‘Money doesn’t grow on trees’: Local venture capitalists discuss the state of the industry

Kenton Hornbeck
Kenton Hornbeck
Kenton is a reporter for LINK nky. Email him at [email protected]

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Venture capital is defined as funding provided by investors to startups and small businesses that demonstrate growth potential. With the digital technology boom of the 2010s, the term ‘venture capital’ has entered into the mainstream business lexicon.

Similar to startup hot spots like California’s Silicon Valley, the Greater Cincinnati region also boasts its own venture capital sector. These capital firms play an important role in the local startup ecosystem, serving as a vital source of funding for upstart businesses.

In recent years, business leaders in both Cincinnati and Northern Kentucky have placed greater emphasis on the local startup ecosystem in an effort to be viewed as an up-and-coming hub for innovation and entrepreneurship.

Still, these efforts haven’t come without a fair share of challenges. Since 2020, the region has endured a global pandemic, high inflation, and frequent market volatility. These factors have led to a nearly 50% decrease in venture capital funding being invested in early-stage companies since 2021, said Evan Knowles — founder of Lexington-based business media company Middle Tech. In July, Reuters published a report that found venture capital funding around the world hit an annual record of $745.1 billion in 2021.

“Money doesn’t grow on trees the way it did two years ago,” said Max Dworin of Cintrifuse Capital.

Middle Tech, in conjunction with Northern Kentucky entrepreneurial resource and advocacy nonprofit Blue North, hosted a venture capital panel to discuss the current state of the industry and how founders can navigate the choppy fundraising waters.

“Founders have experienced a lot of volatility and are looking around wondering what they need to be preparing for related to their business,” Knowles said.

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The panel was comprised of venture capitalists from firms located in Northern Kentucky, Cincinnati, and Lexington, including Dworin, Kim Banham of Connetic Ventures, Jon Cottrell of eGateway Capital, Mario Mazzone of KeyHorse Capital. Knowles was the event’s host.

Despite fundraising slowing overall, Banham said Connetic Ventures has actually seen an increase in funding applications from founders.

“Our deal flow has continued to increase despite what’s going on with the current market,” she said.

She did include the caveat that their increase has primarily been in pre-seeding rounds. Pre-seeding is defined as a firm investing in an idea or concept behind the startup. At that stage, the companies may be only in the initial planning stages or be limited to just a prototype.

Given the current state of the fundraising market, Dworin suggested founders focus on growing at a reasonable pace rather than chasing lofty or even inflated valuations.

“It’s less about, how are you going to grow top line? It’s how are you going to take this investment and grow in a capital-efficient way,” Dworin said. “Nobody wants to put money in and six months later, you’re out of runway, and you don’t have any traction to show for it.”

Banham said Connetic Ventures generally advises companies to raise enough capital to give them two years of runway, then connecting them with other venture capital firms that focus more on investing in that startup’s specific industry.

Funding for startups in the Midwest and Kentucky has been historically undervalued, according to the panelists. Dworin referred to this phenomenon as ‘Midwest Pricing.’ To combat this, he suggested local founders and venture capitalists “aim high” but also operate in a capital-efficient manner.

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“I think what makes a lot of the companies here successful versus a lot of the really big flameouts you might see on the coasts is that we are operating in a way that is more capital efficient,” Dworin said.

“We are just helping and encouraging them to focus on a bigger round that gives them more runway so they’re not stuck,” Banham said.

Despite fundraising slowing overall, each of the panelists was optimistic state of startups in Northern Kentucky and Greater Cincinnati. Dworin said he admired the “culture of collaboration” that the Greater Cincinnati startup community offers.

“Many of the organizations that are creating kind of a culture of collaboration — as one company or founder rises, everybody rises, and so that’s been really refreshing,” Dworin said.

When speaking about mergers and acquisitions, each of the panelists advised the founders in the audience to start crafting an exit plan in the early stages of their startup.

Cottrell said when planning an exit, founders need to differentiate themselves as early as possible. Being properly organized makes the process easier for venture capital firms. Negotiating a merger or acquisition also doesn’t have to mean a complete exit for the founder, he said.

“It’s not like you’re cashing out everything, when you get acquired,” Cottrell said. “A lot of the time, you’re getting equity in this company or the acquirer, and then you’ve got to grow alongside of them.”

Banham described the journey of a founder as a “roller-coaster,” so being adequately prepared when it’s time to exit will help ease the transition.

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