National Venture Capital Strategy
With all the buzz about innovation corridors and startup hubs, nearly every city in America aims to attract more of the risk capital invested on the coasts.
Ecosystem builders are clear about the need for capital to drive entrepreneurial growth. What’s challenging is determining the best strategy to gain access to and develop relationships with the right investors—those who will provide the investment needed to get high-potential businesses and entrepreneurs on the road to product development and fit into the market space. The strategy question is especially important in the middle of the country where decades of growth capital have left once high-potential startups to “flat line” because of lack of growth capital.
With all the buzz about innovation corridors and startup hubs, nearly every city in America aims to attract more of the risk capital invested on the coasts. As ecosystem builders monitor the amount of venture capital entering their regions through self-tools like Pitchbook, and as experts continuously hypothesize where the next entrepreneurial startup hub will be, there’s a lot of pressure for regions to be proactive in creating new strategies and playbooks to attract risk capital. Under this pressure, it can feel like the right approach is to double down on relationships in your region, or that the most viable strategy is to strengthen connectivity and visibility between high potential startups and active angels, angel networks, and early stage seed investors within your ecosystem’s immediate zip codes. But it’s time we consider how this localized approach to ecosystem investing, though it may seem obvious in the short-term, is just not enough to catalyze the growth our regions need long-term. Economic vibrancy is made possible not by building bubbles around our region’s resources, but by looking beyond our own borders for opportunities to build pathways to investors from outside the region, especially given the fact that the cost of early-stage deals and business building on the coasts is skyrocketing.
WHY A HIGHLY ACTIVE, NATIONAL INVESTMENT STRATEGY CAN ACCELERATE ECONOMIC VIBRANCY IN NON-COASTAL CITIES
The vast majority of entrepreneurs that hire employees will need financing to start their businesses—relying on personal or family savings, bank loans, grants, generated revenue, angel investments, or institutional investments (i.e. Series A, B, C rounds) to launch and grow their startups. Yet 83% of entrepreneurs don’t access external private institutional capital at startup—and the likelihood of receiving such capital is far worse for women and minority founders, as well as startups emerging in cities between the two coasts, which offer historically better syndicates and longer track records of successful returns on investment. The density of angels and institutional investors is exponentially higher in coastal California and New York—and the art of raising investments is dramatically different in those regions compared to nearly every other city in America.
For all these reasons, capital for startups has never been easy to come by in the Midwest. But over the last decade—thanks to efforts like Rise of the Rest, and surprising, yet proven growth centers like Ann Arbor and Cincinnati—a light has been shone on the Midwest and the quality of its entrepreneurs. Now institutional seed fund leaders like Matchstick Ventures and Firebrand Ventures are looking to cities between the two coasts as low-cost, talent-rich alternatives to Silicon Valley and New York to source deals.
HERE’S A FUND OF FUNDS STRATEGY THAT WE USED IN CINCINNATI TO PULL INVESTORS IN AND GROW OUR STARTUPS OUT
A fund of funds is a fund that invests in other funds, instead of investing directly in startups. Structurally, it’s an investment vehicle run by a General Partner (GP) who attracts and manages multiple Limited Partners (LPs)— investing their money in high quality venture funds with a proven track record of generating returns from a strong portfolio of startups. Fund of funds have been around forever. They’re a smart way to protect investors from the risk of putting all their money into one startup. But too few cities in the Midwest are utilizing a fund of funds strategy to spark innovation. And those that are using this strategy aren’t always doing so wisely.
WHY FAR MORE MIDWESTERN CITIES SHOULD BE DEPLOYING A FUND OF FUNDS STRATEGY IN A HIGHLY ENGAGED, NATIONAL WAY TO ATTRACT AND RETAIN VENTURE CAPITAL FOR THEIR REGION’S STARTUPS
Before I started my tenure as CEO of Cintrifuse, the Cincinnati Business Committee leveraged McKinsey and Company to understand where our ecosystem compared against its peers and unique strategies we could implement to catch up on the risk capital side. During a visit to Michigan, we were wowed by Chris Rizik’s Renaissance Fund. Inspired by their success, we set out to design a highly unique variation for Cincinnati called The Syndicate Fund: a fund of funds managed by Cintrifuse (GP) that attracts investors mostly from Cincinnati’s top BigCos (LPs) by investing in high-quality early stage venture funds both inside and outside Ohio. You heard that right. The secret of our innovation growth in Cincinnati was our intentional decision to invest regional dollars in early-stage venture funds outside our region and, by doing so, deliver economic vibrancy for all players in the ecosystem.
A short-sighted fund of funds strategy would invest in regional venture funds alone, holding tight to the idea that local dollars are best kept local. This creates challenges in the long-term growth and scale of local startups, who ultimately struggle to unlock new early customers and follow-on capital. The Syndicate Fund was designed with a different philosophy. Along with Fund Manager Sarah Anderson, we hypothesized that investments made to venture firms across the nation with a proven track record and innovations that align with the needs of our corporate LPs would yield the strongest returns and, equally importantly, get us access to the world’s most emergent technologies and time-tested venture capitalists and startup mentors.
Positioning Cintrifuse’s Syndicate Fund as an LP within the best venture funds in San Francisco, Los Angeles, New York, Boston, Boulder, Chicago, Houston and beyond gave us leverage. Leverage for our regional BigCos, who could gain insider knowledge of emergent innovations in their verticals. Leverage for our ecosystem builders, who could learn from the best fund managers and company builders in the nation how to multi- fold increase innovation investments and thereby accelerate ecosystem success. And significant relationship leverage for our local entrepreneurs, who could gain outsized exposure and increased access to risk capital thanks to strong relationships with the highest performing venture funds in the nation.
GETTING FUND MANAGERS FROM SILICON VALLEY TO PAY ATTENTION TO STARTUPS IN THE MIDWEST IS NO EASY FEAT. BUT A HIGHLY ENGAGED, NATIONAL FUND OF FUNDS STRATEGY MADE IT HAPPEN IN CINCINNATI
Let me share a quick case story that reveals what’s possible thanks to this strategy: NaviStone, led by serial entrepreneur, Larry Kavanaugh, is a local Cincinnati startup that was on a solid growth path with a highly differentiated approach to direct mail solutions. It was time for a new round of institutional capital. Because Cintrifuse is an LP in a major San Francisco fund, we were able to communicate the potential of NaviStone to the GP of that fund. Let’s pause for a moment to recognize the incredible nature of this moment. The work that is required for CEOs and Midwestern founders to gain access to VCs can’t be understated. Without the backing of an organization like Cintrifuse Syndicate Fund, one that vets opportunities and ensures that GP time is spent well, startups like NaviStone would have to work significantly harder to get in front of VCs willing to invest. The introduction alone is an example of the leverage that’s possible thanks to a national fund of funds. But this story goes far beyond that. Upon hearing his pitch, the fund manager invested in NaviStone and joined their board of directors. Now, when they come to town for a board meeting, they make it a habit to visit Cintrifuse, where we introduce them to other high growth- potential startups in our region. Today, this one GP alone has mentored many other startups founded in the Cincinnati region, plus pitched startups within their portfolio to our regional BigCos, giving them the opportunity to develop relationships and test one another’s capabilities.
More Midwestern cities can and should adopt a highly engaged, national fund of funds strategy.
Relationship-building like this was critical to the long-term success of the Syndicate Fund. When we started the fund, we took meetings with hundreds of institutional early seed stage investors. Although we had to be highly selective about the funds we would invest in—we were focused only on seed investors, since most of the startups in our region needed $500-750K investments to validate and scale—we proactively sought out investors who we knew would be active, engaged mentors with investment theses that closely aligned with our LPs’ growth strategies. Even though we couldn’t invest in all 1,500 funds at the start, we took those meetings in order to build a strong national network of relationships with new venture capitalists. Now, innovation events held at Cintrifuse attract VCs from all over the nation who keep their fingers on the pulse of what’s happening in Cincinnati.
More Midwestern cities can and should adopt a highly engaged, national fund of funds strategy. Instead of creating bubbles around our regions and recycling the same resources over and over again, we can intentionally grow relationships with high-quality partners and sophisticated company builders who hold expertise in the tech categories that matter most to our region and mutually benefit our investors, BigCos, and entrepreneurs. As researchers predict that innovation will be increasingly isolated to specific, predicable regions of the nation, it’s more important than ever for non- coastal cities to leverage strong national relationships to open doors that were previously closed.
“We want to find the most sophisticated company builders in the world, bring them to Cincinnati to engage with our startups and BigCo’s, and develop long term relationships with the region to help build our innovation economy. We hope to ultimately work ourselves out of a job when the network effects become organic both for local startups and for our corporate investors.”