Plans for a new, small, state-backed investment fund that would’ve been operated by Cleveland-based venture development group JumpStart were shot down earlier this year by the state’s Third Frontier program.
But JumpStart and the lead investor in the fund, which would be called Euclid Ventures, haven’t given up on the fund and are exploring options to create it, JumpStart CEO Ray Leach said. Initial plans called for a $4 million fund, with half the amount coming from the state and the other half from private investor Keith Brown of Universal Equities.
The future of for-profit Euclid Ventures — if it has one — could involve private or public funding, or both, according to Leach.
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“We’re trying to find ways to raise as much capital as we can for companies in the region,” he said.
The idea behind the fund was to co-invest with other venture firms in series A rounds for startups that are too mature for the JumpStart model and had already received seed funding. (Disclosure: JumpStart is an investor in MedCity News’ parent company, MedCity Media.)
Currently, JumpStart receives most of the funding for its existing nonprofit investment fund, which focuses on earlier-stage companies than Euclid Ventures would have, from the state and private sources. JumpStart was founded in 2004 and has received $27.5 million in state funding over its lifetime. That figure accounts for about 45 percent of JumpStart’s overall funding.
Roughly speaking, Euclid Ventures would’ve made about 10 investments at around $400,000 each. Money likely would’ve gone to some JumpStart portfolio companies, though investments wouldn’t be limited to those startups.
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It’s that last part — Euclid Ventures’ investment in JumpStart portfolio companies — that raised questions by Third Frontier administrators — or, more precisely, a Columbus-area consulting firm called Invantage Group that was hired by the state to evaluate proposals for the program.
“The reviewers were troubled by the proposal’s frequent focus on specifically aiding JumpStart and the applicant’s lack of accepting market valuations,” said a (pdf) report evaluating Third Frontier proposals.
“The potential for conflict of interest, by an overt focus on investing in existing portfolio companies, raises concern,” the report stated.
Leach chalks up the conflict-of-interest concerns to a misunderstanding with Third Frontier reviewers, and the explanation seems reasonable. The key thing to keep in mind is that Euclid Ventures would’ve invested alongside other venture firms, which would have no incentive to allow JumpStart to hijack the process.
So, for example, if JumpStart intended to use Euclid Ventures as a means of propping up struggling companies and saving face on previous investment decisions, no rational venture firm would want any part of such a deal. Further, if the concern is that JumpStart would use Euclid Ventures to artificially jack up valuations of its portfolio companies in subsequent investment rounds, again, no partnering venture firm that cared about making money would want to touch such an overinflated deal.
The Third Frontier reviewers did praise Euclid Ventures for one aspect of the proposal: JumpStart’s ability to oversee the fund with existing employees, which would make management of the fund much cheaper than it would’ve otherwise been.
“The absence of direct expenses for due diligence and enhanced management services is a benefit,” according to the report.
