Startup-Cincy-by-the-Numbers2

#StartupCincy by the Numbers – Funding Situation Analysis

This is the third in a four part series on “#StartupCincy by the Numbers”. Blog one provides context about our city-wide data capture exercise while blog two contains aggregate statistics and commentary about Cintrifuse’s member companies.

I began my career in finance in early 2008, right as the Great Recession reared its ugly head. I was a buy-side research analyst focusing on equity, mutual fund, and fixed income markets.Kevin Mackey StartupCincy By the Numbers Funding

Like many in the industry, I sat glued to my computer as Bear Stearns collapsed on St. Patrick’s Day, oil climbed to its all-time high of $147/barrel then subsequently fell to $30/barrel, and watched as Washington Mutual was forced to be sold and Lehman Brothers failed – on the same day.

I basically had a first class ticket to financial devastation. In a short time period, the wealth many of our clients had been building their entire lives was erased. I watched my bosses, honest men who cared for their clients, tell them that their retirement was gone.  It was painful and I ended up leaving finance because of it.

Now, working at Cintrifuse, I see parallels between the pain and fear of a retiree facing a significant funding shortfall and, as Wendy says, the “dark nights of the soul”. The nights when startup founders lie awake pondering how they’re going to keep their dream alive while financially supporting themselves, their families, and their employees.

Obviously this is an extreme comparison. Yes, startup fundraising is challenging and painful but it’s not the same as working for 40 years only to see your future vanish in a life-altering, potentially unrecoverable way.

Nonetheless, the point is both groups have a significant gap to overcome: Retirees need money to live; startups need money to exist. Without funds, both dreams are over.

Cintrifuse is interested in keeping dreams alive. One way we do so is through our Funding Connections program.
The program teaches startups how to develop relationships with the right VCs and, when appropriate, leverage our Syndicate Fund’s network to help close funding rounds and keep our startups’ dreams alive.

So, in preparation to execute our Funding Connections program in 2015, we conducted a “situation analysis” to quantify the region’s funding supply and demand gaps.

[pullquote]Cintrifuse is interested in keeping dreams alive. One way we do so is through our Funding Connections program.[/pullquote]

This third blog in my #StartupCincy by the Numbers series covers what we identified including potential gaps we’re attempting to plug by leveraging our Syndicate Fund network.

Our Need

Before I go through the “needs”, I’d like to level-set expectations by saying the numbers listed below are estimates based on information provided to us by a subset of the region’s startups.

From late 2014 through February 2015, we reached out to our member base and conducted portfolio reviews with CincyTech, NKY E-Zone, QCA, and The Brandery, to determine how much money the region’s startups were seeking in 2015.

Because many companies provided a range for their funding needs (“we’re planning to raise between $3 and $5 million”), we determined 71 startups were seeking between $127,800,000 and $157,600,000 in 2015.
The following chart breaks down #StartupCincy’s 2015 funding needs by investment stage.

Min Range Max Range
Seed (36) $16,300,000 ($452k average) $20,800,000 ($577k average)
A (32) $90,500,000 ($2.8m average) $107,800,00 ($3.37m average)
B+ (3) $21,000,000 ($7m average) $29,000,000 (9.67m average)
Total (71) $127,800,000 ($1.8m average) $157,600,000 ($2.2m average)

[pullquote]We determined 71 Cincinnati startups were seeking between $127,800,000 and $157,600,000 in 2015.[/pullquote]

Here’s how we stacked up against the nation’s averages, as calculated by PitchBook’s 2015 Annual U.S. Venture Industry Report (2014 statistics):

• Seed: 1,352 deals closed; $1.8m average
• Series A: 2,261 deals closed; $8.4m average
• Series B+: 1,547 deals closed; $24.2m average

Our average round sizes were a bit lower than the national average but that isn’t surprising considering our Midwestern roots. By that, I mean premiums are higher and more money is available in “mature” startup ecosystems like Silicon Valley and Boulder. One big reason is momentum. Many startups in Silicon Valley and Boulder have demonstrated exits that made a lot of money for their investors. Cincinnati hasn’t built that momentum to a fever pitch. Not yet.

When you combine a limited number of investment groups, a more risk-averse culture (generally speaking), and a lack of significant exits, investors can exert more influence here than they could in more mature ecosystems.

I’ll discuss this dichotomy and its impact on #StartupCincy further in blog #4 but for now let’s move on to discuss the supply of funding we do have here.

The Supply

To understand the supply of funding in #StartupCincy, we referenced the most recent Venture Ohio report (2013 stats released in 2014).

According to that report, it is estimated that 176 Ohio-based startups need $523 million by the end of 2015 ($2.97m average). The report also determined only $260m is available for investment. This leaves a pretty sizable $240 million gap! Specific to #StartupCincy, CincyTech reported investment in the region in 2013 was $86,600,450 (we don’t have data for 2014 yet). That means #StartupCincy needs to come up with approximately $40 – $70 million in 2015 to meet our startups’ stated needs.

[pullquote]That means the region needs to come up with approximately $40 – $70 million in 2015 to meet our startups’ stated needs.[/pullquote]

Beyond what Cintrifuse does to fill that gap (see below), there is a lot of support from local governments.
The State of Ohio (specifically Diane Chime and Brian Colas) does a nice job developing programs such as CALF for low-interest loans and Gazelle for 1:1 investment matching. Several local companies including Ahalogy and BlackbookHR have already taken advantage of these programs in 2015.

Kentucky also demonstrated commitment to building their investment ecosystem as evidenced by a 40% tax credit for startup investors. For example, an investor could supply $1,000,000 in funding and receive $400,000 of that money back as a tax credit. That credit is transferable (meaning you can sell it like an asset!). The program was an undeniable success – the funds were saturated within two months. This credit helped Connetic make investments in Hello Parent and Foxtrot Code.

The Solution

I’ve linked to it a couple times but if you haven’t read it, Patrick Venturella wrote a tremendous piece on Cintrifuse’s Syndicate Fund. It’s a strategic solution with a long-term time horizon but it all starts with developing relationships.

This happens in two ways.

First, we have our Fund Manager, Tim Schigel. If you don’t know Tim, you should. He’s an experienced entrepreneur who raised $60+ million as founder of ShareThis. He also has a VC background with Blue Chip Ventures. Put simply, Tim has a lot of industry experience and he knows a lot of influential people.

Second, the Fund is a “honey pot” that attracts investors from across the country. When I was in finance, mutual fund companies took us out to play golf, go to dinner, etc. It wasn’t because of our glimmering personalities. It was because they wanted us to invest in them.

Same concept applies here. We have money to invest and there are plenty of VCs raising capital. But to get our money, they have to come here. When they’re here, we hold “Immersion Days” – we literally immerse them in all things #StartupCincy including meetings with startups in their field, meetings with ecosystem partners (Brandery, CincyTech, etc.), and meetings with innovative people within our BigCos.

Basically we want them to walk away and say, “Holy shit, I had no idea so much was going on in Cincinnati!” From all accounts, the strategy has worked so far.

The Conclusion

Besides general ROI for our investors, we measure our investment success with a “regional economic multiplier”. That means we track how much money our investment funds have invested in local startups. As of 12/31/2014, Cintrifuse deployed $8 million of its $57 million. Last year we had a 4:1 regional economic multiplier meaning $32 million was invested in our local startups.

[pullquote]It’s our hope that as we make more investments and develop more relationships, the $40 – $70 million gap will close. That’s our dream. And like yours, we’re doing everything we can to make it a reality![/pullquote]

Through those relationships we’ve personally introduced 58 founders to VCs and facilitated 40 “immersion day” meetings in 2015. As a result, three $1 million+ rounds can be attributed to Cintrifuse’s efforts.

It’s our hope that as we make more investments and develop more relationships, the $40 – $70 million gap will close. That’s our dream. And we’re doing everything we can to make it a reality!

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