Never mind the rust. Young tech companies are hot in Cleveland, where creating a startup has never been easier.

Startup City 

Never mind the rust. Young tech companies are hot in Cleveland, where creating a startup has never been easier.

It may not be evident yet, but the next hot tech company is being created in Cleveland, a city long known as flyover country by venture capitalists and once rated the worst place in the U.S. for startups on a list penned by some bored intern in New York.

This is not just bullshit boosterism churned out by another nonprofit. It's real. Sure, it's less likely that geeks who invent something in their dorm rooms at Case will lure millions in VC than it is at, say, Harvard. But Cleveland's always been a place that resists boom-and -ust cycles, that creates real companies out of grit and determination, not hype.

From twentysomething CEOs to whiz-bang medical-device makers at top hospitals, Cleveland has a burgeoning tech scene. According to a recent study by Jumpstart Inc., a nonprofit that provides support for startups, Cleveland outpaced the nation in drawing venture capital last year. Young tech-based firms snagged $201 million in 2012, a 34-percent spike over the previous year, as centure capital declined about 10 percent nationally.

Take DecisionDesk as an example: The young company, which was started by three Case grads and lets colleges and universities review online applications more efficiently, recently snagged $1.7 million in venture capital funding.  

From 2004 to 2012, the amount of equity capital raised by Northeast Ohio companies doubled from $103 million to $212 million, according to Jumpstart. During the same period, the number of companies raising equity tripled from 36 to 108. Early-stage funding also increased over this time, from fewer than 10 funds to 35 today.

After 10 years of patient work—Jumpstart was created in 2003 and made its first investment soon thereafter—the entrepreneurial ecosystem in Northeast Ohio is now proving to be fertile ground. Internet startups like LeanDog (a software company), iOTOS (a company that makes technology allowing you to control appliances and products with your smartphone) and BoxCast (a company that makes a device for video streaming) are rapidly springing up—hardly household names yet, but soon they could be.   

These days, Cleveland is making it onto a different list—of the nation's most underrated tech scenes. "Some of the most innovative ideas are springing up in the least likely places," cooed a 2012 Fast Company story on '15 Tech Scenes in Places You'd Never Think to Look' featuring Cleveland. "The reasons for the shift are ... The Internet has lifted the cost and geographic barriers of starting a business. That, combined with the proliferation of local incubators and other support networks, has freed entrepreneurs all over the country to innovate, and take risks, without losing their shirt."

Of course, there are plenty of barriers to starting a company here. You're less likely to simply bump into the Internet CEO at the coffee shop who could be your next mentor, and capital and talent are often a bit harder to find than in some bigger coastal cities.

Yet Cleveland's entrepreneurial environment offers something that's hard to find on the coasts, says John Dearborn of Jumpstart: a high-support, low-cost environment that's different from Boston or New York City, where a mere shoebox rents in the thousands.

"The concept of 'nail it and scale it'—keeping costs low while proving out your business model—that's a macro trend where investors want to see additional proof at the early stages," says Dearborn. "There are significant advantages to doing business here. You can keep it lean and mean in Cleveland and then come back to investors [for funds]."

What's at stake here is keeping job-creating talent in Cleveland. "We've lost so many worldwide entrepreneurs worrying about how to keep big businesses alive," comments Paul Allen, leader of Bizdom Cleveland, a nonprofit incubator and accelerator created by Cavs owner Dan Gilbert and located in renovated space next to Tower City Center. "Cleveland tends to play catch-up in investing in new technologies and innovation."

A tech scene in Cleveland?!

Walk into Shaker LaunchHouse any given morning and you'll find 50 to 100 entrepreneurs working on laptops at open desks in the sprawling complex. The former car dealership sat vacant and was nearly torn down before Shaker Heights turned it into a tech hub.

The grassroots accelerator, run by scrappy cofounders Todd Goldstein and Dar Caldwell, has so far invested in more than 40 companies, including social networking aggregation company Widdle and visual presentation platform Quick2Launch.

Goldstein and Caldwell, both in their 30s, started LaunchHouse a few years ago to keep startups from leaving town. They offer cheap space, mentoring and early-stage funding.   

"There was no one focused on young entrepreneurs," says Goldstein. "We figured we were either going to get up and leave Cleveland like everyone else, or we were going to bring support to early stage companies. We wanted to connect them to relationships."

The hallmark of LaunchHouse is that it's open to anyone with an idea and a laptop. The for-profit incubator and accelerator hosts dozens of free events, throws open its doors once a month for flexible Fridays and lets entrepreneurs rent a desk for $100 a month.

Goldstein and Caldwell have come a long way since their first office above a pizza shop in University Heights. This summer, they'll accept 10 new companies in their accelerator program, which awards $20,000 to startups and helps them to validate ideas and seek funding. The accelerator is funded by a grant from Ohio Third Frontier's ONE Fund (Ohio's New Entrepreneurs).

"We have to show entrepreneurs that this is a great place to start a company," argues Goldstein. "Once they come out of here, we help them get the next round of funding."

LaunchHouse is just one example. Across Northeast Ohio, there has never been more support for entrepreneurs: from university business plan competitions, to a wealth of nonprofits that offer money and support, to a range of incubators and accelerators.

The latter are the newest startup trend. Bizdom, LaunchHouse and newbie FlashStarts—housed at PlayhouseSquare and run by serial entrepreneur Charles Stack—promise to help get new companies to "fail quickly and move on to success," says Goldstein.

"This is not just about building companies, but building an entrepreneurial community."

FlashStarts has provided $20,000 to 10 teams of entrepreneurs this summer to help them get their idea off the ground. In return, companies give up eight-percent equity.

The community also includes Bizdom, which has invested in 16 companies (four from other cities) and created 36 full-time jobs. "We're in a sleepy office building located next to a deteriorating mall," says Allen of the nonprofit's 7,000-square-foot offices on West Huron Road next to Tower City. "Yet people walk in and say, 'Hey, this looks cool.'"

The seed of an idea

What's notable about the tech scene in Cleveland is that after so many years of pining after legacy industries—steel being one of them—the city is beginning to embrace the notion that startup companies in new, burgeoning industries are the key to job creation.

A big part of that sea change is providing seed funding to help entrepreneurs get going. Laura Bennett of Embrace Pet Insurance is an example of someone who benefited from the region's increased focus on aiding startups. She raised $250,000 from Jumpstart in 2004 and has since grown her fledgling company to 38 employees, most in Cleveland.

"When we first came here, Jumpstart was just being born and there were no angels and no accelerators," says Bennett, who worked in the insurance industry in Canada for years before striking out on her own because she wanted to do something more inspiring. She came to Cleveland when her husband got a job at Progressive.

"I've seen a huge change in the past 10 years and it's really accelerating," she adds.

Not that it was easy. Bennett and cofounder Alex Krooglik stumped for two years to find an insurance partner. Pet insurance is common in the U.K., yet less than 1 percent of U.S. pets are covered because good products weren't available, Bennett says. Her idea was to introduce new, improved products and grow the once-sleepy U.S. market. They finally found a partner in Lloyd's of London and the firm has been growing ever since.

"You have to kiss a lot of frogs to find the prince," says Bennett, who met with dozens of insurers. "We just so believed in the idea. We talked about giving up for one night, and then woke up and said, 'OK, the last one didn't like us—let's go find the underwriter.'"

Gordon Daily of BoxCast, a startup whose product is a device that plugs into cameras and allows users to stream live coverage of events, also got a boost from seed-stage programs. He won $200,000 from GLIDE at Lorain County Community College and North Coast Opportunities Fund, enabling him to hone his product and hire people.   

"If you're a startup, you can't go to the bank," he says. "They won't give you any money unless you put your house on the line, and I can't risk my house and my family's future. That's why these programs are so special: they give me the chance to take a run at it."

Getting to the next stage

Although nearly everyone agrees it's harder to fundraise for early-stage companies in Cleveland than coastal cities, in some ways that's come to define the area's startup culture. It's better for startups to prove their concept before accepting investment.

To David Levine, a serial entrepreneur who cofounded Wireless Environment in 2006 when he saw a gap in the marketplace for battery-operated LED lighting solutions, having to prove your idea actually works before taking money isn't a bad thing.

"The fantasy is that people raise big amounts of money right from the start, but that's actually the worst path," he says. "Until you're aimed in the right direction, it's like a rocket: Adding more fuel will only cause you to go faster in the wrong direction."

Levine has "bootstrapped" his business by putting in partner equity and raising money from friends and family, and he's seen growth of 650 percent since he started in 2008.

Angel investors—high net worth individuals who invest money in companies—have stepped up to the plate to fill some of the early-stage funding gaps, says Dearborn. That's allowed startups to keep growing until they're able to secure venture capital. Because of this change, finding funding for startups is getting easier in Cleveland.   

Adam Roth of Streamlink Software, which launched its first product in 2008 and now has 25 employees working in the Caxton building in downtown Cleveland, says that early stage funding is never easy to find but it's available for persistent individuals.  

"We're in the middle of wrapping up an angel investment round for $2.5 million," says Roth, who expects to hire 10 more employees between now and the end of the year. Streamlink provides software-as-a-service solutions that help nonprofits manage communications with their boards and apply for and track large federal grants.

Ryan O'Donnell is an entrepreneur who moved from New York to Lakewood last fall to start Sociagram, which allows shoppers to record a video to personalize a gift bought online. He's raised $500,000 so far and has 25 customers for his e-commerce plug-in. He says entrepreneurs need support and guidance just as much as they need money.   

Although not as developed as New York, Cleveland's a good place to experiment.  "Jumpstart is not like a traditional venture capital firm, where it's 'one and done,'" he says. "They help you think critically through your business and pivot towards success."

Exit signs

After early-stage funding, venture capital and "exits" are considered the next stages of success.  Although Cleveland is not as rich in venture capital as some coastal cities, VC firms in Cleveland and other cities are increasingly eyeing deals here because of our growing tech scene and the fact that our investments are a comparative bargain.

John Knific, Eric Neuman and Marc Plotkin, who founded DecisionDesk in 2010 out of their Case dorm rooms, are an example. DecisionDesk helps universities more easily process applications that include multimedia submissions such as video and music. The startup has offices in Cleveland and New York.

DecisionDesk recently landed $1.7 million from the North Coast Angel Fund and the Innovation Ohio Loan Fund. This came after years of bootstrapping their startup company. The first year, they lived with their parents and earned $12,000.

Knific is excited to announce that DecisionDesk is a venture-backed company—and to move their New York office, which is currently above a motorcycle shop, to a quieter location. Yet he says Northeast Ohio still needs to attract a lot more investment.   

"Currently, there's not heavy access to capital beyond the seed stage," Knific argues, citing the fact that New York VC firms often want to be no more than an hour car ride from their portfolio. "As a region, we have to help investors see that they can safely place bets outside their backyard."

Yet venture capitalists are finding deals in Cleveland, an area once considered flyover country. From 2007 to 2011, $961 million of venture capital was invested in Northeast Ohio companies — an increase of 26 percent compared to the previous five-year span, according to a report by the Venture Capital Advisory Task Force. Ohio now ranks between 13th and 16th nationally in terms of the dollars attracted to companies.

"I'm seeing evidence of investors actually competing for deals," says Dearborn. "That competition is more common in other parts of the country. Now it's happening here."

Still, a worrying trend in recent months has been a slowdown in venture capital funding. Many VC funds are waiting for their portfolio companies to be bought or go public.  Jumpstart is carefully watching the trend, a problem playing out across the U.S.  

Cleveland has seen a handful of high-profile exits in recent years. One is Onosys, an Internet company founded by Case graduates Stan Garber, Oleg Fridman and Alex Yakubovich. It was acquired by the daily deal company Living Social a year ago.  

"We've taken over all the restaurant operations for Living Social," says Garber, who first developed the online restaurant ordering software for Rascal House Pizza years ago. "We'll have 33 employees this month—up from 18 when we sold the company."

One thing that helped Onosys to grow was the fact that people in Cleveland were willing to talk to them. "In Silicon Valley and Boston, it's harder to get on people's calendars," says Garber. "When I was in college, we met with Scott Wolstein [of Developers Diversified] and Albert Ratner [of Forest City]. They made time for us."

A new success story

With the success of the entrepreneurial community here, some company founders are trying to do their part to keep the area's top talent from leaving for bright lights, big city.

"My customers are asking me to build [software developers] here and ship them to other cities," says John Stahl of LeanDog, a 50-person software company whose offices are in a boat off the East 9th Street pier that once housed Hornblower's Restaurant. "I can't keep talent here. We've had our people leave for Chicago, Austin and California."

To stem brain drain, Stahl, a flip-flop-wearing CEO who ditched his job at Nationwide Insurance five years ago to pursue his passion, allows other entrepreneurs to work on his boat. Stahl also started LeanDog labs to help entrepreneurs launch new companies.   

Entrepreneurial support groups are also building the pipeline for the next generation of entrepreneurs. Blackstone Launchpad at Case is one of many university programs in Northeast Ohio that teach students entrepreneurial skills. "Some of our students are competing for top spots in accelerators," says Bob Sopko, director of Blackstone.   

John Dearborn says Cleveland's success stories and increasingly vibrant startup community are signs that the entrepreneurial ecosystem is teeming with life here.

"I think we're close to creating a new story [for the region]," says Dearborn. "What you see happening is that, like any portfolio, in the first few years these young companies are finding their sea legs. Now you're seeing companies with over 100 employees raising $10, $20, $30 million. We're not at the tipping point yet, but we're close."

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