The Union Hall Lecture Series returns for February on 2/22 — Beer 101!

What Is The Fund of Funds? A Straight-Forward Guide to a Complex Financial Instrument.

This week, 25 startups from around the country will come to Cincinnati for Innovation Xchange. In front of corporations and VC firms, these startups will showcase their unique brands of innovation. It’s a great opportunity for startups to connect with potential clients and funding sources. It’s also a great opportunity for VCs and corporations to engage with innovative startups.  Innovation Xchange Cincinnati Ohio

Overall, it is an exciting weekend for #StartupCincy.

But how does #StartupCincy continually attract all this talent from so many different places? Well, we’re glad you asked.

One obvious reason so many people are interested in Cincinnati’s startup community is because we’re awesome. Really awesome. But another reason is because we have something most startup ecosystems don’t have – The Cintrifuse Fund

The Cintrifuse Fund is a great tool for #StartupCincy. It is constantly growing Cincinnati’s access to funding sources, mentors and advisors. Because it is such an big part of our community, we wanted to take some time and explain how it works and why it’s been so successful.

The Fund of Funds

In 2012, 16 Cincinnati investors, many representing the largest corporations in America, pooled their money together and created what is officially known as the Cintrifuse Early Stage Capital Fund I, LLC. The fund stopped taking investments in June of 2014. When it closed, the total amount of investable capital sat at $57 million making it the largest first-time fund of its kind in the nation.

The Cintrifuse Fund operates as a fund of funds – investing in seed and early-stage venture capital funds as opposed to investing directly in companies. We adapted this model from the Renaissance Venture Capital Fund out of Ann Arbor MI. Founded in 2008, The Renaissance Fund has proven effective for the Ann Arbor region as well as the entire State of Michigan. It is currently on its 2nd fund and their region sees a 21:1 return on every dollar they invest.

The Cintrifuse Fund is successfully following the Renaissance model and has become an integral part of Cintrifuse’s mission to be the connective tissue of Greater Cincinnati’s startup community.
When we started the Fund it was more than a good investment opportunity. It was the beginning of a national network and the beginning of a growth pipeline that feeds #StartupCincy.

Regional Capital – National Reach

Silicon Valley works because entrepreneurs have access to capital. It’s fair to say that entrepreneurs can walk down Sand Hill Road and meet with 20 venture funds between breakfast and lunch. We don’t expect that to happen in Cincinnati and, to be honest, Cincinnati shouldn’t try to be Silicon Valley.

This leaves us with a problem. Startups need venture capital but the majority of VC firms are located on the coasts. So how do we give our startups the same access to VC funds that startups in New York or Silicon Valley have? How can they take advantage of the Midwestern cost-of-living and secure funding? This is where the fund of funds’ outside-in strategy comes into play.

On the face of it, our investment strategy may seem at odds with regional growth. After all, we aren’t investing directly in Cincinnati companies and we don’t require our VC funds to invest in Cincinnati companies. So what gives?

The idea is that investing outside Cincinnati leverages our regional capital and gives Cincinnati a national reach. By reaching outside of the Greater Cincinnati region, we create a network of VCs and entrepreneurs. We gain access to startup ecosystems from across the country. Ecosystems responsible for companies like Uber, TrueCar, BuzzFeed, and Content.ly.

And we don’t simply cross our fingers and hope the venture funds engage with the Cincinnati startup community. Before accepting our investment, we require the venture fund to develop a regional engagement plan. Each plan is a formalized agreement outlining their commitment to the success of our community – just as we’re financially committed to their success.

These engagement plans allow #StartupCincy to gain access to funding sources from across the country while, at the same time, broadening our network and putting the Cincinnati startup community on a national stage.

This strategy also increases the investing power of the fund of funds. Let’s say we deployed $57 million via direct investments. With this strategy we could make, at best, 12 investments of $5 to $7 million. Which isn’t bad – but it can be better.

By investing in funds instead of companies, we expand our portfolio of companies exponentially. Each fund we invest in puts 10-12 new startup companies in our portfolio. Not only does it increase the size of our portfolio, but it also greatly leverages our investing power. Currently, The Cintrifuse Fund’s portfolio contains 90 plus companies and represents $950 million in investable assets.
This strategy continues to build a robust, national network of entrepreneurs and VCs that are plugged into #StartupCincy as mentors, advisers and investors.

In short – the strategy continues to leverage our regional capital into national reach.

Investing In the Best

It’s a big responsibility when corporations like P&G and Kroger entrust you with millions of dollars. There are four main things we look for in VC funds.

Performance

Quite simply, we look for the best. While our fund of funds is designed to strengthen Cincinnati’s startup ecosystem, it’s also meant to give our investors great returns. We look for the highest performing funds based on national benchmarks.

Company Builders

Good returns are great – building companies that last is better. Our fund of funds looks for VCs that have a history of building successful startup after successful startup.

The funds we invest in know how to pick startups and make them hum. We find the funds that turn startups into market leaders with significant revenue.

Cincinnati Engagement

As stated before, we don’t require funds to invest in Cincinnati startups. But we do expect them to engage with #StartupCincy. Because we invest in the best funds, we bring the best advisers, mentors and potential investors to Cincinnati to interact with our community. We want companies to invest in Cincinnati because they want to, not because they have to.

Industry Fit

With nine Fortune 500 companies, including big names like Procter & Gamble, Kroger and American Financial Group, Cincinnati has become a leading area for technology, energy and consumer sciences.

So it makes sense to invest in venture funds with portfolio companies that serve these markets. The Fund tries to optimize the vertical overlap of Cincinnati’s market strengths with each of its investments. Our goal is to connect venture funds and their startups to a community of potential customers.

What We’ve Done

So what did we do with the $57 million? As of March 2015, the Fund invested in 8 top-tier venture funds, committed $23.5 million of the original $57 million, and of that $23.5 million, deployed $8 million.

Because each of these funds invests in 10 to 12 companies, the Cintrifuse Fund has 94 innovative companies in its portfolio. And because each of these funds have investable capital ranging from $50 million to $150 million, the original $57 million has been leveraged into $950 million in investable capital.

And we’re just getting started. By the end of 2016 we expect to invest in a total of 15 funds. After that, we expect to build off our success and start a second fund.

So Much Win

The Cintrifuse Fund has a lot of success stories. It brings value back to the Cincinnati region in many tangible ways. Overall $8 million has left Cincinnati and $32 million has come back. A 4:1 return for the region.

Here are just a few of the big wins the fund of funds has produced.

Mercury Fund – Our Investments Result in Startup Funding

In 2013 the Cintrifuse Fund invested in the Mercury Fund out of Austin, TX. Their regional engagement plan allowed them to interact with the #StartupCincy ecosystem and, ultimately, invest in Dónde, LISNR and STRAP. All together these investments totaled $5.5 million.

Hyde Park Ventures – Our Immersion Day Results in Funding

Last year Hyde Park Ventures, a venture firm out of Chicago, visited Cincinnati for an immersion day as part of the fund of funds’ vetting process. Over the course of the day, the General Partners of Hyde Park Ventures were introduced to LPs, ecosystem partners and entrepreneurs.

Because this was Hyde Park Venture’s first fund, it didn’t meet our investment criteria. But that didn’t stop Hyde Park Ventures from investing in Cincinnati startups. As a direct result of immersion day, Hyde Park Ventures invested $300,000 in SQRL and co-lead a $3.1 million dollar investment in Ahalogy.

Greycroft Capital, Spark Capital and EBTH – Our Reputation Results in Funding

In late 2014, Everything But The House experienced rapid growth and expansion. They came to Cintrifuse to discuss what venture capital funding would mean for their business.

Utilizing our VC network, we introduced EBTH to Greycroft Capital and Spark Investments. The net result was a $13 million investment and the largest Series A funding for a consumer tech platform in Cincinnati history.

Continuing Our Success

The Cintrifuse Fund increases the reach of our community and shines a spotlight on the great things happening all over the Queen City. Every fund of funds investment has generated positive momentum for startups across the city.

The network it builds gives our community access to unparalleled resources and makes events like IXCincy possible. Cincinnati may not have a Sand Hill Road but the fund of funds is building an ever-increasing pool of resources our startups can access. And we look forward to continuing our success well into the future.

 

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