Why I Like My Entrepreneurs Scared
Of all the industrial heartland cities trying to re-emerge as start-up hubs, you'd probably never pick the river town once nicknamed “Porkopolis” as most likely to succeed. While the meat-packers that earned Cincinnati its nickname have long since gone elsewhere, the city’s profile remains conspicuously non-entrepreneurial: Its economic imprint is shaped by the large number of corporate bigfoots holed up there, including Procter & Gamble, Kroger’s, Macy’s, Fifth Third Bank, and GE’s aircraft engine division.
So Palo Alto it ain't, but still, Cincinnati is trying. It has a well-regarded accelerator, the Brandery, which borrows the regional expertise in consumer marketing (this is the homeown for P&G, after all) to help start-ups build a brand. Research at the University of Cincinnati (UC) and local Children’s Hospital has fed a number of life sciences startups. And venture funds at the Fortune 500 companies headquartered in the city supply more capital than you might expect.
The opportunity has been significant enough to lure back a few homegrown entrepreneurs from either coast. One of them is Michael Venerable, the co-founder of Talus, a DC-area data warehousing company sold in 1998, and a managing consultant to Palo Alto-based Sagent Technologies. He is now managing director of software and digital at CincyTech, a six-year-old public-private seed fund in downtown Cincinnati.
That puts Venerable in a smaller entrepreneurial pool than he once knew, but his new home gives him what Twitter CEO Dick Costolo refers to as an “outside the beltway” perspective on what your startup needs to do to get funded. He spoke to Inc. editor Eric Schurenberg at the National Venture Capital Association annual conference last week.
Q: So, Mike, uh…Cincinnati?
A: Economically, the city punches above its weight. We have more than our share of big companies, and we have world-class expertise around consumer marketing and branding. For example, you know that whatever Procter & Gamble chooses to do in advertising will wash over the whole industry.
And while we don’t have as many hip young people as Palo Alto or SOMA or Dumbo, the entrepreneurs who come through our doors are smart and have that midwestern work ethic.
Also, we’re starting to see a lot of what I call boomerangs--people who decide to move back to raise kids. I’m one of them. And one of our portfolio companies, Zipscene, just hired Red Bull’s North American head of IT from the West Coast to be CTO. He happens to be a graduate of UC.
Q: What adjustments do you have to make to launch scalable companies in the midwest?
A: You have to right-size your expectations. We’re looking for companies that have identified an addressable market of $250 million. That doesn’t mean, by the way, that they have to own the whole market. We’d be happy with an exit of $50 million.
We’re a seed fund, so we want to bring companies along to the point where they get venture capital. One of the questions we ask is,"How long do we have to sustain one of our companies to make it viable?" We figure we need to stick around until they are showing metrics you'd ordinarily see in a B round of venture capital. For SaaS companies, that means, for example, that we want to exceed the minimum threshold monthly recurring revenue; for consumer companies, we want, among other things, to achieve usage rates that actually bring in revenue. We understand that many of the investors we want to attract don't have the advantage of physical proximity to our portfolio companies, and so we de-risk them more than might be necessary if they were located on either coast.
Q: What do you look for in the entrepreneurs you fund?
A: Well, by nature and my own history, I’m a boot-strapper--so it’s kind of ironic that I stand here in front all this start-up capital.
But the fact is, I like to see a company that has built a certain momentum with little or no outside money in hand. Part of our process is to see what people do when they don't have money.
You can think of every business idea as a stack of assumptions. If you’re trying to prove that you have a viable business, you have to start with the most dangerous assumptions first--the ones that will kill you if you got them wrong. If you get a bunch of money too soon you can easily waltz right past those assumptions. You saw it happen many times in the last bubble: Companies got so much money they just walked by the fundamental problems staring them in the face.
Q: What about the entrepreneurs themselves, the people?
A: I want to see deep domain insight and expertise--someone who has been in an industry or pursuing a scientific topic for a long time.
After that, I want my entrepreneurs to show unrelenting curiosity about their business. I want them terrified of what they don't know. They should constantly feel starved for information and never feel confident that they have their business idea nailed. Smart and scared--those are the people we keep.
The ones we let go are the ones who think they know everything. Ego will kill you in a startup.
Finally, I want to see focus. Most entrepreneurs are actually introverts. They didn’t choose to follow this path because they love business plan competitions and pitch contests. They just see something wrong with the world and want to fix it.
But you can get distracted by all the things a start-up has to do. So I tell my entrepreneurs they have to focus on the one thing the company needs to do well to survive. You should never do more than you can measure and test so that you can see what’s actually working and what isn’t. If you try to do too much, you end up not really understanding what’s happening in your business.
It’s partly defensive. If you run out of money but you have a lot of data about what happened, you might be able to get someone to fund you again. But if you just ran out of money and didn't learn why your idea didn’t work, you have nothing.
ERIC SCHURENBERG | Staff Writer | Editor-in-chief, Inc.
Eric Schurenberg is the president and editor-in-chief of Inc. Before joining Inc, Eric was the editor of CBS MoneyWatch.com and BNET.com and managing editor of Money Magazine. As a writer, he is a winner of a Loeb and a National Magazine Award.