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February 2007 Presentation

New Funds: Fertilizing The Region, Supporting Entrepreneurs

February 20, 2007

February 20th luncheon was a panel discussion of new funds in the region. Moderator Bob Coy, President of CincyTech, led the six panelists in a discussion of what the new funds are, their focus, industry, level and what stage of development they invest in.

Panelists were Dr. Dorothy Air, Associate Senior Vice President for Entrepreneurial Affairs at the University of Cincinnati; Steve Baker, Managing Director, Private Equity at Fort Washington Capital; Mark Richey, Draper Triangle Ventures; Dov Rosenberg, Blue Chip Venture Capital; Bob Saunders, Managing Director of Chrysalis Ventures; and Mike Venerable, CEO-in-Residence at CincyTech.

Bob Coy opened the discussion by stating we are in the latest stage of evolution in Cincinnati's infrastructure to support start-ups. Years ago, Blue Chip and River Cities Capital started the area's VC base; now we have Queen City Angels, two Life Sciences companies (Triathalon and Charter Life Sciences), as well as Ft. Washington Capital with a $40 million Tristate Growth Fund and CincyTech with a $22 million grant for a 3-year pre-seed fund. "We're positioned in the region to accelerate growth," Bob feels.

He asked the panel to start by explaining what their new funds are and how they are positioned, as well as how they differ from existing funds. Dorothy began, explaining she represented Southern Ohio Creates Companies, a Third Frontier grant of $1.1 million, $1.65 million with matching funds. She said, "We have no investments yet, but we will concentrate on pre- or low revenue, technology-based companies." As a State-sponsored fund, they will follow State priority areas of IT, electronics and bioscience.

Steve explained Ft. Washington's fund next. Their 2001 TriState 1 fund of $40 million is largely committed. "Now," he said, "we are developing a follow-on fund, TriState 2, which will be largely the same as TriState 1. Our goal is to continue to bring the fund to the attention to entrepreneurs and venture capitalists." They also do co-investments with syndicates who can add value and seek to introduce the funds to national groups. "We also have a $10.5 million seed fund for co-investing in napkin and imagine stage companies," he said.

Draper Triangle is still investing out of their $72 million fund with a regional focus in Pennsylvania, Ohio and Kentucky. "Most of our investments are early stage, sometimes with Angels," Mark said. "We're usually the first professional investors in a company."

Dov explained Blue Chip's Third Frontier Validation Fund looks for very early stage, typically pre-revenue opportunities. "We are interested in entrepreneurs who need $50k to hire a consultant to do a business plan, or $100k to get to the next level," Dov said. "We have $1.5 million which we expect to invest in 10 companies." So far, they have committed approximately 15% of the fund to 2 companies. Their focus is the same as their other funds - "It's what we know," according to Dov - mostly IT and Life Sciences.

Bob Saunders said Chrysalis is now forming their fifth fund, for an unknown reason named Chrysalis Ventures 3, with approximately $150 million expected. "This will be an early stage fund," he said. "We'll frequently invest the first institutional money into a company. We often invest with Angels, and in some start-ups. We work closely with entrepreneurs."

Mike finished this portion of the discussion by describing CincyTech's $10.5 million fund that he said is "targeted at the formation stage to first revenue." He describes it as a seed fund that, with the addition of other seed funds and Angel capital, provides approximately $20 million in aggregate capital. "This is as much funding as any similar size city," he claims. Their focus is IT and Life Sciences. They'll be doing their first investments in March/April as they are finishing due diligence on several opportunities right now.

Bob Coy moved on to ask about deal flow in the region. "With a spectrum of venture capital from pre-revenue to later stage, we have a good foundation - now we need good deals to invest the capital in." He asked Mark and Bob to address the quality of deal flow in Cincinnati compared to the contiguous region, since they work both inside and outside the area.

Mark started by saying they have reviewed several hundred business plans in the past several months, so they have a good idea of what's available where. "The honest answer is the quality of the deal flow to date does not measure up," he said. "The volume is there, but the deals are not as good as in Kentucky and Western Pennsylvania. I do believe the region is taking steps to address this."

He described the Pittsburgh and Cleveland entrepreneurial communities as tightly connected to the university and medical facilities. He sees this as a way to increase quality: "These are very valuable organizations that produce enhanced deal flow. These areas have larger funds - simply because there is more deal flow. They have more resources which enable them to do private mentoring, help companies understand what it takes to be successful, what's needed to raise capital. The lifeblood of any organic growth is research, not just for the sake of research, but to effectively commercialize that research." He finished by saying that if you do not have this type of environment, you severely limit the opportunity for early and later stage funds.

Bob Saunders, on the other hand, felt there is a difference in any number of factors which make it difficult to compare regions. "Chrysalis just opened an office in Cleveland. We do about 100 deals a year out of Ohio; one-third of these are in Cincinnati." He feels life science is a strong area for the region: "There is high quality life science activity in Cincinnati and Northern Kentucky; eventually, this will be a source of a number of successful commercial investments." However, he does feel Greater Cincinnati could foster more entrepreneurial ventures with the right climate. "Look at the history - the culture of entrepreneurship is less aggressively developed here. There are not sufficient examples of failure then success, so people know it's OK to fail. We need to develop a culture where it is OK to fail. This only grows out of trying and failing. If the culture is not tolerant of failure, you won't have strong growth."

Bob Coy then asked Mike about the mentoring program he's been developing that's similar to those in Cleveland and other cities. Mike echoed Bob Saunders' statements about failure, saying, "We have to be willing to embrace failure. All successful entrepreneurs have had their problems. We've looked at deals all over the country. The problem with Cincinnati is, there is little deal flow and little entrepreneurial support." He feels the biggest mistake many hopeful entrepreneurs make is to say too much to too many, too soon. "This is a fishbowl community - if you say too much, you ruin your chances of receiving the resources you need."

He says CincyTech is building a support network to allow them to "intervene asap. This intervention can take many forms. Sometimes, it's to say 'Stop!' Why are you pursuing this? Other times, it's to hold them back before they 'out' themselves. I recently told a company I really like that their numbers are preposterous." The audience laughed at his choice of word, and he reiterated it: "That was accurate - they were preposterous. Things in the real world don't happen that way; they needed some realism." He believes the region as a whole will benefit from the mentoring program that's coming. "With $20 million aggregate to apply, we can do a lot of triage that wouldn't ordinarily happen."

Dov agreed with Mike, adding, "We're beginning to hear a consensus. We saw a hole in the region - there are entrepreneurs with good ideas but no role models and nowhere for them to go for guidance. Our goal is to find the best entrepreneurs in the area and provide that guidance. More of this type of help is springing up in the area."

Expanding on this discussion, Steve described a "deal" as being all about people. "Unless you're attached to a really dynamic person who's been there [in a start-up] before, you're not fundable. There isn't enough money out there to fund ideas - are there enough people with experience?" He feels not enough people are taking risks for the big payoff. "Now it's all about the people, not the capital any longer." He is excited about CincyTech's work in teaching entrepreneurs, and stresses that you must learn from your failures: "If you don't learn from failure, you shouldn't do it again. It's hard to listen to presentations where someone is saying the same thing over and over. Come back to us a better entrepreneur with a better plan."

Bob Saunders agrees that an experienced team has a much higher chance of success - at all levels - than a single person. He says, "If you have a good idea, it can be discouraging to be out there on your own. Attach yourself to someone who has experience."

Using a real-life example, Mike supported this, too: "I know a prominent venture capitalist who watches how a CEO affects people around him. If he has what it takes to bring in the best team - that's what's needed to succeed." He says the ability to get others to buy in, and to carry people through discouragement, is the mark of a true leader.

Bob Coy then asked how often each panelist participated in a syndicate or co-invested. Mark started by saying they are almost always part of a syndicate: "Most times it's with companies within the region, but sometimes they are outside. It's rare for a company to be funded by only one investor."

Bob Saunders agreed, saying a syndicate not only helps make sure there is enough capital for the deal, but they always like to share the risk.

Dorothy confirmed that participation in syndicates is part of Third Frontier's strategy, and it will allow them to do bigger deals than they could alone.

Question: Could you recommend sources of funds for consumer products?

Bob Saunders suggested River Cities as they have done some consumer deals recently. Mark felt Angels were the way to go, since they tend to have a broader range of investment interests. He said The Circuit and Queen City Angels also have resources to assist development, as well as CincyTech.

Question: Are you seeing students from entrepreneurial schools coming out willing to take risk, and are they being properly prepared?

Mark started this discussion, saying, "By nature, younger people are more willing to take on risk. The culture of this region is a two-edged sword. We need to embrace entrepreneurs and allow them to fail, not beat them up for that." He feels we have a relatively healthy economy but this also doesn't make an area desperate enough to take on risk. "We need to see more entrepreneurs," he said.

Dorothy said their MBA program is changing to a Venture MBA in order to get students more in tune with the real world. "We need to teach our students to be entrepreneurs and intrapreneurs, to focus on innovation no matter where they are working." The University is developing the program and plans to launch in a year or two.

She continued, explaining that CincyTech is currently using students out of all the local Universities, following a model out of Utah. "Students do due diligence for companies through CincyTech," she said, "as well as assist with market analysis and other projects. They can see the opportunities and challenges facing start-up companies."

Mark added that it seems progress is being made. "We are highly optimistic about what's happening in the region," he said. "We are placing funds in fertile ground for entrepreneurs in the region. It's a great ride - attach yourself to the smartest people you can find, because resources are more available now than ever before.

Mike finished the discussion by addressing those "latent entrepreneurs" currently working in companies: "Walking away is the hardest thing you'll do - it's really scary. A year later, it can all be different than what you planned."

What all panelists hope, however, is that, even if it's different, it's a great ride - and with the current resources and growing support available, it should be.