Area startup health care businesses could be getting a boost from a recent round of investments by the state's Third Frontier program.
In March, Third Frontier awarded $30.5 million to four Cuyahoga County-based organizations. The money will be available to help fund pre-seed and seed rounds for technology startup companies, particularly in the health care and biotechnology areas. Those are the earliest stages of funding for startup companies.
One of the investments will be the basis of a new collaboration between two local organizations. It will provide $4 million to kick off the Healthcare Collaboration Fund, an investment fund that JumpStart Inc., the Cleveland-based nonprofit business accelerator, and University Hospital Ventures, the innovation and commercialization arm of University Hospitals, are creating to make investments in Northeast Ohio technology startup companies in the biomedical and life sciences.
Each of the partners will add $2 million, creating an $8 million fund that will seek to grow its clout with co-investment partners. The fund will focus on a broad range of the biomedical and life sciences, including diagnostics, imaging, surgical instruments and equipment, implant devices, therapeutics and regenerative medicine, as well as software applications for health care.
Jerry Frantz, chief investment and services officer of JumpStart, said the idea to create a working relationship came from UH Ventures, and it kept building until they decided to create the fund.
"It really is for this region a novel approach to how ... you create and support deals," Frantz said.
David Sylan, president of UH Ventures, agreed, adding that having University Hospitals as a partner can be attractive to potential co-investors. "We bring clinical knowledge to the equation," he said.
That means, Frantz said, that co-investors know that one of their partners is a potential user of the startup's technology, a partner who also has a purchasing department that can help assess the marketability of the technology. And, as part of a research hospital, UH Ventures may even be able to find an in-house place for a pilot program.
"As much as we are sharing the process of putting dollars in to invest, they are also bringing in clinical specialists as subject matter experts and the perspective of the actual marketplace. And that is very attractive to entrepreneurs," Frantz said. "If you're piloting at University Hospitals, then you've got your pilot going with your funder. So it's a very exciting model."
Scott Shane, a professor of economics at Case Western Reserve University's Weatherhead School of Management, sees bringing University Hospitals, through UH Ventures, into the investment arena as a positive move for a region that, he said, has not had a strong venture capital base to draw on.
"Drawing (UH Ventures) into doing more, it's definitely a step forward because what you really want to have is more different players with more different perspectives, doing more different kinds of deals," said Shane, who also is the founder of Comeback Capital, a Cleveland-based venture capital firm that invests in technology-based startups.
Frantz said the new fund is close to making its first investment, which he would not disclose.
"We are preparing to close on our first investment and are building a strong pipeline of new opportunities," he said.
Early-stage funding is considered a two-step process — first what's called a pre-seed round, followed by a seed round.
Pre-seed funding may be sought before the business has a prototype or pilot, done market research or, perhaps, hired any employees. Funding at this stage may come from family, friends and, more and more, from close-to-home investors or investment funds that see themselves as what the financial markets call angels. A pre-seed round may need as little as $50,000, but can be significantly larger.
Seed funding follows, designed to accomplish those first steps and reaching out to a broader pool of investors. A recent study by Wing Venture Capital, an investment firm that focuses on early-stage businesses, found that the median seed round of financing was $4 million in 2020.
That level of funding is more than the Healthcare Collaboration Fund could handle on its own, so its founders know that they will need partners.
Shane said his Comeback Capital fund could be a co-investor. Several other local investors have also expressed an interest, though some medical technologies, because they require a long federal government approval process before their products make it to market and begin to show a return on investment, may not be attractive to some early-stage investors.
North Coast Ventures, a local early-stage investor, for example, would only be interested in investing in what managing director Todd Federman calls a "subset" of the technologies the new fund is targeting.
"The opportunities that we are most interested in tend to have a software component," Federman said. "So that means we're going to be looking more at healthcare (information technology) and digital health."
Federman said UH Ventures recently invited several North Coast principals to make a presentation to a group of UH physicians to share how private investing works and explain what North Coast is interested in.
In fact, Third Frontier, in its recent round of funding, directed investments to both North Coast and Comeback Capital.
Two North Coast funds will divide $9.5 million. Both its North Coast Angel Fund IV, which was awarded $5 million, and its North Coast Venture Fund II, which received $4.5 million, will invest in business-to-business software startups in Northeast Ohio.
Comeback Capital won $1.5 million for its Comeback Capital Pre-Seed Fund, which will invest in Ohio-based early-stage technology companies, primarily those developing software applications for business and health care.
Lee Zapis, president of the Zapis Capital Group, believes this new fund and the partners it will attract will help some of the region's would-be entrepreneurs, and it fits into the investment strategy he has embraced. Zapis, like Shane, believes Northeast Ohio has suffered from a scarcity of early-stage investors.
Zapis, a former business owner — his family's Zapis Communications owned radio stations in Northeast Ohio and around the country — said that as he has moved away from operating a business to being an investor in a handful of startups, he needs the kind of expertise that UH Ventures brings to this new fund.
"I find as I've gotten older and I've gotten further away from actually operating a business, I find myself being not much of an expert in anything other than early-stage investing, and then some people may not call me an expert in that, either," he said.
Gloss