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What 'Skin in the Game' Means to Investors

skin in the game imageEvery quarter a handful of entrepreneurs are pitching their companies to the Innovation Fund investment committee. That same day, the committee decides which companies will receive between $25,000 and $100,000 to advance their technologies.

The Innovation Fund does this—awards about $350,000 to four to seven Northeast Ohio startups—four times a year and each time we're carefully screening, reviewing and questioning the applicants. We might not be the Shark Tank, but we do ask tough questions. We've been at this since 2007 and in that time we've screened hundreds of companies. Not much gets by us.

Part of that screening includes asking the entrepreneurs how much of their own money they've invested in the business. And a lot of entrepreneurs don't understand why we "require" founders to have put some of their own cash into the business. I say require in quotes because it's not actually a written rule, but it is certainly something we look at when evaluating companies. There are two primary reasons why we push so hard for that.

First, it shows commitment. Innovation Fund is financially supported by a number of partners, from the Ohio Third Frontier to regional colleges and universities beyond Lorain County Community College's Foundation. Each partner is showing its commitment to the entrepreneurs' companies (in hopes they'll be successful and create jobs for the region) by putting up cash. It's only fair that the entrepreneurs show that same level of financial commitment. Time and sweat equity is a great thing to put into a startup and certainly a requirement for success. But nothing binds an entrepreneur to his or her business idea like dipping into the savings to make sure something succeeds.

Second, we've been burned before. A few years ago, we might not have looked so hard at that factor, thinking that most entrepreneurs are cash-strapped but committed nonetheless. But after a company or two, each led by an entrepreneur who failed to commit their own funding, bails on the idea, leaving the Innovation Fund and its partners to take the hit, we learned our lesson. And I don't mean that these companies ran into tough times and the entrepreneurs fought to save their business but to no avail, I mean that the companies ran into hard times and the entrepreneurs seemed to think, "Well, no skin off my nose." We don't want that to happen again.

There's usually a healthy discussion around this topic at informational sessions and on screening days, and I encourage that. And I think down the road, as entrepreneurs continue to grow and raise funding, they'll see more and more investors eying up their commitment to their companies by their cash in.

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