F I N A N C I A L R E S O U R C E S

Introduction F or new businesses to start up and for existing businesses to grow, they must have access to financial resources in the state or region where they operate. Ready access to capital or loan financing is also greatly conducive to attracting new ideas, new businesses, and young entrepreneurs to a region. It should be noted that existing public data mostly provide information on the supply of business F I N A N C I A L R E S O U R C E S financing, as opposed to the demand for it (i.e., the extent to which financial needs remain unmet). This chapter examines two subcategories related to financial resources: Capital Resources Entrepreneurial Support BENCHMARK RESULTS Strengths Good availability of commercial and industrial loans Strong state support of venture capital/seed capital programs Average to good in business incubator support Weaknesses _ Low volume of small and micro business loans _ Low level of capital investment in manufacturing _ Insignificant private venture capital investments _ Inadequate seed capital availability _ Low SBIC investments F I N A N C I A L R E S O U R C E S 26 Benchmarking Ohio s Economic Competitiveness

Introduction Indicator Capital Resources Commercial & industrial loans as a % of total bank assets (for all FDIC-insured institutions) Value of small business loans (<$1m) per worker Value of micro business loans (<$100,000) per worker Capital expenditures per employee in the manufacturing sector Entrepreneurial Support Average annual value of venture capital investments made in state over three years, and as % of U.S. total Average annual value of startup/seed venture capital investments made in state over three years, and as % of total VC investments in state State sponsorship of seed/venture capital programs Total value of SBIC financing per business establishment Number of business incubators (# per 10,000 establishments) Summary of Benchmarking Indicators Ohio Indicator Value National Ranking (out of 50) Benchmark Ranking (out of 16) 12.2% 14 5 $863.89 23 10 $282.30 23 11 $7,974.01 31 9 $200.4 million (0.72% of U.S. total VC) $1.2 million (0.58% of total state VC) 19 11 23 (30) 13 (14) Ohio offers: 1) allocated state funds/dedicated state revenues for seed/vc programs; 2) tax credit incentives for VC; 3) investment of state pension funds in seed/vc programs $154.99 27 11 37 (1.33) 6 (23) 5 (8) Benchmarking Ohio s Economic Competitiveness 27

Capital Resources T his category includes indicators on the traditional sources of business financing, such as loans made by banks and conventional financial institutions that are classified as commercial and industrial loans. To benchmark small businesses access to financing in each state, we look at the value of small and micro Capital Resources business loans per worker in Ohio and the benchmark states. This section also reviews capital investment per employee in the manufacturing sector to benchmark the ongoing investments made by Ohio s manufacturing firms. Benchmarking Indicators Capital Resources Commercial & Industrial Loan Availability Small & Micro Business Loan Availability Capital Investment in Manufacturing Commercial & industrial loans as a % of total bank assets (for all FDIC-insured institutions) 1) Value of small business loans (<$1m) per worker 2) Value of micro business loans (<$100,000) per worker Capital expenditures per employee in the manufacturing sector 28 Benchmarking Ohio s Economic Competitiveness

Capital Resources Commercial and Industrial Loan Availability Why is this indicator important? Businesses that have sufficient working capital can make investments continuously, but large investments in plant, equipment, process improvements or new projects often are financed through loan. This indicator measures the value of commercial and industrial loans as a percentage of total bank assets at financial institutions (i.e., FDIC-insured commercial banks and savings institutions) in Ohio and the other benchmark states. 12 These types of loans represent a very important source of funding to the business sector. Commercial and industrial (C&I) loans are defined as loans made for commercial and industrial purposes to sole proprietorships, partnerships, corporations, and other business enterprises, whether secured (other than by real estate) or unsecured, single-payment or installment. Loans to individuals for commercial, industrial, and professional purposes, but not for investment or personal expenditures purposes, also are included. 13 Where does Ohio stand? Ohio is fairly competitive in this indicator, ranking 5 th among peer states and 14 th in the nation. In the second quarter of 2004, commercial and industrial loans represented 12.2 percent of total bank assets in Ohio, compared to the national average of 9.6 percent. The availability of loan financing and the willingness of Ohio institutions to lend to businesses represent an asset to firms looking to expand and make additional investments. Overall, the Northern and Midwestern states are very strong in this indicator, with Michigan, Minnesota, Illinois and Wisconsin taking up the first to fourth places among the peer group. 12 Because this indicator is drawn from bank balance sheet data collected by the FDIC, it measures the amount of C&I loans held by banks at a given point in time, and not the total value of loans made throughout the year. 13 Federal Financial Institutions Examination Council. Commercial & industrial loans as a % of total bank assets (2 nd Quarter, 2004) 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% Michigan (1) 20.1% 12.8% 12.6% 12.3% 12.2% 11.9% 11.0% 10.6% 9.5% 9.5% 8.5% 7.1% 6.3% 4.8% 4.4% 3.7% Minnesota (8) Illinois (12) Wisconsin (13) Source: Federal Deposit Insurance Corporation Ohio (14) Georgia (15) Pennsylvania (20) Texas (21) Kentucky (25) North Carolina (26) Indiana (36) Florida (42) Arizona (43) California (45) Virginia (47) Massachusetts (49) Benchmarking Ohio s Economic Competitiveness 29

Capital Resources Small and Micro Business Loan Availability Why are these indicators important? While small business represents one of the most vibrant sectors of the economy, small business owners often encounter difficulties in securing financing to start or expand their businesses. After personal equity, commercial banks represent the second largest source of financing for small business. The value of small business loans and micro business loans made in each state is a good proxy indicator of the availability of financing to small business. Small and micro business loans are defined by loan size because financial institutions do not classify lending based on the size of the borrowing firms. Loans under $1 million are classified as small business loans, while loans smaller than $100,000 are considered micro business loans. Loans are adjusted for the size of states based on the size of the civilian labor force. This unit of measurement was chosen because small and micro businesses are typically individuals (e.g., partnerships or sole proprietorships). Where does Ohio stand? Ohio supplies a lower than average value of small business loans per worker compared to the peer group as a whole. At 10 th on this indicator, Ohio falls behind every other benchmarked Midwestern state. Within the country as a whole, Ohio ranks just above the middle, at 23 rd in the nation, even though the state s value of small business loans per worker is, at $864, lower than the nationwide average of $951. Likewise, Ohio s businesses have access to a smaller value of micro business loans per worker than to businesses in the competitor states. On this indicator, Ohio ranks 11 th among the benchmarked states and 23 rd in the United States. The value of micro business loans per worker in Ohio is $282, compared to an average of $331 across the country. These results may imply that Ohio s financial institutions are more risk-averse in lending to small and micro businesses than their counterparts in other states. Value of small and micro business loans per worker (2000) $1,800 $500 $1,600 $487 $438 $450 $1,400 Value of small business loans per worker $1,200 $1,000 $800 $600 $400 $325 $414 $301 $289 $289 $243 $365 $282 $266 $286 $353 $269 $270 $400 $350 $300 $250 Value of micro business loans per worker $200 $0 $1,464 $1,428 $1,275 $1,209 $1,099 $1,060 $985 $890 $890 $864 $864 $815 $814 $807 $786 $468 $216 $200 $150 North Carolina Wisconsin Georgia Michigan Illinois Indiana Florida Minnesota Value of small business loans (<$1m) per worker California Ohio Kentucky Pennsylvania Texas Arizona Virginia Massachusetts Value of micro business loans (<$100k) per worker Source: Federal Deposit Insurance Corporation 30 Benchmarking Ohio s Economic Competitiveness

Capital Resources Capital Investment in Manufacturing Why is this indicator important? Capital investment in manufacturing is a good indicator of a firm s potential for growth and confidence in its future. The following chart compares capital expenditures per employee in the manufacturing sector among the benchmark states. Per employee is used as a unit of measurement here because it adjusts capital expenditures by the size of the manufacturing sector. Where does Ohio stand? Ohio s performance is weak in this indicator. It ranks 9 th among the 16 benchmark states, but 31 st out of 50 states. At $7,974 per employee, capital expenditures in Ohio were below the U.S. average by more than $1,000 in 2001. Among the Northern and Midwestern peer states, only Kentucky ranks among the top five states in the benchmark group in this indicator. Capital expenditures per employee in manufacturing (2001) Arizona (6) Kentucky (8) Texas (9) California (10) Massachusetts (17) Michigan (19) Indiana (26) Virginia (28) Ohio (31) Pennsylvania (32) Illinois (33) North Carolina (37) Georgia (39) Minnesota (41) Wisconsin (42) Florida (44) $13,914.14 $12,666.57 $11,834.20 $10,952.06 $9,597.46 $9,314.75 $8,821.62 $8,256.18 $7,974.01 $7,837.91 $7,836.09 $7,507.20 $7,043.44 $6,848.31 $6,816.29 $6,246.18 $0.00 $2,000.00 $4,000.00 $6,000.00 $8,000.00 $10,000.00 $12,000.00 $14,000.00 $16,000.00 Source: Census Bureau Benchmarking Ohio s Economic Competitiveness 31

Entrepreneurial Support I n this section, we examine indicators that measure the financial resources available to entrepreneurs who own small firms, especially start-up firms. Small start-up firms often have limited access to commercial bank loans since banks typically avoid making investments they deem risky. At the same time, startup firms do not have the financial track record necessary to seek funds in a public offering. This financing gap most often is filled by venture capital or other seed capital providers in the private sector, as well as federal, state, or local government programs designed to help small and start-up businesses. Entrepreneurial Support To benchmark the market supply of capital to entrepreneurs, we look at venture capital investments in each state, including the availability of seed and first-stage capital. This section also examines public funding provided through the Small Business Investment Companies (SBIC) and business incubator programs, which benefit both high-tech and non-hightech companies. Benchmarking Indicators Entrepreneurial Support Venture Capital (VC) Resources SBIC Investments Number of Business Incubators 1) Average annual value of venture capital investments made in state over three years (2001-2003), and as % of U.S. total 2) Average annual value of startup/seed venture capital investments made in state over three years (2001-2003), and as % of total VC investments in state 3) State sponsorship of seed/venture capital programs Total value of SBIC financing, and value per business establishment Number of incubators, and number per 10,000 business establishments 32 Benchmarking Ohio s Economic Competitiveness

Entrepreneurial Support Venture Capital Resources Why are these indicators important? Venture capital is critical to new businesses because it fills a funding gap between the start-up stage and the later consolidation stage, when companies can obtain conventional financing from banks or tap equity from the public stock markets. Venture capital typically is provided by financiers who have a high risk tolerance but seek higher returns from their investments. Most of the venture capital in the United States is invested in small, technology-based companies with high growth potential. To help neutralize business cycle fluctuations, annual venture capital investments on a gross basis and as a share of total U.S. venture capital have been averaged over the period 2001-2003 for comparison across states. Seed capital (or first-stage venture capital) usually is invested in fledgling companies with partially established operations, providing these businesses with funding to continue their research and development of innovative ideas. This is considered the riskiest form of venture capital investment. Here we compare total seed/first stage venture capital invested, and the share of total venture capital investment that is composed of seed capital, averaged over 2001-2003. Many state governments also help to extend access to financing to startup companies in the following ways: Allocating state funds or providing dedicated state revenues for seed or VC programs Offering tax credit incentives for VC Investing state pension funds in seed/vc programs Below we compare Ohio and the benchmark states on whether they offer these programs and/or incentives. Where does Oho stand? Overall, the level of venture capital financing in Ohio is weak and insignificant. The average annual VC investment made in Ohio from 2001 to 2003 was around $200 million, placing it 11 th among the peer states and 19 th nationwide in this indicator. It should be noted that three states California, Massachusetts, and Texas receive a disproportionately high share of VC investments, with 60 percent of all U.S. VC going to these states. California alone receives 41 percent of all VC investments made during this period. An annual average of $1.2 million of VC investments was made as seed capital to startup companies in Ohio in 2001-2003. This represents a very small proportion of Ohio s VC investments (0.6 percent), placing it near the bottom of the benchmarking group. While the overall picture of venture capital resources in Ohio is quite weak, the state government has put into place several mechanisms to help ease financing resources to start-up companies. In fact, Ohio is the only one among the peer group that has: allocated state funds or has dedicated state revenues for seed/vc programs; tax credit incentives for VC; and investment of state pension funds in seed/vc programs in 2000. Only six other U.S. states have all three types of programs and incentives in place: Arkansas, Iowa, Kansas, Louisiana, and New York. Benchmarking Ohio s Economic Competitiveness 33

Entrepreneurial Support $12,000 41.28% Average annual venture capital investments (2001-2003) 45.00% Average annual venture capital investments ($ millions) $10,000 $8,000 $6,000 $4,000 $2,000 $0 California (1) Massachusetts (2) Texas (3) Source: PricewaterhouseCoopers 11.88% 6.92% 2.60% 2.25% 2.23% 2.14% 2.08% 1.96% 1.36% 0.72% 0.55% 0.46% 0.23% 0.14% 0.06% Pennsylvania (7) Virginia (10) Georgia (11) Illinois (12) North Carolina (13) Florida (14) Minnesota (15) Ohio (19) Arizona (21) Michigan (24) Wisconsin (25) Indiana (30) Kentucky (41) Average annual venture capital investments ($ millions) Average annual venture capital investments as a % of U.S. total 40.00% 35.00% 30.00% 25.00% 20.00% 15.00% 10.00% 5.00% 0.00% Average annual VC investments as a % of U.S. total Average annual startup/seed venture capital investments (2001-2003) $250.0 2.7% 3.0% Avg. annual startup/seed VC investments ($ millions) $200.0 $150.0 $100.0 $50.0 $0.0 1.8% $207.8 $89.7 $14.8 2.4% $14.3 2.0% $11.7 1.9% $9.8 0.5% $5.4 0.9% $4.8 0.8% $4.0 1.1% $3.9 0.7% $3.3 2.2% $1.4 1.1% $1.2 0.6% $0.4 1.1% $0.4 0.6% $0.0 0.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% Startup/seed VC as a % of total VC investment California Massachusetts Virginia Pennsylvania Georgia Texas North Carolina Illinois Minnesota Florida Arizona Michigan Ohio Indiana Wisconsin Kentucky Average annual value of startup/seed VC investments ($ millions) Source: PricewaterhouseCoopers Average annual startup/seed VC funding as a % of total VC investments 34 Benchmarking Ohio s Economic Competitiveness

Entrepreneurial Support State support of seed and venture capital funds (2000) Allocated State State Funds/Dedicated State Revenues for Seed/VC Programs Tax Credit Incentives for VC Investment of State Pension Funds in Seed/VC Programs Arizona California Florida Georgia Illinois Indiana Kentucky Maryland Massachusetts Michigan Minnesota North Carolina Ohio Pennsylvania Texas Virginia Washington Wisconsin Source: National Governors' Association Benchmarking Ohio s Economic Competitiveness 35

Entrepreneurial Support SBIC Investments Why is this indicator important? Small Business Investment Companies (SBICs) are privately owned entities that are licensed by the Small Business Administration to provide venture capital to existing or new small firms. Created to fill the gap in small and startup business financing, SBICs offer debt and equity financing as well as management assistance. Some specialize in making investments in businesses owned by socially and economically disadvantaged groups. This indicator is important because SBICs are often the only source of equity investment available to small and disadvantaged businesses, including many that are not in the hightech sector. The chart below depicts total SBIC financing provided in Ohio and the benchmark states. Measurement per business establishment was added in order to adjust SBIC investments for the size of the state and the business sector. Where does Ohio stand? Ohio firms received $43 million in SBIC investments in 2003, placing it 11 th among its competitive peers and 18 th nationwide. At an average SBIC investment of $155 per business establishment, Ohio also ranks 11 th among the peer states in this indicator, but its national ranking drops to 27 th. The national average SBIC funding in 2003 was much higher, at $310 per business establishment. SBIC financing (2003) $800.00 $710.32 $700.00 $600.00 $500.00 $400.00 $300.00 $200.00 $100.00 $0.00 $410.9 $364.06 $156.2 $494.25 $140.7 $130.9 $268.15 $129.1 $413.88 $96.6 $415.86 $77.3 $398.80 $67.0 $445.11 $64.2 $131.37 $47.4 $218.56 $43.0 $154.99 $26.7 $109.01 $26.0 $174.84 $132.21 $16.4 $5.5 $37.57 $26.44 $2.7 California Illinois Massachusetts Texas Pennsylvania Georgia Virginia Minnesota Florida North Carolina Ohio Michigan Wisconsin Arizona Indiana Kentucky Total SBIC financing ($ millions) SBIC financing per business establishment Source: Small Business Administration 36 Benchmarking Ohio s Economic Competitiveness

Entrepreneurial Support Number of Business Incubators Why is this indicator important? Business incubators provide hands-on management assistance, access to financing, administrative and technical support, and sometimes subsidized office space to small and start-up firms. While business incubators can be sponsored by a range of institutions (e.g., economic development agencies, universities, community colleges, municipalities, utility companies, real estate development partnerships, chambers of commerce, etc.,) the majority are sponsored by government agencies or some form of public-privateuniversity partnership. Where does Ohio stand? Ohio is strong in the number of business incubators in the state, ranking 5 th among the peer states and 6 th nationwide. However, adjusted for the size of state using the number of business establishments, Ohio s ranking drops to the 8 th in the benchmark group and to 23 rd among all U.S. states. Number of business incubators (2003) 140 3.2 3.5 120 3.0 Number of business incubators 100 80 60 40 1.1 1.9 0.9 1.3 1.8 1.6 1.8 1.3 0.8 1.7 1.5 0.8 1.0 2.5 2.0 1.5 1.0 Number of incubators per 10,000 establishments 20 0.7 0.3 0.5 0 123 58 48 43 37 36 36 34 34 30 26 26 22 20 10 4 0.0 California Pennsylvania Wisconsin Texas Ohio Florida Massachusetts North Carolina Virginia Georgia Illinois Minnesota Indiana Michigan Kentucky Number of business incubators Number of business incubators per 10,000 business establishments Arizona Source: Department of Commerce, National Business Incubation Association Benchmarking Ohio s Economic Competitiveness 37