As published in the September 1, 2007 Toledo Business Journal
Toledo Business Journal recently interviewed David Waterman, managing partner, Shumaker, Loop & Kendrick, LLP. He shared the following thoughts.
Toledo Business Journal: Can you explain your role with the Third Frontier Project?
David Waterman: I served as northwest Ohio’s representative to the Third Frontier Project for one year, which concluded at the end of last April. I enjoyed my participation, my colleagues on the committee, and all the members of the Ohio Department of Development (ODOD) who essentially run the program. I think it is a wonderful program.
However, as a lawyer with a large firm like Shumaker, Loop & Kendrick, nearly all of the applicants for Third Frontier grants from northwest Ohio – and even some from other parts of the state – were clients of the firm, which required my abstention from actual votes on their proposals. As I saw that develop, I concluded that it really wasn’t proper for me to continue on the committee, so I resigned after the end of my first year appointment.
TBJ: How has this program performed to date in your opinion, and what key benefits do you see resulting from this effort?
DW: I am a big supporter of the Third Frontier program. In fact, I was impressed with every aspect of it.
Most impressive, I suppose, is the role of the National Academy of Sciences (NAS) in evaluating the responses to RFPs issued by the Third Frontier. In other words, the State develops specific grants designed to foster investment in specific technologies or industries and requests applicants to make proposals seeking funds in response to the RFP. The grants vary in structure and size. Responses to RFPs for the larger grants are reviewed by panels of experts consisting of appropriate representatives from the NAS and members of the business and venture capital communities.
The NAS is comprised of the most distinguished scholars in their respective scientific fields. Not only is NAS input invaluable to the Third Frontier program, but representatives address the commission frequently and were in each instance very complimentary of the Third Frontier program, which they described as innovative and well-funded.
In this instance, the State of Ohio is well ahead of other states, although many have now developed and continue to develop similar programs. Ohio, as far as I know, has devoted far more resources to this [program] than any other state. It will take many years before the success of the entities that receive funding by the commission can be established. In the meantime, success is measured by the leverage created by Third Frontier dollars in terms of additional funding from other public and private sources. To me, this seems to be the best and perhaps the only way to measure success in the early stages. On that basis, the Third Frontier program has been highly successful and has typically leveraged each dollar into $5 to $8 from other funding sources.
TBJ: Do you see new technology-based businesses developing in our region as a result of the Third Frontier program or from other efforts in the area?
DW: I believe the Third Frontier program will definitely assist technology-based businesses in our area. Again, the program is too new to measure the ultimate success from the State’s investment. However, the University of Toledo and some of our larger corporate citizens in northwest Ohio have already received funding that will enhance their efforts in technology initiatives.
Universities are now widely regarded by economic development professionals and the Third Frontier as catalysts for economic development. UT, along with many others, has been very active in facilitating the transfer of technology developed by faculty into new and existing business enterprises for commercialization. UT has also been awarded a large grant under the Wright Centers of Innovation Third Frontier Project to develop a facility devoted to photovoltaic research. Northwest Ohio is now recognized as a center for that technology with considerable expertise and assets, and the Wright Center award will significantly expand our capabilities in that area.
Most people have no doubt read about the public offering by First Solar last year that was very favorably received by Wall Street. First Solar was founded by the late Harold McMaster and may be the world leader in the so-called thin film type of solar panel.
TBJ: You sit on the Regional Growth Partnership (RGP) board of directors, and the agency has launched a venture capital fund – Rocket Ventures. How is the fund progressing, and what impact do you see this program having on our region?
DW: I assume you know that the venture capital fund that is being developed under the auspices of RGP was in fact in response to a specific Third Frontier program – the so- called Entrepreneurial Signature Program (ESP). This is a very interesting grant program and unlike any other that the Third Frontier has pursued.
Essentially, the ESP is a grant, not to specific users but to organizations representing different regions of the State to be invested by each region in technology-based companies of their choosing.
One criticism of the Third Frontier had been that the recipients were, for the most part, large institutions consisting primarily of universities, medical institutions, and public corporations. By contrast, the ESP is designed to assist entrepreneurs in early-stage companies.
Northwest Ohio will receive $15 million in funding under this program, which I believe is the second largest of the six regions identified by the commission for the State of Ohio and by far the largest grant per capita.
To qualify for the grant, we had to raise private funds locally. So far we have raised a little over $6 million and hope to reach $7.5 million. Six million of the $15 million provided by the State will be added to the local dollars to make direct investments in northwest Ohio companies. The other $9 million will be used primarily to assist in the evaluation of investment opportunities and to provide financial, technical, and managerial assistance to the enterprises in which we invest. We are creating Rocket Ventures as a call fund, which will make demand upon its committed investors periodically in response to investment opportunities. The $6 million of State funding will be received soon and held in escrow to be withdrawn as investment opportunities emerge.
The RGP was the applicant for this grant, and an enterprise controlled by it will coordinate and pursue the investment analysis and the provision of services. The investments themselves will be routed through a separate for-profit venture capital fund owned and controlled by the investors. We are still in the process of refining and documenting the organizational structures of both enterprises, preparing an offering circular for submission to the investors, and securing firm commitments.
I am not certain when the fund will be prepared to make its first investment, although I would expect that to occur within two to three months. This, of course, is but one tool in the economic development box in northwest Ohio. However, I believe it will be a very important one and will be a significant catalyst for entrepreneurial activity of a technological nature in our community. We have identified two areas of concentration, consisting of advanced materials and agbioscience. However, the fund will be permitted to invest in any other technology that its investors find of interest.
TBJ: There has been interest by outside venture funds in our region. Do you see outside funds investing in area enterprises?
DW: There has been a fair amount of interest expressed by outside venture funds in northwest Ohio opportunities over the last two or three years – something of a departure from what I’ve seen historically. Private equity transactions, of course, are different in that they tend to involve acquisitions of controlling interests in mature businesses. Venture capital funds, by contrast, are typically interested in non-controlling positions in earlier stage businesses with significant potential for appreciation. That is what has been missing in northwest Ohio for many years.
I think Bob Savage at Core Network has clearly had something to do with generating the more recent interest in northwest Ohio from the venture capital community. Steve Weathers at RGP also has considerable contacts in that area and will be utilizing them with the Rocket Venture Fund.
TBJ: Can you discuss the role of private placement funding for a business and advise if you see area companies using this financing approach?
DW: Capital formation through private placements is going on all the time, even in northwest Ohio. Although, again, our activity is probably less than in other communities. In my experience, capital can be raised with some ease if the management behind the investment is a known quantity with a proven track record. Without that, potential investors tend to look at who else is investing and follow the crowd, at least if the crowd includes influential persons who are regarded as astute businessmen.
Technology investments are especially difficult if one of those two elements don’t exist, because they are so hard to evaluate. The ESP through the Third Frontier will address this by providing $9 million of capital – not for investment purposes – but to hire expertise to evaluate technology and prospects for commercialization and provide input to the fund board. That should be of great assistance in this area.
We at RGP hope that the Rocket Venture Fund, by making investments, will also communicate to the venture capital and angel investor communities that the technology is viable and commercialization prospects exist; that should attract investment capital from other sources as well.
TBJ: Do you see new options for area firms to obtain investment banking services and access to private placement funds?
DW: I am a little confused by this question. Investment banks are used to negotiate and structure a variety of large business transactions and, in particular, to assist in the sale of both public and private companies. It is the latter function that we see most often, and in that role there is a considerable amount of investment banking assistance available to help local owners find buyers for their business.
Perhaps your reference to private placement funds should be to private equity funds. I explained those a bit in an earlier comment. I graduated from law school in 1975 before the private equity industry got going. In the early stages it was confined to a few well-known companies like Kohlberg Kravis Roberts & Co. (KKR) that structured leverage buyouts of mature companies. Now, there are nearly 3,000 private equity funds that tend to segment their targets in terms of size, industry, or stage of development. They are a huge factor in the mergers and acquisitions (M&A) industry today and getting more powerful all the time. Until recently, it was thought that private equity funds could not win a bidding contest for a target against a strategic buyer. Now, that is clearly not the case. Private equity firms are a factor in virtually every M&A opportunity. I need only point out the recent announcements by Cerberus in acquiring Chrysler and the Carlyle Group in the pending acquisition of Manor Care. At Shumaker, Loop & Kendrick, we handle many transactions with private equity funds every year. They probably account for 75% of the M&A activity in northwest Ohio.