Startup City

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.