Dayton, Ohio, Area Loses Funding for High-Tech Startups

The area's unspent allocation reverted to state control at the end of June, making the eight-county region the only one in Ohio not receiving new state money to assist technology startups.

by Lynn Hulsey, Dayton Daily News, Ohio / July 20, 2015

(TNS) --The Dayton Development Coalition failed to secure $1.8 million in state funding for a tech startup program at the same time it let more than $2 million in previously approved money intended for the same purpose go unspent, an investigation by the Dayton Daily News found.

The unspent allocation reverted to state control at the end of June. And the eight-county West Central Ohio region will now be the only one in Ohio not receiving new state money to assist technology startups.

On June 11 the Ohio Third Frontier Commission rejected the Dayton coalition's request for $1.8 million in Entrepreneurial Signature Program (ESP) funding for Accelerant, a program that provides tech startups with funds and assistance in Montgomery, Greene, Miami, Preble, Clark, Champaign, Shelby and Darke counties.

"It slows momentum," said state Rep. Niraj Antani, R-Miamisburg. "Dayton is home of the Wright brothers and Charles Kettering — we are the home of entrepreneurism. I'm sick and tired of Dayton being everybody's little brother. To me it's a slap in the face if we are the only region without an ESP."

Dayton Development Coalition president and chief executive Jeff Hoagland said the loss of money means fewer entrepreneurs will receive help with accounting, business planning and legal work, but does no "harm to entrepreneurial development."

He said there are 30 to 40 companies in Accelerant's ESP portfolio, and he does not believe entrepreneur needs were left unmet by the coalition's failure to spend more than half of its previous $4 million allocation.

Hoagland said the coalition will continue to assist the four companies in which it directly invested $1.75 million through its separate $9 million public-private investment fund — known as the Accelerant Fund I — and look for other startup investments.

"This is a small setback, but it is a small piece of the big puzzle and we are moving full steam ahead with everything else in a great way," Hoagland said.

The state's independent evaluator identified multiple weaknesses with Accelerant's ESP program, giving it low marks for failure to raise enough financial support from the private sector. It also was cited for limited client services and lack of formal commitments from "deal flow" sources such as universities and research labs.

Despite assistance from local legislators and Ohio's Development Services Agency (DSA) — which administers voter-approved Third Frontier bond funding — the coalition was unable to overcome those objections.

This newspaper's analysis of DSA data found that the coalition's entrepreneurship program had the worst or second worst performance of the state's six regional programs in terms of job creation and retention, average salary of jobs and the amount of money spent to create or retain them.

Accelerant-funded companies attracted the second-lowest amount of leverage, which includes third-party investment, product sales and federal research money. Leverage is considered a key metric for the Third Frontier program.

Special subsidy helps

Accelerant's subpar performance and its failure to get new funding or spend what it already had could prompt other groups to seek the entrepreneurship program funds. Scott Koorndyk, a former coalition executive vice president who now is president of The Entrepreneurs Center, said he is considering applying for the next round of Third Frontier money in 2016.

The center is a business incubator that provides leased space to technology-oriented entrepreneurs and helps them commercialize technology. It would have gotten part of the new ESP grant. With that money now gone, the state agreed to help fund the center this year with a special subsidy of $400,000 from the coalition's unspent balance.

Koorndyk said he hopes to use that money to help fill some of the void in services left by Accelerant's failure to get the new grant. He is in discussions with community leaders about how to overcome shortcomings identified by the state, including the need for more private-sector funding.

Koorndyk said potential private-sector partners need to be convinced of the value of the entrepreneurship program.

"The criticism is we haven't been able, up to this point, to articulate a value proposition which generated that support," he said. "I really believe this will be a catalyst for change in the community. It really catches everybody's attention."

The Dayton coalition is the designated western regional representative of JobsOhio, the state's privatized economic development arm. Ohio DSA director David Goodman called the coalition "a valuable and successful partner."

"They have had so many incredible wins for the community in the area of economic development and job creation and we are very excited about continuing to work with them in the future," Goodman said.

City of Dayton spokeswoman Toni Bankston said the city and region have benefited from the coalition's work.

Fewer jobs

Since 2007 the coalition has run the Third Frontier-funded entrepreneurship program, which it revamped and renamed Accelerant in 2013 after the state nearly pulled funding when evaluators in 2012 cited it for "deficient" performance.

Statewide, the six regional organizations operating such programs in Ohio between February 2007 and December 2014 spent $143 million in state funding to create or retain 4,269 jobs, according to DSA data.

That adds up to $33,570 in state funds spent per job. On average, those jobs paid $65,369 annually and the funded companies attracted nearly $3.5 billion in leverage, according to the DSA.

The Dayton coalition's entrepreneurship program spent $17.3 million in Third Frontier funds during that period, and the 223 jobs created or retained ranked lowest in the state.

It also spent the most state dollars — $77,755 per job — of the six regional organizations. By comparison, the Cleveland region's JumpStart Inc. ranked first with 1,817 jobs created or retained and spent $25,950 in state funds for each job, second only to TechColumbus Inc..

The average salary of the jobs created or retained by the coalition's program was $43,000, second lowest in the state after TechGROWTH, which serves southeastern Ohio. The Cincinnati region's CincyTech entrepreneurship program produced the highest average salary for jobs, at $83,162.

The coalition's funded companies attracted $244.9 million in leverage, the second lowest after TechGROWTH. JumpStart ranked first, with nearly $1.4 billion in leverage.

Numbers debated

Hoagland defended Accelerant, saying the revamped program is relatively new. Phil Parker, president and chief executive of the Dayton Area Chamber of Commerce, argues that it isn't fair to hold all six regions to the same standards for Third Frontier funding because Columbus, Cincinnati and Cleveland have access to more resources and major community partners. He said voters approved the bonds that fund Third Frontier to help the entire state.

"Not every city is equal," Parker said. "People did not want all the (Third Frontier) money to go to just the three-C's. They want it to be spread out."

Hoagland also questioned the accuracy of the state's jobs data and said it doesn't accurately reflect the entrepreneurship program's progress because it shows fewer jobs created or retained than the Ohio DSA's previous annual reports.

"We are not sure where DSA's 148 (new) job creation number comes from, but our portfolio companies X-Spine, SpinTech, Renegade and Angstron alone currently employ nearly that many, if not more. We also have had investments and provided development services to over 50 additional technology-based startups since 2007," Hoagland said.

He said those companies "are mostly small, and some have not survived, but many continue to attempt to grow their business. The data seems to keep changing and I cannot accurately comment on the job decline that the state has provided you."

It took three rounds of data and multiple conversations with DSA officials before they provided this newspaper with what they say is correct data. Earlier, a reporter found discrepancies in 2013 data included in DSA's 2014 annual report on Third Frontier-funded entrepreneurship programs. Also, Hoagland found a mistake in the amount of 2014 leverage the state claimed for Accelerant.

DSA spokeswoman Lisa Colbert did not explain why the information was wrong in the annual report, but said the 2014 numbers hadn't been properly vetted in the agency's haste to respond to the newspaper's data request. But she stood by the final round of jobs figures, saying totals had dropped for some regions compared to previous reports because the agency now only counts jobs that still exist.

Critical of program

Antani was surprised to hear that the coalition didn't spend its previous allocation and said it is critical that entrepreneurs get services and financial assistance.

"Frankly I think it would have been my hope that we use all the resources we have," Antani said. "I don't think we can afford to not use the money we have."

Hoagland said when the new Accelerant team was formed in 2013 it had "a spending level that was deemed effective by the new team. We weren't going to race to spend Third Frontier funds just because (funding) was there."

He said Accelerant tried to spend the money "in a targeted and appropriate manner" and he doesn't think the coalition's failure to spend the previous award factored into the Third Frontier Commission's decision to not award additional money.

"We felt that we had an appropriate-sized program that met the needs of tech-based entrepreneurs that would need future rounds of external investment," Hoagland said."As with any program, more money will result in more services."

Tom Franzen, Springfield's assistant city manager and director of economic development, said it would have been helpful if Accelerant's $2.1 million in unspent Third Frontier funds had been repurposed to target groups other than tech companies, or perhaps used for brownfield remediation to replace state funding that no longer is available.

But Franzen said he understands that there are limits on what can be done with voter-approved bonds issued for Third Frontier funding, which is designed to support development of high-tech companies.

Franzen said identifying high-technology entrepreneurs has proven to be a challenge in Clark County.

"It's probably because those companies just don't exist," Franzen said. "The entrepreneurs just aren't as robust as they are in Cleveland, Cincinnati and Columbus."

Koorndyk said "the Dayton region is tremendously good" at technology development. But, like Franzen, Koorndyk said there is a need for people to create companies to commercialize those technologies.

"As a community we need more people who are taking that entrepreneural risk," Koorndyk said.

And when they do, he said they need support.

"As a community we need to do a better job of pulling these resources and programs together in a kind of holistic approach to commercialization," Koorndyk said.

©2015 the Dayton Daily News (Dayton, Ohio). Distributed by Tribune Content Agency, LLC.