In 2004, Entrepreneur magazine ranked Cleveland dead last in a national survey of "Hot Cities for Entrepreneurs." To do something about that, Northeast Ohio's Fund for Our Economic Future and the state of Ohio made major investments in JumpStart Inc. The nonprofit organization would attract startup money for regional entrepreneurs, and it aimed high. It invested between $100,000 and $500,000 in "high-potential entrepreneurs and their innovative, early-stage companies that have the potential to generate $30 to $50 million in revenues in five to seven years and create hundreds or thousands of globally-competitive jobs."
The numbers are impressive. In 2007, Entrepreneur ranked JumpStart the No. 9 venture-capital firm in the country. Today, JumpStart estimates that the $16 million it has funneled to 47 companies has "created 347 direct jobs with annualized payroll of $23,752,170, for an average salary of $68,450."
JumpStart is less vocal, however, about the fact that it's outlived its planned existence — three to five years — and grown dramatically. Overhead, including six-figure salaries, is up, and investing in businesses is merely holding steady, raising the question: What is JumpStart's mission?
JumpStart's Venture 47 portfolio companies include Synapse Biomedical, Embrace Pet Insurance and Akron digital-marketing applications company Knotice.
Knotice was founded in 2003. JumpStart invested in February 2006. Knotice CEO and co-founder Brian Deagan says that after receiving funding from JumpStart, his company grew from 10 employees to 50. "The investment was instrumental to that," says Deagan. "Tell me any organization in Northeast Ohio in the last 100 years that has cut more checks to entrepreneurs."
But four years after investing in Knotice, JumpStart Inc. is a very different company. It now has four business units, each with a different mission. JumpStart Ventures continues the company's initial goal; over the last three years, it's invested $11 million in 24 companies. Three other divisions advise startups, help entrepreneurs network and invest in businesses with women or minority owners.
In some ways, the company has become a victim of its own success.
On behalf of Ohio's Department of Development, JumpStart now helps secure funding for nine similar business incubators in the region, from Cuyahoga County's Northcoast Opportunities Technology Fund to the Youngstown Business Incubator. JumpStart sponsors events from seminars to networking opportunities that CEO Ray Leach says "have connected to 35,000 people in the region."
JumpStart operates in a humble downtown office, where it spreads the good word about regional organizations like Cleveland Plus and promotes the Third Frontier technology-jobs-creation initiative. The shift in services, Leach says, is why the organization's staff has grown from 22 employees in 2007 to 35 in 2010. The staff includes five full-time marketing employees; Leach says they average 50-hour weeks.
Remarkably, JumpStart has weathered the recession with no layoffs to date, though Leach says that is about to change. The CEO explains that lack of layoffs was the result of fortuitous timing: Many of the staff positions, he says, were fully funded by three-year contracts that are about to expire. For the fiscal year that began in July, he says, executive base salaries are the same, but the top employees are taking reductions in bonuses that will amount to gross reductions between 10 and 16 percent. When the state of Ohio announces its budget in 2010, JumpStart's various divisions will lose around a half-dozen employees.
JumpStart's 2007 IRS filing reports a total revenue of $8.2 million. That year, it invested $4.1 million.
"$8 million overhead to invest $4 million is out of whack by any standards," says a veteran in equity investing who follows JumpStart but who spoke on condition of anonymity.
Chief Operating Officer Rebecca Braun says JumpStart Ventures, the division that invests in "incubating- imagining- and demonstrating-stage companies," has a budget that's close to a 1:1 ratio between overhead and investing. And the larger JumpStart organization is funded to achieve other goals.
"JumpStart Inc. is a services organization that happens to invest," says Braun. "I'm not sure the community has kept up with that evolution."
Leach has a complicated explanation for why the organization doesn't use more of its money to invest. The short version: It can't. "A criticism the market has of JumpStart is we're not investing enough," says Leach. "The monies we raise for investment, those are given for us only to invest. And the monies that we raise to pay for operations, 80 percent or so of those monies are specified how we can use it."
Leach says JumpStart can — and does — use general, undesignated funds to invest, but adds, "It's incredibly hard to raise that money."
Braun amplifies the argument, offering, "For people who are used to investing, they're not used to granting dollars to investing groups. So we've just struggled to raise more dollars to invest. People are more comfortable giving dollars for services than to invest."
For the 2007-2008 fiscal year, the JumpStart staff was paid well to provide those services. Compensation of officers, directors and key employees was $1.2 million. Salaries of the rest of the staff combined to $1.5 million. Leach himself — a University of Akron graduate with an MBA from MIT — made $369,000 in base salary that year, with $34,000 in contributions to his benefit plan and deferred compensation. The other four top employees' salaries averaged $158,000. In the 2008-2009 fiscal year, the top five employees made a combined $1.31 million.
Youngstown Business Incubator's director made $80,000 in the 2007-2008 year. At Pittsburgh's Innovation Works — a nonprofit with a more comparable scale and scope — the president-CEO made $295,803.
Leach says JumpStart's board of directors approves his salary, and he believes it's appropriate. "I'm working 80-plus hours a week," he says. "This is my life. And I feel like we are an unusual organization — we have a lot of private-sector people. I could make a lot more money in the private sector that I'm making here. The people who pay the bills have a significant voice in that issue."
Says Knotice CEO Deagan, "If JumpStart is above average [in payroll], they do above average work."
"The region is better off for having JumpStart exist," says Thom Ruhe, a founding member of the JumpStart executive team, who left in 2007. "Among its clients is the potential next billion-dollar company." But referring to the organization's growth, he adds, "The question is: Are they changing and being as dynamic as they need to — are they keeping up with the changing times?"