David Deeds was a bearded, as-yet-untenured business school prof whod only recently been installed at his new perch at the Weatherhead School of Business when he got an idea for his latest round of entrepreneurial research.
With support from the Center for Regional Economic Initiatives, a think tank based at the school, the sunny-dispositioned San Diego native decided to crunch some numbers from the Securities & Exchange Commission.
The goal: To rank various metropolitan areas in America on their record for producing new public companies for initial public offerings. After all, these are future Fortune 500 companies, and as indicators of a regions economic vitality, there arent many more telling yardsticks than the number of enterprises that can successfully negotiate all the necessary hurdles to going public.
To do an IPO, a company has to be able to sell a venture capitalist. And then sell an underwriter. And then sell an institutional investor, says Deeds. Its an arduous process.
What he found was interesting, though much of it couldnt have been surprising to anyone who follows these things. The Bay Area, encompassing San Francisco, Oakland and San Jose, Calif., topped the list, producing 416 IPOs between 1988 and 1996, or about seven percent of the 5,627 in the country over that period. Next came the Los Angeles and Boston areas again, no big surprise. At the other end, the Grand Rapids, Mich., area captured the bottom rung at No. 31.
But for his newly adopted area, the results were bad, and perhaps a little more surprising. Over the same nine-year period, the Cleveland/Akron metropolitan area produced just 32 IPOs, which collectively raised less than $500 million from the capital markets. Expressed another way, Northeastern Ohio produced barely one-fifth of the 154 new public companies that the similarly sized Minneapolis/St. Paul area managed to give birth to during the same period.
As Deeds told a regional economic conference earlier this year, the ranking puts us in the middle of the pack clearly, not among the high flyers. For the entire period, the Cleveland-Akron area ranked No. 17, just ahead of Pittsburgh, Nashville, Columbus and Cincinnati (in that order), but immediately behind St. Louis, an even older city, and one not generally regarded these days as an entrepreneurial hotbed.
When examined more closely, his research points up more troubling indicators.
One of the big things you dont see here is software its a big hole, he says. Between 1988 and 1996, of the 490 IPOs nationwide in the computer programming and data processing category, this area had only one good for just 25th place out of 31 metro areas.
And that company, Twinsburg-based Smart Games Interactive, turned into a spectacular flop after raising $8.5 million in the mid-90s to produce golf and baseball simulators (the downfall of that company, originally called Sports Sciences Inc., was vividly chronicled by SBN in August 97). At 25th place, he says, these are not the cohorts I want to have Buffalo, Grand Rapids, Louisville and Rochester.
Perhaps more ominous still, this region has steadily lost ground relative to others over the nine-year period. On a per-capita basis, Cleveland/Akrons IPO statistics steadily grew worse from the 1988-90, 1991-93 and 1993-96 periods, while Cincinnatis relative position improved and Columbus stayed the same in the last two periods.
So why did he compile this data?
Id never seen anything like this before, and it seemed like such an obvious thing to do, Deeds says. It seems like such a good leading-edge indicator [of an areas economic standing], or maybe tailing-edge indicator.
After all, he argues, IPOs are an excellent proxy for a regions ability to nurture entrepreneurial activity. There is a correlation, he says, though not necessarily a causal link, between the number of IPOs a region produces and its per-capita income. More generally, its a telling indicator of investor confidence in the regions future, in the direction its economy is collectively headed.
I mean, these are some smart people [Wall Street and other institutional investors] betting on where the economy is going. What its saying is they think we are not where the future of the economy is.
Clevelands poor record for producing new public companies is all the more disappointing, Deeds says, because of its vaunted industrial heritage.
In the 19th century, this was the Silicon Valley, he says. And it wasnt just oil. It was also steel, paints, chemicals. At the turn of the century, I think Cleveland was the richest city per-capita in the country.
But what happened afterward, he wonders aloud over lunch, absently picking at his salad in late August, the first week of classes at CWRU.
Clevelands an interesting town, he says. But it never made the transition from industrial technology to electronics and software. It seems that Cleveland had a base to do it from, but it missed. And I dont know the history enough to know why.
But he seems determined to at least try to solve the puzzle. In a little over a year, hes burrowed into the region in uncommon fashion. One of his best vehicles for doing so will be Cleveland 2000, a nonprofit initiative which is providing Cleveland-area small businesses free Web access and a Web site in exchange for serving as research subjects. Modeled on a program in Seattle, it will offer Deeds a ready-made population to study.
We want to get beyond all the hype about the Internet and find out what small businesses actually get out of the Web, he says. Publicly launched just weeks ago, approximately 250 businesses had signed up as of early October. (See www.cleveland2000.org for details).
His publishing credits, both in academic journals and in more popular media outlets for which he has served as a kind of pundit quote machine for newspapers from Dallas to Salt Lake City and magazines such as Bloomberg Personal Finance are the kind that can give rise to special envy in the ivory tower. (A recent list of his media mentions in a Weatherhead publication was as long as that of three colleagues combined).
Of course, much of that is accounted for by the fact that his is a white-hot specialty at a time when everyone in America seems interested in business, investments and entrepreneurship.
At the source of all the activity is a restless curiosity. Through a half-dozen conversations for this story, its often not entirely clear whos being interviewed.
To talk with David Deeds, a relative newcomer to Cleveland, is to submit to a thorough debriefing about various entrepreneurs and other community players, or about pieces of local history.
David came here with a wonderful ambition: To learn more about this area and its entrepreneurship, explains Richard Shatten, director of the center for Regional Economic Issues and Ameritech professor at the Weatherhead School of Business. He has a nice mix of interest both in data and policy. In whats happening and what should happen. Hes not merely curious about entrepreneurship; hes anxious to learn enough to say, Now what do you do with it?
Based upon his initial research, Deeds critique of the region is wide-ranging. But stripped to its core, it really boils down to a single critical issue: The regions apparent lack of risk tolerance, its reluctance to use the riches from its past as an industrial powerhouse as a regional investment springboard into the kinds of technologies that will drive the future economy.
Because he was raised and educated on the more technology-friendly West C oast, he discerns the conservative local investment environment in everything. In San Diego, where he grew up, and in Seattle, where he attended graduate school (at first embarked on an MBA, but instead earning a Ph.D. in strategic management at the University of Washington), Everybodys talking about entrepreneurship. The law firms and the accounting firms are set up to support start-ups.
But supportive environments are even more amorphous than that. As he told the aforementioned REI conference earlier this year, when it comes to competing regions, its not just about amenities, its not just about research institutions. I grew up in San Diego, and out there, when you go into the bars, it just smells like entrepreneurial opportunity.
Cleveland, on the other hand, gives off a whiff of trust-fund conservatism, he suggests.
The civic leadership in this town is third-generation sons and daughters of sons and daughters of people who founded companies, and theyre risk averse.
Big companies can try to latch on to the bandwagon by talking all they want about intrapreneurship, he says, but they dont understand how important $50,000 is [to an early-stage company]. Thats pocket change to them, what they pay to move their CEO. Where are this areas angel investors, he asks, those who can pump a half-million dollars into promising new companies, crucial early-stage investments that are generally too small to command much attention from a venture cap?
And why, for Gods sakes, cant the towns major daily newspaper cover entrepreneurs even half as energetically as it does the bigger companies?
A couple of important asterisks to his research should be noted. Deeds, having recently caught some minor errors in his numbers, is still refining his findings. He doesnt think theyll much affect the relative rankings.
The rankings, meanwhile, dont include real estate investment trusts (REITs).
Cleveland has a fair share of those, he says. Perhaps more important, it didnt include all of the roll-ups, a particularly hot trend in this and other manufacturing centers, under which established manufacturers in the same or related industries are purchased by investors and operated under common management for the sake of increasing scale and synergy.
Its a strategy thats been pursued to great success by several private equity buyout groups in this area, which have scooped up venerable but mature companies and fashioned them into larger, healthier entities, often before selling them to turn a steep profit for the limited partners and other investors.
While they clearly rejuvenate older industries, the problem with these rollups, Deeds argues, is that they occur almost by definition in industries with little promise of real growth in the future.
The classic manufacturing sector is going to be viable and continue here. But its not gonna grow, he says. As bellwethers of the economy of the future, he insists that these companies just dont portend as much as new, stand-alone public companies.
And they dont provide the same foundation.
We really want headquarter companies in this area,
says REIs Shatten. The best way to do that is to have IPOs.
In the early 90s, the then-head of technology transfer at CWRUs medical school former NFL linebacker, M.D. and intellectual-property lawyer Jim Kovach put the local communitys collective investment challenge in stark perspective. The test of whether this regional economy would prosper, he liked to say, is whether those who historically built their fortunes in tangible assets such as steel and iron ore will be able to recognize that in the coming century, it will be ideas and other intellectual property that will provide most of the wealth.
Now, at the end of the decade, David Deeds is sounding much the same alarm from a University Circle perch just a few hundred yards away from Kovachs. We gotta get the wealth in this town to invest in the ideas, in the entrepreneurs in this town. Cause most of the capital is not going to come from outside.
At age 38, with formative entrepreneurial experience under his belt and a steadily growing list of publications behind him, Deeds is enjoying his current posting like a carefree joy rider tooling along the Southern California coast in a convertible.
I was raised an irreverent Californian, so I like to stir the pot, he says to the accompaniment of his signature impish grin. With his academic credentials, if his contrarian views about Clevelands economy cause him to fall out of favor at Weatherhead, somebody else will take me, he says matter-of-factly, sounding as though he doesnt for a moment expect that to happen.
Instead, he gives every evidence of settling in for a longish stay. Hes excited about the research project on small businesses and the Internet, and always on the prowl for inspiring new speakers to invite to his classes. Hes hoping to secure the assistance of a graduate assistant to deepen his IPO research (to crunch the numbers for the top 100 metro areas).
Hes energized, too, by the faculty dream team the Weatherhead School is assembling in his specialty. The school, now in the process of hiring two more faculty specialists in entrepreneurship, should one day soon have five tenure-track positions in that area, with the stated intention of becoming the top entrepreneurial academic program in the country.
And I plan to hold them to it, he says.
With all that, whats to complain about?
I get paid to pontificate in front of students and research issues Im interested in. Its a blast, I love it.
John Ettorre (firstname.lastname@example.org) is senior contributing editor at SBN.