Jun. 28–The phrase “venture capital” often conjures up mental images of computer chip companies and sunny Silicon Valley.

But for companies in Northeast Ohio, venture capital sometimes comes from much closer to home.

Thomas H. Roulston II has been helping fund businesses for 40 years, the last 20 as a venture capitalist.

Along with partner Robert F. Williams, he now manages Roulston Ventures Management LLC, a Fairport Harbor company run from the offices of MJM Industries Inc., a manufacturer of electrical components.

Roulston is chairman and partner of MJM.

Since its founding in 1982, Roulston Cleveland Ventures LP has invested $77.9 million mostly in small Northeast Ohio companies. It has returned $200 million to its partners over investment-holding periods of five to eight years The firm’s sixth fund, Cleveland Ventures LP, will begin making investments next month.

“We’ve done things a little differently than everybody else,” Roulston said. “We’re the only venture capital fund I know of that does it by geography.”

The Cleveland focus — 97 percent of all Roulston funds have been invested in Northeast Ohio — isn’t so much out of an emotional attachment to the region as simple good business sense.

The keys to a successful venture capital fund are choosing the right companies and then choosing the right boards for each company, Williams said.

Whether they buy 2 percent or an entire company, Roulston and Williams insist on the appointment of independent, knowledgeable directors to help management weather crises and growth.

“It doesn’t matter if you have a 5 percent investment or a 95 percent investment,” Williams said. “The governance is going to be the life of that company and really drive the future success of that business.”

For a board of directors to be truly useful to a company, it must meet regularly and be nearby, Roulston said.

“So when a problem occurred, you could call the board together the next day and come up with a plan to fix the emergency,” he said.

When it comes to choosing companies to buy, Northeast Ohio has a seemingly endless supply.

“What’s made Cleveland great is guys who have started companies, and they’ve grown up,” Roulston said. “Go through an industrial park and there are dozens of companies. Where did they all come from? It’s because of something in the culture here. Not every city has that.”

Some of those small companies will grow into the Lubrizols of the world, he said. Others will eventually die.

“The ones that go bust, it’s usually because they don’t have the money to keep going.”

Roulston Ventures regularly invests $1 million to $1.5 million in a single company. With so many clamoring for an infusion of capital in the current economic climate, Roulston and Williams have picked up the pace of their visits from 100 to 300 companies per year.

“Unfortunately, 49 out of 50 companies don’t meet our criteria,” Roulston said. “We do look at some companies that are already dead. If Bob and I leave deals sitting on our desks, so that we’ve got 25 companies we’re looking at, it’s like trying to take care of 25 children. You’ve got to make a decision fairly fast.”

Decisions are based on the fundamentals of a company. Start-ups and high-tech companies are eliminated immediately.

Williams said they target companies with track records and businesses that are understandable.

“The general theme is the types of businesses that are based in the Midwest,” he said. “A lot of them are small- to medium-sized manufacturers that can be as mundane as a dolly manufacturer or as sophisticated as a light electronics manufacturer.”

Old line companies that use technology to become more efficient are candidates, but true high-tech companies are not.

“If you went into a really high-tech place where you didn’t know what was going on, who are you going to have as your board?” Roulston asked.

“There may be only a half-dozen people in this area that know what the guy does.

“What we really like is the good, old manufacturing business.”

Thousands of companies in Cuyahoga, Ashtabula, Geauga and Lake counties fit that description, he said. They’re often owned by some employees or one family.

“What happens when the guy running the company decides to sell the company or gets sick or passes away?” Roulston asked. “That’s where we come in. It’s these smaller shops, and we’ve been involved in all sorts of different businesses.”

The success of Roulston Ventures’ five previous funds helped raise more than $5 million for the sixth in about three months. While some past investors have not returned, some first-timers have shied away from the stock market and taken their place.

Most are wealthy individuals, but there are some institutions. All are from Northeast Ohio.

“This is probably the best time I’ve ever seen for investing in equity,” Williams said. “There are a lot of healthy companies out there that have really struggled through the last two or three years. They need working capital. They’re businesses that are trying to grow, and they need some additional support that they are not getting from their bankers.”

Roulston said large companies have the clout to get funding from banks, but many smaller companies are getting shut out.

“Banks are under tremendous pressure to reduce their outstanding loans,” he said. “You’ve got to invest if you’ve got money. You’ve got to put it somewhere.

Because Roulston Ventures’ average investment is so small, large competitors don’t bother with the companies it targets. That keeps prices low.

“Most of the companies that we look at, we are the only people looking at,” Roulston said.

Over the years, Roulston Ventures has had success in a wide variety of businesses.

A manufacturer of hand trucks and carts grew from a 10,000-square-foot plant to a 160,000-square-foot plant. During that growth, it bought out its largest competitor. The business was eventually sold to an Akron company for 350 percent of the original investment.

Roulston’s first investment, in 1983, was the purchase of Women’s Federal Savings Bank for $12 million. Three of the 15 branches were losing money and dragging the whole bank down.

During board visits to each branch, “It was obvious which ones were losing money,” Roulston said.

The bank was later sold to Cleveland-based Charter One Financial Inc. for $110.1 million.

In 1985, the firm bought the federal government’s 15 percent share in the bankrupt Erie Lackawanna Railroad for $8.4 million. Though the railroad no longer ran, Roulston Ventures’ liquidated share ended up worth $20.4 million.

There have been failures, too.

Roulston said a bingo-card manufacturer had a clever formula that would ensure only one winner per game. The idea seemed like a good one because no one wants to share a $500 pot with a dozen other players. It didn’t work out, in part because of the difficulty of dealing with Indian reservations that were the target customers.

“That’s the reason people buy funds instead of investing in single companies,” Roulston said. “That’s really important.”

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(c) 2003, The News-Herald, Willoughby, Ohio. Distributed by Knight Ridder/Tribune Business News.

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