Early-Stage Investment Activity 45

$350

40

41

$300

35

38

$250

$238.30

30

30

$200 Number of Companies Total Investment

$150

25 25

20

$143.45

15

$100 0

45

$72.45

2004

$71.82

$75.45

2005

2006

10 2007

2008

Xunlight – Ohio’s 2008 Early-Stage Investment Highlight Xunlight Corporation, a technology spin-off from the University of Toledo, engages in the development, manufacture, and marketing of photovoltaic modules that convert sunlight into electricity. The company develops thin-film silicon based photovoltaic products and manufacturing equipment for high-throughput production of flexible and lightweight photovoltaic modules at low cost.

Xunlight recently completed a $34 million series B financing to build a roll-to-roll full-scale production line. The company has also received over $11 million in funding from the US Department of Energy, US Department of Commerce, and Ohio Department of Development to develop its products and manufacturing process. Xunlight has been featured in a variety of national/global media outlets including CNN, Newsweek, The Wall Street Journal, and the New York Times. The company is headquartered in a 122,000 square foot manufacturing facility in Toledo, Ohio.

2008 Ohio Venture Capital Report

2008 Early-Stage Activity

11

2008 Growth-Stage Investment Activity Recent pressures on the global economy have had the greatest initial impact in Ohio on the availability of risk capital at the later stages of venture development.

Due to sliding economic conditions, the level of growth-stage investment activity in Ohio fell significantly in 2008. A total of $147.3 million was invested in growth-stage opportunities as compared to $263.5 million in 2007 – a 44 percent decline. Twentytwo companies received growth funding, as compared to 29 companies that received growth funding in 2007 – a 24 percent decline. In addition, average deal size fell from $9.1 million in 2007 to $6.7 million in 2008 – a 26 percent decline. Investors report that most of the declines were due to the need to invest more funds over longer periods of time to prop up and move promising startups through earlier stages of development.

As the numbers show, recent pressures on the global economy have had the greatest initial impact in Ohio on the availability of risk capital at the later stages of venture development. Analysts predict this condition to continue into the next two to three years. This is particularly problematic when you consider the dynamic and incremental nature of venture investing. The increase in early-stage investments that have been and will be needed to traverse the uncertain times for Ohio’s early-stage companies could mean fewer dollars available for growth investments when the economy recovers.

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2008 Groiwth-Stage Activity 2008 Ohio Venture Capital Report

Steady Focus in Uncertain Times Trends in Growth-Stage Investment Activity

$350

45 $303.62

40

$300

$263.49

$250

29

$200 $150 Number of Companies Total Investment

$100

35 30 25

26 22

22

24

$147.29 $111.63

$108.76

20 15 10

0 2004

2005

2006

2007

2008

ShareThis – Ohio’s 2008 Growth-Stage Investment Highlight ShareThis is a sharing network that makes it simple and easy to share online content. A Southwestern Ohio company, ShareThis allows users to seamlessly access their contacts and networks from anywhere online and share content.

During the past two years, more than 110,000 sites have added the ShareThis embedded link.

As of May 2009, the ShareThis network was handling up to 12,000 requests a second and 130 million page views every day.

The company was founded in 2004, raised $6 million in venture capital in late 2007 and another $15 million growth-stage funding in March 2008. Investors include Blue Chip Venture Company, DFJ Mercury, Draper Fisher Jurvetson, Gotham, Illinois Ventures, Queen City Angels, Reservoir Venture Partners, and RPM Ventures. The company is managed by Tim Schigel, CEO and former Partner at Blue Chip Venture Company and Nanda Kishore, CTO.

2007 Ohio Venture Capital Report

2008 Groiwth-Stage Activity

13

Future Demand for Venture Capital in Ohio For every $1 invested in seed-stage ventures, Ohio’s venture community must be committed to providing up to $8 more in follow-on funding.

Few facts are more certain about venture capital investment than the demand for follow-on funding. Investments at each stage of development are intended to prepare ventures for subsequent rounds as the young companies grow and increase in value.

If the availability of investment capital at later stages is limited, investors will have fewer means for realizing the value created from earlier investments.

But, what are Ohio’s needs for follow on funding to support its burgeoning number of quality seed stage deals? Based on the data collected at the regional level across the state between 2004 and 2008, the minimum required follow-on funding is approximately $4 billion through 2017 to 1) keep the seed-stage deal flow active, 2) account for increased valuations as deals mature and 3) ensure the availability and accessibility of follow-on funding needed to fuel the surviving firms to exit (Table 2).

Table 2 Future Demand for Follow-On-Funding STAGE Seed Early Growth Total

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2008 Future Activity

2009

2010

2011

2012

2013

2014

2015

2016

2017

$620,000 per company per year $3.94 million per company per year $9.16 million per company per year

FIRMS

$M

818

$ 509

409

$1,612

205

$1,878 $4,000

2008 Ohio Venture Capital Report

Steady Focus in Uncertain Times

The assumptions underlying Table 2 are that the number of seed-stage deals is expected to increase conservatively at 6 percent per year for the five year period projected. Average seed-stage deal size is calculated for 2009 as the average of the last five years (2004-2008). That value is conservatively expected to increase 5 percent per year for the next four years in the seed stage projections. This results 818 seed-stage companies totaling about $509 million in investment the next five years.

To determine the amount of follow-on funding required to fund the seed-stage deals completed from 2008 to 2017, the model assumes each firm will stay two years at each stage of investment and that there will be a 50 percent attrition rate between stages. Finally, the model conservatively assumes no new firms will enter into the early and later stages that have not first been funded at the seed stage. Thus, early-stage deals in the model include only the 50 percent of seed-stage deals that transition forward every two years, and all growth-stage deals consist of the 50 percent of early-stage deals that transition forward every two years.

Under these assumptions, it is clear that Table 2 provides a very conservative estimate of the level of follow on funding required to carry the seed stage investments that survive the full development process through to exit. The chart indicates that Ohio needs to be thinking conservatively about how to activate and channel as much as $4 billion just to launch and support the surviving seed level ventures for the next 10 years. The point is simple. For every $1 invested in seed-stage ventures, Ohio’s venture community must be committed to providing approximately $8 more in follow-on funding.

2007 Ohio Venture Capital Report

2008 Future Activity

15

Fisher College of Business Since 1916, Fisher College of Business at The Ohio State University has produced exceptional leaders who meet the challenges of a changing global business environment through creative and effective solutions. In 1993, the college received a gift from alumnus Max. M. Fisher, a leading industrialist, philanthropist and public servant. Mr. Fisher’s desire to see his alma mater become one of the premier management institutions in the country spearheaded the construction of a state-of-the art, six-building campus. In recognition of his commitment, the college was named the Max M. Fisher College of Business.

Since then, the college has undergone a corporate turnaround; narrowing the focus of its programs, recruiting leading faculty, placing a renewed emphasis on experiential learning, and offering a wide range of international study options. Faculty and staff have also established new scholarship and fellowship opportunities, strengthened their commitment to diversity, and created innovative academic and corporate partnerships. As a result, Fisher’s international reputation continues to rise and is reflected in rankings which place the college among the top business schools in the nation at both the undergraduate and graduate levels.

Center for Entrepreneurship Launched in November 2001, the Center for Entrepreneurship supports academic research, education and community engagement in entrepreneurship. The Center strives to advance both the science and practice of entrepreneurship so as to stimulate economic growth and development through new company formation, technology commercialization, and improved competitive performance of entrepreneurial ventures. The center is a leader in the development and dissemination of entrepreneurship theory and practice that will impact a global economy and stimulate economic growth by assisting new company formation and graduating students who possess strong entrepreneurial skills and experiences. Some of the compelling program offerings are the Technology Entrepreneurship and Commercialization Initiative and the Venture Capital Research Program.

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2008 Ohio Venture Capital Report

Regional Highlights These are indeed challenging times. It is particularly notable that in 2008 seed and early-stage funding increased nearly 67 percent over 2007. The sustained growth in seed and early-stage activity can be traced back to specific initiatives the State of Ohio has put in place to promote company formation to build Ohio’s next generation economy. Increased early-stage company formation creates additional funding challenges at later stages, but the discipline of Ohio’s venture capital and angel communities is to nurture the most promising young technology companies through these difficult times. The following pages highlight key strengths of the major regions of the State.

2008 Ohio Venture Capital Report

Regional Highlights

17

West Central

Dayton Development Coalition .

Angel Funds and Venture Capital Firms Dayton Development Coalition www.daytonregion.com

In 2008, Dayton Region investments focused on the four targeted growth industries that are the cornerstone of our regional strategy:

• aerospace research and development;

• IT/data management;

• advanced materials and manufacturing; and

• human sciences.

Venture capital and angel investments in the Dayton region in 2008 totaled $16.8 million, comprised of various rounds of financing in 13 companies. Institutional investment was led primarily by the Dayton Development Coalition’s (DDC) family of funds: the Miami Valley Venture Funds and the Dayton Region Signature Fund, which is a State of Ohio Third Frontier initiative focused on pre-seed investment.

Summary by Sector The Air Force Research Laboratory and its $1.6 billion research budget administered by Wright Patterson Air Force Base continued to fuel technology commercialization efforts and local investment. West Central investments were focused primarily in the advanced materials and electronic sectors, reflecting the market pull associated with commercial and military aerospace development, a core competency of the Dayton region. Major aerospace programs such as the Joint Strike Fighter program and the development of Unmanned Aerial Vehicles (UAV’s) are major catalysts for scaling of technologies that have been the subject of R&D efforts in the Dayton Region for the past two decades. Composite materials and sensor-driven systems are being required for high temperature applications in jet engines, to provide the capability for remote operations and data gathering, and to respond to aircraft weight reduction requirements.

Summary by Stage While traditional venture capital investment will be required to enter commercial markets in the near future, current capital needs for scaling to production levels are being met through pre-seed and early-stage DDC fund investments and Department of Defense support. Major aerospace prime contractors are also the largest source of capital through joint ventures, strategic partnerships, and mergers and acquisitions. Examples include BAE’s $450 million acquisition of MTC and SI International’s $59 million acquisition of Logtec, Inc. in 2008. Both of these acquired firms were headquartered in the Dayton region. These acquisitions are not reflected in Dayton region venture capital statistics but are substantive in size and economic impact and represent a more frequently seen investment vehicle in a defense-related economy than traditional venture capital.

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Regional Highlights

2008 Ohio Venture Capital Report

Steady Focus in Uncertain Times

Regional Highlights As a result of this highly focused Regional investment strategy, strong cluster relationships exist. For example, Renegade Materials, a company that manufactures high-temperature composite materials for aerospace parts manufacturing, called “pre-preg,� utilizes nano-enhanced polymer dispersions produced by Nanosperse, LLC. Nanosperse also provides dispersions to Composite Advantage, which in turn injects the nano-enhanced polymers into a fiber reinforced foam product for use in bridges and large structures. The foam is supplied by Webcore Technologies, which supplies its proprietary product to wind energy manufacturers as core material in wind energy blades. Each of these companies is a portfolio client of the Dayton Region Entrepreneurial Signature Program and Signature Fund. Taken together, the synergies among them indicate the dynamic opportunities presented by a focused pre-seed and early-stage investment strategy targeted to regional cluster development.

2008 Ohio Venture Capital Report

Regional Highlights

19

Central Ohio TechColumbus

Angel Funds and Venture Capital Firms CID Capital www.cidequity.com/pages/ index.asp Custer Capital www.custercapital.com/ home.asp Microcom www.microcomcorp.com/ contact.htm Nationwide Mutual Capital www.nationwide.com/ about-us/mutual-capital.jsp NCT Ventures www.nctventures.com Ohio Capital Fund www.theohiocapitalfund.com Ohio TechAngel Fund www.ohiotechangels.com Reservoir Venture Partners www.reservoirvp.com Talisman Capital www.talismannetworks.com/ partners.php TechColumbus www.techcolumbus.org

In 2008, even as venture capital investments were dropping nationwide, Central Ohio proved the strength of its innovation economy, achieving a 9.1 percent increase in venture investments over the previous year – $172.2 million as compared to $157.9 million in 2007. The investments represent a diverse group of companies in all development stages from seed stage to exit. For the six-year period, 2003 to 2008, total capital invested in the region reached over $760.7 million, with a compound annual growth rate (CAGR) of 6.7 percent. Fifty-seven (57) companies received funding in 2008 over the 37 companies in 2007, a 54.1 percent growth rate.

The growing number of promising companies is causing investors from outside the region to take a closer look at Central Ohio. Of the total investment in Central Ohio over the last six years, 90 percent came from funders outside the region. In 2008, the import ratio rose to 92.6 percent ($159.6 million) from 89.6 percent ($136.8 million) in 2007. Among Central Ohio investors, angels in particular continue to show confidence in the region. Over the last six years, angel investments in the critical pre-seed and seed stage companies, led primarily by Ohio TechAngels, the third largest angel investment group in the country, have grown at a CAGR of 44 percent. Together, Central Ohio angels and venture capital firms accounted for 25.5 percent of the funding received by these early-stage companies in 2008. This compares to 6.5 percent in 2003. In looking at total investments, including those investors from outside of Central Ohio, angels accounted for $10.9 million in 2008 versus $23.3 million total for venture capital firms.

Summary by Sector With strengths in information processing and medical research, healthcare and IT drive innovation investments in Central Ohio. This is demonstrated clearly when you consider the shift in industry sector investments from 2003 to 2007 as compared to the data from 2008. Healthcare and IT software companies received over 95 percent of total investments in Central Ohio companies in 2008. IT investments jumped 277 percent from 2007 to 2008, realizing a 72.4 percent CAGR over the six-year period of 2003 to 2008. IT now composes 58 percent ($101 million) of total investments as compared to 13 percent from 2003 to 2007. Healthcare investments grew 201 percent from 2007 to 2008, with a 5.3 percent CAGR during this same time frame. Healthcare contributed 37 percent ($64 million) of total investments in 2008 versus 19 percent during the 2003 to 2007 period.

Summary by Stage Seed-stage investments provide the foundation for fundable companies. It is during this critical stage that ideas are validated, intellectual property is protected and market demand is determined. The outcomes of these efforts create the companies poised for

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Regional Highlights

2008 Ohio Venture Capital Report

Steady Focus in Uncertain Times

2008 by Industry Advanced Specialty Materials and Chemical = 1% • $1.7M Retail and Consumer = 4% • $6.6M

Healthcare = 37% • $63.5M

Information Technology = 58% • $100.5M

accelerated growth that capture the interest of follow-on funding. Central Ohio has been priming the pump with these seed stage investments. The total number of deals, through all stages, increased dramatically from 37 deals in 2007 to 57 deals in 2008. More importantly, the total number of seed-stage deals increased 152.6 percent, from 19 companies receiving seed-stage funding in 2007 to 48 in 2008. This increase resulted in seed-stage investments comprising 84 percent of the total amount of deals closed in 2008. During this same time, seed-stage dollar investments increased 154.8 percent from $14.6 million to $37.2 million, a 7.7 percent CAGR since 2003.

Regional Highlights CleveX is one of Central Ohio’s exceptional seed-stage companies that has been successful at raising money from local sources (angel and venture capital), as well as from a Michigan-based fund. CleveX has developed an innovative single-step, minimally invasive, skin biopsy, closure and repair instrument for dermatology, cosmetic surgery and primary care physicians. The company’s first product, the ExiClip™, effectively excises skin lesions while simultaneously closing and repairing the excision site in a single step. It provides safe, consistent excisions, shortens the procedure time and significantly improves patient outcomes. It also makes earlier diagnosis of skin malignancies possible by moving the procedure forward in the patient care pathway.

In 2008, CleveX raised over $1.9 million from angel and venture investors.

Participants included the Ohio TechAngels, Reservoir Venture Partners and Michigan-based Plymouth Ventures. The company is using these investments to complete product development, ramp up manufacturing and expand its sales and marketing efforts. As of early June, almost 500 units have been shipped; and the customer response has been very positive.

2008 Ohio Venture Capital Report

Regional Highlights

21

Northwest

Regional Growth Partnership

Angel Funds and Venture Capital Firms CoreNetwork www.core-network.org Rocket Ventures www.rocketventures.org

Northwest Ohio is continuing its transformation from a predominately manufacturing and agricultural base into a high tech, knowledge-based market. This change in the region’s economy is driven in part by the research and technology transfer efforts of world-class colleges and universities. It is also largely due to the Regional Growth Partnership’s programs Launch and Rocket Ventures. Launch, a Thomas Edison Program incubator, entered its fifth year and Rocket Ventures, partially funded by the Third Frontier’s Entrepreneurial Signature Program, completed its first full year. These programs have complementary missions; helping entrepreneurs develop early-stage, technology-based businesses, attract investment, and achieve viability.

In 2008, Northwest Ohio ventures received $52 million through equity investment, debt, or grants. Of this, $35 million (67 percent) came from venture capital firms, almost $17 million involved state grants or economic development programs, and $400,000 came from angel investors. More than 85 percent, involved in-state resource providers, but the 14.3 percent of deals with out-of-state providers represented twothirds of the total dollars.

Summary by Sector Because of the strength of manufacturing, research, and innovation, there is a natural fit in Northwest Ohio for the alternative energy, bioscience, and advanced materials and manufacturing industries. As a result, the region is now focused in the three “signature” technology areas. The advanced and alternative energy sector includes renewable wind, solar and biofuel technologies. The biosciences sector involves companies in bio-pharma, medical devices, medical delivery systems and bioinformatics. Advanced materials and manufacturing technologies (AMMT) is made up of advanced materials and composites, ICE, advanced power systems.

Building on a century of success in the glass industry and knowledge in manufacturing, tied in with the research capabilities and focus at the University of Toledo, alternative energy has emerged as an obvious growth industry for the region. This industry led the deal activity in the region in terms of dollars and number of deals. Fourteen deals were completed which raised over $49 million in venture and grant funds for alternative energy investments. The successful merging of the University of Toledo with the Medical University of Ohio, coupled with the strength of the healthcare systems in the region, provides significant growth potential in the bioscience sector.

Signs of growth are exemplified in the six deals in the bioscience sector raising over $2.5 million for area companies last year.

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Regional Highlights

2008 Ohio Venture Capital Report

Steady Focus in Uncertain Times Advanced materials and manufacturing technologies (AMMT) have been a staple of the Northwest Ohio region for decades. Investments in AMMT are helping to convert the region from its rust belt image into that of a high-tech, high-wage industrious center for Northwest Ohio and the Southeast Michigan. Two companies have already begun the transformation - Genziko and AquaBlok. Together in 2008 these two companies raised over $500,000 in early-stage funding.

Summary by Stage Measured in terms of quantity and amounts, most investments have been in prerevenue companies, whether at the pre-seed or seed stage. This is a testament to the effort of the region to transform itself, spearheaded by business incubators, economic development agencies, and the RGP. Stage

No. of Deals

Dollar Amounts

Pre-Seed

20

$3,330,624

Seed

5

$47,257,000

Early

1

$467,698

Later/Growth

2

$1,977,270

Regional Highlights The most celebrated venture capital success story in Northwest Ohio is the Xunlight Corporation. In 2008 alone the company received over $33 million in venture capital and almost $13 million in grant awards for a total of $46 million. As a result of these deals and the PR effort of the RGP, Xunlight was featured on CNN and ABC’s World News Tonight and is viewed as an entrepreneurial role model for the region. In the Bioscience sector, Cognitive Pharmaceuticals merged with Mithridion. The company is working to combat Alzheimer’s disease and other central nervous system disorders.

Mithridion received over $2.3 million in venture capital and began negotiations for a second round expected to be near $3 million.

In 2008 the University of Toledo (UT) broke ground on two new on-campus Incubators.

They will focus on biomedical and mixed-technology, respectively. This means a total of four incubators for the University; clean and alternative energy and information technology incubators are already in place campus. By the end of 2009 there will be 7 incubators within the Northwest region. These facilities are expected to attract more venture capital dollars to the area, as they continue to grow and help local entrepreneurs. The RGP is committed to creating an entrepreneurial ecosystem in Northwest Ohio. In 2008, 10 Ignite! Imagining Grants, with amounts up to $50,000 were awarded by Rocket Ventures. These grants are designed to provide very early stage companies the ability to validate their technology or quantify market potential.

The venture capital arm of Rocket Ventures invested almost $1.5 million and began performing due diligence on several other companies.

2008 Ohio Venture Capital Report

Regional Highlights

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Southwest CincyTech

There were a total of 65 state and federal grant, angel, and venture capital investments in the Southwestern Ohio region in 2008. The investments totaled approximately $88 million across new funding rounds. Of the funds raised and invested in 2008, there were 25 investments in Southwestern Ohio based companies and 40 investments made by local venture capitalists and angels in deals outside of the region. Thirty-five (35) of the 40 investments by Southwestern Ohio funds were outside the state.

Angel Funds and Venture Capital Firms American Financial Corp. www.afginc.com Blue Chip Validation Fund www.bcvc.com/index.lasso Blue Chip Venture Company www.bcvc.com/index.lasso C-Cap www.c-cap.net Charter Life Sciences www.charterls.com CincyTech www.cincytechusa.com Fort Washington Capital Partners Group www.fortwashington.com Isabella Capital www.fundisabella.com The Legend Partners www.thelegendpartners. com Miami Valley Venture Fund www.mvva.org NCIC Capital Fund www.ncicfund.org Queen City Angels www.qca.com/about.html River Cities Capital Funds www.rccf.com Senmed Medical Ventures www.senmed.com Triathlon Medical Venture Partners www.tmvp.com

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Regional Highlights

Of the 25 investments in Southwestern Ohio companies in 2008, 14 (56 percent) were venture capital and 11 were angel investments. All 40 investments by regional players occurring outside the Southwestern Ohio region were venture capital investments.

Summary by Sector Investments in bioscience companies in the Southwestern Ohio region accounted for 53 percent of the total investment in the region in 2008. This occurred even though only 7 of the 25 investments were in life sciences. In summary, the $24.7 million of bioscience investment in the seven deals accounted for 28 percent of the total deals closed in the region. The largest deal in 2008 in the region was a $15.1 million round led by Novartis and participated by Fort Washington Capital, Queen City Angels, Blue Chip Venture Company and CincyTech.

Information technology (IT) investment in 2008 accounted for 72 percent of the total deals closed in the Southwestern Ohio region. The $22.2 million invested in IT companies represented 47 percent of the dollar investment in the region. The largest 2008 IT deal in the region was a $15.1 million round in ShareThis led by Draper Fisher Jurvetson and joined by Blue Chip Venture Company.

Summary by Stage Seed investments in the Southwestern Ohio region accounted for 52 percent of the deals closed in 2008. There was a total of $4.1 million invested in seed rounds for 9 percent of the total dollar investment in the region. Early-stage investments in the region accounted for 20 percent of the deals closed in 2008. There was a total of $33.6 million invested in early stage rounds in Southwestern Ohio companies accounting for 72 percent of the total dollar investment in the region. Growth-stage investments in Southwestern Ohio accounted for 28 percent of the deals closed in 2008. There was a total of $9.7 million invested in growth rounds accounting for 20 percent of the total dollar investment in the region.

2008 Ohio Venture Capital Report

Steady Focus in Uncertain Times

Regional Highlights There were two large venture capital investments in the region that involved highprofile coastal investors including Draper Fisher Jurvetson (DFJ) and Saints Capital.

DFJ participated in rounds for ShareThis and ThinkVine, a company that received seed funding from CincyTech. The two largest investments in the region in 2008 were ShareThis, raising $15 million, and Akebia Pharmaceuticals, raising $15.1 million.

Companies continued to attract state and federal grants for development and commercialization. State and federal grants accounted for 20 percent of the investments in the region in 2008 with the rest accounted for by angel and venture capital. State and federal grants accounted for $7.6 million, 16 percent of the total investment dollars in the region.

2008 Ohio Venture Capital Report

Regional Highlights

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Northeast

Jumpstart, Inc. Over the past two years, Northeast Ohio companies have raised over $577 million in equity capital. In fact, in 2008, more companies in Northeast Ohio received angel or venture capital investment than in any of the past four years with 73 companies receiving $259 million in investment capital. While nationally there was a 4 percent decline in the number of investments in 2008, Northeast Ohio actually experienced a 5 percent increase. Northeast Ohio continues to establish itself as a significant center for innovation and growth.

Angel Funds and Venture Capital Firms Akron ARCHAngel Network www.akronarchangels.com/ acorn.php Bridge Investment Fund www.bridgefundllc.com C&T Access Ventures www.accessventures.com Chrysalis Ventures www.chrysalisventures.com Cleveland Clinic Innovations www.clevelandclinic.org/innovations Cleveland-Cliffs Iron Co. Pension Fund www.cleveland-cliffs.com Crystal Internet Venture Fund, L.P. www.crystalventure.com Crystal Ventures www.crystalventure.com Danville Partners, LLC www.danvillepartners.com Draper Triangle Ventures www.drapertriangle.com Early Stage Partners www.esplp.com Everstream www.ccur.com/products_ ev_main.aspx Fairport Asset Management www.fairportasset.com Frantz Medical Ventures www.frantzgroup.com/fmv/ index.html Glengary Ventures www.glengaryventures.com iNetworks www.inetworksllc.com

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Regional Highlights

Summary by Sector Companies Financed Sixty (60) percent of the capital raised was in the healthcare 73 71 sector, demonstrating the 56 region’s status as a national 51 42 center for healthcare innovation and entrepreneurship. Twenty2004 2005 2006 2007 2008 six (26) healthcare companies raised over $158 million in 2008, with notable successes including ViewRay’s $25 million round, IntElect’s $13.5 million round, and AxioMed Spine’s $10 million round. The largest investment in this group, $50 million in PartsSource, an area supplier of replacement parts for hospital equipment, was syndicated by investors both in and outside the region, including Polaris Ventures.

Cleantech, consisting of advanced materials, energy and environmental companies, more than doubled the investment dollars from 2007 to 2008, leveraging the region’s strengths in materials-based sciences and manufacturing. Some of the largest investments included Energy Focus’ $10 million round, Arisdyne Systems’ $5.3 million round, and reXorce Thermionics’ round of $5 million.

Information Technology (IT) also remained a solid sector with 14 companies raising nearly $27 million. The largest investments were in software companies: TOA Technologies received $13 million, SageQuest LLC received $3.7 million, and Axentis received $3.6 million. Several out-of-region investors participated in these deals including Intel Capital of Santa Clara, California, Hopewell Ventures, L.P. of Chicago, Illinois, and Panorama Capital of Menlo Park, California.

2008 Ohio Venture Capital Report

Steady Focus in Uncertain Times

Invacare Corporation www.invacare.com JumpStart, Inc. www.jumpstartinc.org Lorain County Community College Innovation Fund www.lorainccc.edu MCM Capital Partners, LP www.mcmcapital.com Morgenthaler Ventures www.morgenthaler.com Mutual Capital Partners www.mutualcapitalpartners. com North Coast Angel Fund www.northcoastangelfund.com Ohio Innovation Fund www.oifventures.com Peppertree Capital Management http://www.peppertreefund. com Primus Capital Funds www.primuscapital.com Rexon www.rexon.com Riverside Capital Microcap Fund www.riversidecompany. com RiverVest Ventures www.rivervest.com Roulston Ventures www.williamscapital. com SunBridge Partners www.sunbridgepartners. com Zapis Capital Group LLC www.zapiscapital.com

Summary by Stage Seed- and early-stage investment dollars increased by 10 percent in 2008, demonstrating a steady pipeline of innovation and continuing development of the venture capital continuum. Growth stage investment slowed slightly in 2008, resulting in growth-stage investment in the region of $259 million, a 20 percent decline from 2007.

Building Pipeline Several companies number of companies by stage of financing in the region did 14 experience exits. A few 16 of the most notable 8 8 exits in Northeast Ohio 29 Growth 1 27 in 2008 were Theken 16 22 Early 19 Spine, a healthcare 33 27 29 22 Seed 26 company acquired by 2004 2005 2006 2007 2008 Integra Life in a deal valued up to $200 million, Sorbent Technologies, an environmental company acquired by Albemarle Corp. for $20 million, and Brulant, a digital marketing company acquired by Rosetta, based in Princeton, New Jersey.

Regional Highlights In the past five years nearly 90 investors from outside the region have invested in Northeast Ohio companies. In 2008 alone, 14 venture capital firms from outside the region made their first investment in a Northeast Ohio company. This trend demonstrates that the regional and state-wide strategies to increase equity investments in local companies are working.

The trends in Northeast Ohio are heartening. In the past five years, over $1 billion has been invested in over 250 Northeast Ohio companies. Ten (10) percent of all venture capital firms in the country have made an investment in the region. These results are a testament to the growth of Northeast Ohio’s venture and entrepreneurial communities.

Most excitingly, the industries that are being created through these investments are creating thousands of high paying jobs across a variety of growth sectors.

2008 Ohio Venture Capital Report

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Southeast Ohio Adena Ventures

Angel Funds and Venture Capital Firms ACEnet www.acenetworks.org Adena Ventures www.adenaventures.com Athenian Venture Partners www.athenianvp.com Ohio Appalachian Development Fund www.coadinc.org

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Regional Highlights

While the southeast region of Ohio has not closed on any significant venture capital placements during 2008, the year showed great progress in building an infrastructure of entrepreneurial support and capital formation in the region. The Southeast ESP program (TechGROWTH Ohio) spearheaded the development of a network of angel investors in the region, uniting them under a single organization and fund management structure. At the same time, TechGROWTH Ohio has ramped up both its organization and activity levels as evidenced by increased deal flow and intensive operational assistance in preparing companies in the region to be investment-ready and investment-worthy.

This investment in infrastructure and entrepreneurial capacity in the region during 2008 is paying off during 2009. During the first half of 2009, qualified deal flow for the TechGROWTH Ohio program increased over fourfold compared with all of 2008.

Client companies in the TechGROWTH Ohio program more than doubled.

The 2008 story of the Southeast region is really one of the building up of infrastructure and of delivering intensive operational assistance to companies to prepare them for investment and render them “venture-ready”. After significant investment during 2008 through the TechGROWTH Ohio program (i.e., in terms of both professional assistance as well as purchased service “mini-grants” to companies), the program succeeded in bringing several companies to “market entry” and attracting increased investment interest in companies that have been assisted in this way. In addition, the programs helped fill a robust pipeline for preseed and angel funds in the region with qualified prospects and generate new deal flow as a result of increased visibility and branding in the region as the gateway for technology entrepreneurs seeking professional support and access to capital.

2008 Ohio Venture Capital Report

Steady Focus in Uncertain Times

Regional Highlights The story in the SE region is that companies are not merely vetted for investment readiness but are actively PREPARED to be investment-ready and investment-worthy.

In this regard, 2008 was a year of building entrepreneurial support infrastructure for technology companies, developing a deal flow pipeline, and qualifying companies for venture-readiness.

As a result, the deal flow pipeline for the TechGROWTH Ohio Pre-Seed fund has filled with qualified companies. While only a single investment (Toobla) was made out of the fund during 2008, the increased deal flow has resulted in two more investments in 2009 and four additional companies in the due diligence process. Correspondingly, the angel network (ECOTAF) created through the TechGROWTH Ohio program has made two investments in 2009 and is actively evaluating presentations monthly.

2008 Ohio Venture Capital Report

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Fisher College of Business Center for Entrepreneurship www.fisher.osu.edu The Ohio State University 256 Fisher Hall 2100 Neil Ave. Columbus, OH 43210-1144

2008 Ohio Venture Capital Report

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