By James McNair
Enquirer staff writer

On the venture capital seas, Ohio is taking on water while Kentucky is tacking briskly.

The latest quarterly report from VentureOne of San Francisco and Ernst & Young shows Ohio slipping back into the pack and, for the first time, Kentucky passing the Buckeye State in private venture capital receipts.

Venture capital flow serves as a barometer of entrepreneurial and economic activity. Venture capital funds help provide money for startup companies to engage in research and development activities and to expand sales and marketing efforts. The most successful startups, such as the Web browser Google, move on to sell stock to the public, allowing venture capital firms to cash out.

The numbers from VentureOne rank Ohio 29th of 43 states that received venture capital in the first six months of 2004, behind traditional laggards such as Alabama, Rhode Island and Wisconsin. Ohio ranked 20th for all of 2003. Ohio companies closed four deals and received $10.75 million, according to the data. The biggest recipient, a Toledo company that received $4 million, has since moved its headquarters to Massachusetts.

Kentucky, meanwhile, catapulted into 21st place with $52.5 million, largely because of two health care deals that brought in a combined $46 million.

One of those companies, Xanodyne Pharmaceuticals in Florence, received $20 million in June, or nearly twice the amount of venture capital placed in the entire state of Ohio as of the mid-year point.

The other, Trilogy Health Services of Louisville, took in $26 million.

"Life sciences is one of the areas of top priority not only to Gov. Fletcher but to the private sector," said Craig Greenberg, a Frost Brown Todd lawyer in Louisville who manages the state's Commonwealth Seed Capital LLC investment fund.

"We want to make sure that there's capital available in Kentucky to commercialize our university research."

According to VentureOne, $10.4 billion in venture capital was invested in the first half of 2004.

That's 20 percent ahead of last year's pace.

California and Massachusetts accounted for 60 percent of the U.S. venture capital pie. VentureOne said its figures, based on information gathered from venture firms and the companies they invest in, represent about 97 percent of U.S. venture capital activity.

The numbers pose questions about Ohio's capacity for entrepreneurship and the effectiveness of Gov. Bob Taft's Third Frontier Program, established in 2002 to create the machinery for high-tech industry formation.

In 2003, Ohio captured 0.6 percent of the $18.4 billion in U.S. venture capital flow. So far this year, its share is a paltry 0.1 percent.

Two leading venture capitalists in Cincinnati were at a loss to explain the decline Tuesday.

Jack Wyant, managing director of Blue Chip Venture Co., said the slump in fundable ventures in Ohio is perhaps a reflection of the state's economy and the state-hopping nature of venture investing. Only one of Blue Chip's last five deals involved an Ohio company. It did, however, participate in the Xanodyne and Trilogy deals in Kentucky. At the moment, Wyant said five of Blue Chip's prospective deals are in Ohio.

"If we end up doing two or three in Ohio, that would be a substantially larger percentage of Ohio companies in the next six months," he said. "There's a sense that companies are coming out of hibernation at a pretty rapid rate. Suddenly there's a long list of Ohio companies that we're looking at, longer than it's been in four years."

Rick Kieser, a principal in the River Cities Capital Funds and president of the Greater Cincinnati Venture Association, said River Cities closed last quarter on a $4 million investment in Galaxy Associates, an industrial supplier of specialty chemicals and technical support services. He did not know why the deal was not included in the VentureOne data.

"Our deal flow in the last 12 to 18 months has actually been pretty robust," Kieser said. "We do a lot of investing in Kentucky, Indiana and Ohio. In the first six months of this year, we've invested $12.6 million in initial and follow-up investments."

Tom O'Neil, an Ernst & Young partner in Cincinnati and member of the firm's venture capital advisory group, said he believes Ohio will rebound, particularly in the information technology area.

"Around the Midwest, there's a bit of a lag factor from what goes on on the two coasts," he said. "Things don't ramp up as quickly in the Midwest, but they don't slow down as quickly either."

Xanodyne, which has 40 employees at its Florence headquarters, was hatched by Union Springs LLC, an investment firm headed by former Richwood Pharmaceuticals co-owner Roger Griggs. The company makes and markets drugs in the treatment of women's health, urology and pain. Its $20 million infusion on June 1 came from Union Springs and two out-of-state venture firms in addition to Blue Chip.

Union Springs president Tom Jennings said the $20 million will go to the development and marketing of women's health and pain-management drugs that are in clinical trials.

"It'll accelerate the clinical trials as well as provide dollars for expansion of the sales force," Jennings said. "There are some products in development, and submissions to the FDA will commence in 2005."

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E-mail jmcnair@enquirer.com