For startups, money changes everything

Over the past two weeks we’ve covered the roles startup accelerators and incubators play in nurturing new businesses. This week, we explore the next step in business development, and how Cincinnati’s seed-stage funding sources make it possible for entrepreneurs like Michael Wohlschlaeger of Ahalogy to thrive.

Seed-stage investment is an important step in the development of most startups. When Michael Wohlschlaeger graduated from the Brandery’s accelerator program in November 2011, he had to run a consulting project on the side to pay for the development of his new company’s online platform. Wohlschlaeger is now the CEO and co-founder of the Pinterest marketing agency Ahalogy, but at that time the company was called Pingage and he was nearly out of funding.
 
“We didn’t have tons of users yet,” Wohlschlaeger says. “Getting funding was about building relationships, because investors bet on a team and not necessarily on traction. And that doesn’t happen in one meeting. It’s almost like dating.”
 
Wohlschlaeger’s contacts at the Brandery facilitated those “dates” with investors and got him in the door with technology seed-stage investor CincyTech.
 
Watering the seed
Seed-stage investors put money into companies at the earliest stage, before traditional venture capital gets involved. CincyTech began making investments in 2007. Its mission is to attract technology companies to Ohio and to get them to stay here. As part of the Ohio Third Frontier, a technology-based economic development initiative, CincyTech has access to grant money from the state that it parcels out to startup accelerators and incubators, as well as technology startups themselves.
 
CincyTech’s investment money comes from a public-private fund. The state matches dollars going to companies in Southwestern Ohio on the condition that they agree to be based in the region or are willing to open a significant part of their operations here.
 
As he began talks with CincyTech, Wohlschlaeger worried that his company’s shaky finances would trouble investors. He was working hard to raise money to keep development going, but he didn’t think that would make the right impression.
 
“I thought that investors would hate that or view it as a sign of weakness,” he says, “but actually they loved that I was doing everything possible to keep the business going.”
 
Seed-stage investors like CincyTech usually send their money toward startups that come out of an accelerator with a lot of momentum. However, sometimes they bet on a strong personality, someone they think will see the business through. In April 2012, after months of meetings, CincyTech awarded Pingage $200,000 in funding.
 
“They had a willingness to make a bet early, and to bet on the team,” Wohlschlaeger says. “It really helped that they were local, so we could build a relationship.”
 
That first spark of investment caught and has been building ever since. To date, Wohlschlaeger’s company has been through four rounds of investment. CincyTech led three and was the first investor to give a nod in all four.
 
“When a startup is ready, we help make introductions and take them around to different investors,” says Peg Rusconi, director of communications at CincyTech. “Investors like that we’ve done the due diligence, since funding is tied to performance.”
 
Thanks to those initial investments, Wohlschlaeger’s company has attracted $3.1 million in Series A funding this year alone. This latest investment round won Ahalogy funding from North Coast Angel Fund, Vine Street Ventures, Hyde Park Venture Partners, Origin Ventures and, of course, CincyTech.
 
“Every investor needs to see someone lean forward first,” Wohlschlaeger says. “Investors are frequently followers. You need one domino to fall to get the rest of them. CincyTech has been that first domino for us.”
 
Sparking investment in health care
CincyTech isn’t the only organization in Cincinnati making seed-stage investments. Startups of all shapes, sizes and specializations have the need for the support and investment that Ahalogy did. Cincinnati is gaining ground as a major tech startup hub, but there are other genres of business thriving here.
 
Had Wohlschlaeger captained a health solution, his initial round of funding may have come from Innov8 for Health’s first stage contest. Innov8’s startup support has close ties with the incubator bioLOGIC, though anyone with a health or health care-related idea is encouraged to participate.
 
Innov8 for Health runs three contests each year, starting in spring with a broad net for general ideas and a $500 prize. The following two contests narrow the criteria, set organizational milestones, reduce the number of finalists and double or quadruple the prize money, depending on the number of finalists.
 
“We want people who are passionate about solving real problems that impact health and health care,” says Sunnie Southern, managing director of Innov8 for Health.
 
Making it through to the third and final stage comes with a nice cash bonus for the winner or winners, but even those who don’t make it that far get access to volunteers and mentors who help shape, develop and hone innovation ideas.  
 
“One of our signs of success is that people who don’t win still participate,” Southern says. “People say it’s really more about making connections. The environment we create is not one that makes people feel like they fail, but that it’s an accomplishment just to participate.”
 
Spreading the wealth
Another player in the field of seed-stage funding is Bad Girl Ventures. BGV began in 2010 with the mission of empowering and supporting female entrepreneurs. Women own more than half of all privately held companies in the United States, but have access to only five percent of traditional capital. By providing business education and financing for female entrepreneurs, BGV hopes to level that playing field.
 
Twice a year, BGV holds nine-week business development courses led by successful community business owners and professionals. The classes are open to male and female entrepreneurs from any industry, and cover basics like finding financing, getting a good lease, marketing and putting together a board of advisors. The goal is for participants to finish with enough structure to launch their company, expand or in some way take the next big step.
 
“Success for us isn’t necessarily a company coming out and generating any certain amount of revenue, but it’s helping entrepreneurs have a sustainable support system that will continue to help them tackle problems as they grow their company,” says Corey Drushal, executive director at BGV.
 
The other core component is financing. Ten women are selected from each course to compete for one $25,000 and one $10,000 low-interest loan. They’re provided mentors and coaching to help them put together a complete business pitch. At the end of the course, a selection committee hears finalists’ pitches and selects the two winners based on their idea’s viability, local impact and scalability, and whether they have the skills and determination to push through all the challenges that entrepreneurs face.
 
“We ask if it’s the right jockey with the right horse,” Drushal says. “So many startups rise and fall on their leadership, because she’s wearing so many of the hats in the company.”
 
To date, BGV has educated more than 250 entrepreneurs and lent $450,000 statewide without a single default.
 
Gaining momentum
Following the inertia of CincyTech’s investment domino, the story of Wohlschlaeger’s company picks up in November 2012 when Pingage changed its name to Ahalogy and moved into another of Cincinnati’s startup support centers: Cintrifuse.
 
Cintrifuse doesn’t invest directly in the startups it works with, but its role as a collaboration hub gives entrepreneurs access to investment that would otherwise be hard to come by. Like a startup accelerator or incubator, Cintrifuse has an application process, business training and mentorship programs. It also has a venture capital side, though its “fund of funds” is concerned with the broader goal of increasing risk capital available in the region.
 
The venture capital that circulates through the Cintrifuse fund of funds can be tracked around the country, but its indirect benefit to local startups is access to venture capital investors who come to Cincinnati to “buzz” around this “honey pot” fund. Just in January of this year, Cintrifuse coordinated a total of 77 meetings with venture capitalists, startups and corporate partners.
 
“Cintrifuse acts as a connector for entrepreneurs that wouldn’t ordinarily get all this access on their own,” says Eric Weissmann, director of marketing at Cintrifuse. “It would cost startups thousands of dollars to meet with venture capitalists all around the country. The plane ticket costs and time alone would be hard for most of them to afford.”
 
Cintrifuse also provides office space and administrative services for companies to rent. Its coworks space provides a place for entrepreneurs to rub shoulders with one another and take advantage of the customer, investor and collaboration connections always coming through the door.
 
“Our goal is to make Cincinnati a place where entrepreneurial dreams are realized. We do that by amplifying those jewels that are already in the system,” Weissmann says.
 
With a staff of just three at the onset, it made sense for Ahalogy to focus its manpower on the business and let Cintrifuse take care of the office infrastructure. It didn’t take long for that to change, though. Within three months, Ahalogy had eight employees, and it was well on its way to doubling that number.
 
“Ahalogy grew up and out,” Weissmann says. “Cintrifuse was a platform for them, like a landing in a staircase.”
 
Ahalogy set up an office on Mt. Lookout Square in July 2013. It has grown to 32 employees and now has its own office manager on staff just to handle the growth and office mechanics within the company.
 
“There’s a very small chance we’d be where we are today without those resources from the Brandery, CincyTech and Cintrifuse,” Wohlschlaeger says. “If I were a betting person, I wouldn’t put money on us being this far this fast otherwise.”
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