This is the first in an occasional series about new and growing venture markets outside of Silicon Valley.
Joe Bagan co-founded STAQ Pharma in Denver in 2019. Last year, he decided to expand his operations with a second manufacturing plant in Columbus, Ohio. What sold him on this city of nearly 1.7 million people was a coordinated effort among VC funds, incubators, limited partners in the healthcare industry and private economic development agencies to attract the life sciences start-up to the center of the Buckeye state.
In March, STAQ raised $41 million in equity capital and $4 million in debt capital in a Series C round from venture start-up studio Rev1 Ventures, private development agency JobsOhio, Nationwide Children’s Hospital and Cincinnati Children’s Hospital, among others. STAQ, which produces sterile injectable medications sold to hospitals in ready-to-use syringes, is putting much of the cash into retrofitting the former Medco-Express Scripps factory, and it plans to hire 15 new employees by year-end, including engineers, quality control personnel, production technicians and maintenance staff. Next year, Bagan, chief executive of STAQ, hopes to add another 50-75 people, depending on how quickly the Columbus operation gets up to speed.
“For us, it really was all about those organizations coming together to show us why Ohio was a great place to be,” said Bagan. That united effort “gave me a lot of confidence that we were making the right decision” to expand in the state.
VC firms like Drive Capital and Rev1 Ventures, together with state and private development agency initiatives, have turned Columbus into one of the foremost among several under-recognized hubs of venture activity that are slowly shifting the center of gravity away from Silicon Valley and a select few other coastal cities.
Venture investment in start-ups based in the Columbus metro area has climbed considerably in recent years, with Columbus-based companies raising $1.3 billion year-to-date as of August 16, compared with $1.1 billion for all of 2021, according to Crunchbase. Capital deployed to start-ups this year is nearly three times that deployed in 2018 ($451.5 million), with the average round size about eight times what it was four years ago.
As a percentage of total venture investment nationwide, Columbus accounts for less than 1 percent annually. But it is slowly moving its way up the ranks. The city’s share of total US venture capital nearly quadrupled between 2017 and 2018 from 0.12 percent to 0.45 percent, according to One Columbus, an economic development organization. After a dip between 2018 and 2020, Columbus’s share rebounded in 2021 to 0.47 percent of the nation’s total. More than half (about $850 million) of 2021 fundraising was done by local healthcare start-ups.
The geographical region in the US that Drive Capital defines as the “driveway” – 30 states, excluding New England, the Far West, most of the Rocky Mountains and a few others –generated $14.58 trillion in Q1 2022, or just under 60 percent of total US GDP, according to the US Bureau of Economic Analysis. That was more than three times China’s GDP of $4.26 trillion in the same period.
“And yet the driveway gets almost no venture capital investment,” said Chris Olsen, co-founder and managing partner of Drive Capital.
The Ohio pitch
A particular selling point Bagan recalls from a presentation by One Columbus was a slide showing that more than half of the US population can be reached within a half-day’s drive or a one- to two-hour airline flight from the city.
Quick and easy access to such large swaths of the population is important to Bagan because STAQ “serves hospitals – and their locations are highly correlated to population centers.” Big hospitals might need up to 1,000 syringes a day of fentanyl for its patients, which STAQ produces.
Since STAQ bought the 27,000-square foot Medco facility last July, Intel, Honda and other large companies have opened facilities in and around Columbus, turning it into a hotbed of economic growth.
Its $1 million investment in STAQ’s previous funding round is just one of the boosts Rev1 Ventures has given central Ohio’s life sciences industry. The $15 million Catalyst Fund II Rev1 closed in late 2019, with commitments from Ohio State University and Nationwide Children’s Hospital, among others, was three times the size of its first life sciences fund, which has generated more than $250 million in exits. Among those success stories is Myonexus, an NCH spinout that is developing the first gene therapy to correct certain forms of muscular dystrophy. Myonexus was acquired by Sarepta Therapeutics for $165 million in 2019.
Entrepreneurs, VC managers and even LPs that are considering setting down stakes in Columbus would do well to become familiar with some of the key players supporting its venture development.
Rev1 takes a start-up studio approach
Although regional spinouts supported by Rev1 under his watch have increased from eight in 2013 to 122 in 2021, Rev1 CEO Tom Walker said it’s still early days for spinouts from local research institutions.
Walker is a transplant from Oklahoma City, where he ran a similar seed fund program. He was recruited 10 years ago by local CEOs from Nationwide Insurance, Ohio State University and Nationwide Children’s Hospital, one of the country’s largest research hospitals, to create a start-up studio that turned into Rev1.
“[Nationwide Children’s Hospital] and Ohio State were both creating initiatives to put more emphasis on their [research] commercialization efforts, and the community was looking for ways to close the capital gap for seed-stage entrepreneurs,” he said.
Walker describes Rev1 as a hybrid between a VC firm and a tech accelerator. In addition to capital, Rev1 provides studio services to entrepreneurs and innovators from local research institutions that advise them on how to go to market, design for customers first, recruit talent and raise capital.
As a VC itself, with over $120 million in assets, Rev1 has invested in more than 130 companies, about 80 of which remain active in its portfolio. “We are a significant follow-on investor, so we participate with our companies through multiple rounds,” Walker noted.
Rev1’s Fund II, which closed for $20 million in June 2021, is investing in high-growth seed and early-stage companies in the digital health, healthcare IT, HR technology, fintech, insurance tech, data analytics and life sciences sectors. The firm has attracted more than 60 investment partners from the Great Lakes region, and it has doubled its total partner base from all regions since 2015.
Central to Rev1’s mission is “connecting assets in your backyard to help the start-up community thrive,” Walker said. Rev1 rolls returns from its funds back into subsequent funds and its start-up studio. “Our entrepreneurs love that it’s going right back to fund another company,” and advancing the local VC ecosystem, he added.
Rev1 has also been a critical partner to research institutions such as Nationwide Children’s Hospital, which is also an LP for Rev1’s funding activity. NCH spun out 17 start-ups between 2012 and 2020, 14 of which received venture investment, said Matt McFarland, who heads the hospital’s office of technology and commercialization.
“Rev1 has made direct investments into some of our start-up companies and has [helped] us manage our fourth seed fund,” McFarland said. The seed fund mechanism “has been an important catalyst for raising the rest of the seed round necessary to see [our companies] advance.”
McFarland’s office, whose staff has grown from three to 20 since 2012, has seen new inventions increase from 28 in 2012, with three deals, to 102 in 2020, with 32 deals. NCH’s tech transfer revenue, which is reinvested into research and helps keep the hospital sustainable, has consistently been above $10 million a year, reaching the high-$30 million range in a couple of years, and $69.8 million in 2021, said McFarland.
Growth Capital Fund focuses on IP creation
An added boost to Columbus’s VC industry has come from programs initially set up to catalyze investment in local companies hit hard by Covid-related lockdowns. The Growth Capital Fund, created in early 2020 by JobsOhio, originally made convertible loans for six to 12 months to newer companies whose funding had dried up or been put on hold during the pandemic. The loans helped companies continue operating until their funding returned, said Brian Faust, JobsOhio’s CFO. “Then we would convert our loan to equity upon the next financing round.”
When the program proved successful and seeing ongoing demand, JobOhio made the fund permanent in early 2021. Each dollar it invests in start-ups leverages six more dollars from other sources, Faust said. The fund will allocate $50 million a year to local companies, but only to those that have already received significant funding, such as a government grant.
The Growth Capital Fund’s portfolio currently consists of about 56 companies, mostly in IT and other tech sub-sectors, including medical devices and energy storage.
The Growth Capital Fund has seen three portfolio companies exit to date, and several more are expected in the current fiscal year. Returns from exits are re-invested in new opportunities not only within the fund itself but in other JobsOhio initiatives.
While the broader JobsOhio organization tracks the number of new companies that have relocated to Ohio and the jobs they have created, the Growth Capital Fund has a broader mandate that includes creating intellectual property.
IP ranks high because “that ultimately creates jobs, but further downstream,” Faust said. “It could be support for a spinout of a situation here in the state and establishment of that technology and ultimately that creates jobs.”
Drive Capital seeds broader tech applications
Drive Capital, which manages $2.2 billion in assets, closed two new funds for a combined $1 billion in June to fuel new investments. It invests from pre-seed all the way through IPO across several tech subsectors. The strategy has proved successful, as Drive has notched 16 exits to date, including Root, the auto and renters insurance app start-up, whose October 2020 IPO was valued at $6.75 billion. One of Drive’s earliest investments, Olive, is currently valued at $4 billion. Olive uses AI to automate healthcare administration (which consumes 40 percent of total healthcare spending in the US), freeing hospitals to put more money toward nurses and doctors, said managing partner Olsen, who was a partner at Sequoia Capital in the 2000s.
Although the tech innovation that has come to be associated with VC sprouted from Silicon Valley, it has since “seeped into all these other industries, [so] you find there’s just so much more reason to be outside of Silicon Valley than in it,” said Olsen. Drive relocated to Columbus in 2013 after a two-year stint in the San Francisco Bay Area.
Olsen considered other geographic regions with booming economies, like China and India, but then he wondered why America’s heartland had until then been largely overlooked where venture investment is concerned.
Instead of the infrastructure tech like semiconductors that made Silicon Valley’s name, Drive invests in the types of technology that increasingly are transforming other business and industrial processes, including auto, travelers’ and dental insurance (Root, Battleface and Beam Dental, respectively), financial services (Branch and Greenlight), manufacturing and supply chains (Fast Radius), healthcare (Circulo, Enlace Health and CirrusMD) and farming (FarmLogs and Fifth Season).
Ohio has historically been a major industrial hub, with manufacturing, insurance and other financial services and healthcare currently among its biggest industries. In 2020, Ohio was home to 27 Fortune 500 companies, ranking fifth among all 50 states. In Q3 2021, the top sectors contributing to Ohio’s GDP were finance and infrastructure (11 percent), real estate (10.9 percent), government (10.7 percent), healthcare and social assistance (8.5 percent) as well as manufacturing and durable goods (8.3 percent), according to the Ohio Gross Domestic Product Report published in February.
“It’s the application technology to traditional industry, and when you look at where that industry lives, it lives here. It doesn’t live in Silicon Valley,” Olsen said. He believes founders should be near their customers and where there is a deep and experienced pool of engineering and industry talent.
One hurdle local venture capitalists faced early on was the Ohio labor market’s wariness of the start-up economy, which it regarded as scary and dangerous. Olsen draws a distinction between “scary” companies such as Amazon, where every day can be different but employees are building skills for the future, and “dangerous” companies like Sears, which declared bankruptcy in 2018, laying off thousands of workers.
“Now that there are so many examples of amazing companies built in these other cities, you’re seeing the labor pool really swing toward the start-up economy,” said Olsen. VC firms and start-ups are now able to “recruit those engineers out of JPMorgan or Nationwide because they’re excited about the career potential of working in start-ups and they no longer have to go to California for this economy.”
The development of the local start-up economy is also enabling local talent that may aspire to work remotely one day for a large, proven company like Google or Meta to acquire the relevant skills, since those companies are not recruiting from Fortune 500 firms, Olsen said. Start-ups in Columbus can serve as “an on-ramp into more established tech companies so they can have that career trajectory that does feel it’s building toward a big tech company.”
Support from the state
Economic development groups such as One Columbus and Ohio Third Frontier have been another linchpin in central Ohio’s burgeoning venture industry.
Ohio Third Frontier, a $2.1 billion initiative within the state’s Department of Development, is focused on shifting Ohio’s economy further toward tech entrepreneurship. Since 2003, its Pre-Seed/Seed Fund Capitalization Program has awarded $285.5 million to a broad range of entrepreneurial programs run by its six regional partners across Ohio, including Rev1 Ventures. Awards were originally made as grants, but since 2013 they have been in the form of loans that must be repaid with interest.
An additional $281.9 million has been disbursed by Ohio Third Frontier’s Entrepreneurial Services Provider (ESP) Program to regional partners and their networks. Launched in 2007, these grants have funded resources to help founders commercialize their ideas, including mentorships, incubators with state-of-the-art workspaces, and assistance in developing intellectual property and marketing and sales strategies.
In July, the ESP program approved an additional $82.3 million in grants to its regional partners for January 2023 through June 2025.
Ohio Third Frontier’s multi-year grant program funds a lot of the services that Rev1’s studio offers. Grants are conditioned on the local community matching government dollars. “In many ways that program has helped us grow what we’ve built here and helped it become sustainable to support these entrepreneurs,” Walker said.
The combined resources of NCH, Ohio State University and Rev1, together with state programs targeting biotech, have produced an environment in which, as successful start-ups emerge, it’s getting easier to retain the talent responsible for those successes, said McFarland of NCH.
Seeing a committed ecosystem is making entrepreneurs more likely to start their next company in Columbus as well. McFarland’s office is negotiating licenses with some founders for their second or third deals who “are now seeding and developing new talent,” he said.
He cites Myonexus’s former CEO, Mike Triplett, as a prime example of a founder who stayed in Columbus after his company was acquired and has become a local leader in biotech.
“When you’re not in one of the coastal cities that are traditionally known as the hotbed of activity for this space, you’re going to have more difficulty finding the talent you need to support leadership and function of these types of companies,” McFarland conceded. “But it’s improving every day.”