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McNair Center Startup Ecosystems

Mile-High Entrepreneurship

Boulder has long been considered Colorado’s startup hub, but Denver is emerging as a strong contender. Mentoring and venture capital support have helped Denver’s ecosystem expand rapidly so that it is well on its way to becoming self-sustaining.

Denver has garnered a reputation as one of the best places for high-tech, high-growth ventures.The total number of tech startups located in downtown Denver has increased by 13% in the last two years; 4% above the national average in new startup growth. Denver has collected accolades that ranging from the Best Place for Business and Careers by Forbes to the third Best Place in the Country to Launch a Startup according to Washington D.C.-based accelerator, 1776.

History

Colorado has a history of high-growth entrepreneurship ranging from telecommunications (Dish Cable) to restaurant chains (Chipotle and Quiznos). The state’s venture capital-backed startup activity began in the 1980’s when national venture funds such as Access Ventures, Vista Ventures, Sequel Ventures and Heritage Group invested in local Denver startups. By 2000, Denver was supporting a startup ecosystem, but successful companies left the state or were sold to out-of-state purchasers. VC funding collapsed after the tech bubble burst.

In 2006 Jared Polis, Brad Feld, David Cohen and David Brown established Boulder-based Techstars, which brought the nascent startup ecosystems of Fort Collins, Denver, Boulder and Colorado Springs together. Accepting only 1% of applicants, Techstars is extremely competitive. Graduates of this three-month program average approximately $1.8 million in outside financing. In exchange for 7-10% equity, Techstars provides $18,000 in seed funding, a $100,000 convertible debt and mentorship opportunities. Denver alumni include UsingMiles, FullContact, Revolar and MeetMindful.

Techstars is not the only catalyst for the entrepreneurial community in the region. Former Denver mayor and current Colorado Governor John Hickenlooper, himself an entrepreneur before entering politics, implemented policies that made supporting startups a central focus for economic recovery and growth.

Colorado’s Entrepreneur Friendly Policies

Colorado policymakers has made entrepreneurship a central focus. The state legislature has lowered tax rates and lifted regulatory burdens for the business community. Colorado taxes business at a flat rate of 4.63%, one of the lowest business income tax levels in the country.

Governor Hickenlooper has championed programs such as the Colorado Innovation Network (COIN), which works to connect the 29 Colorado research facilities with entrepreneurs. In 2014, the Colorado Impact Fund was launched, a public-private fund that estimates making 10-15 investments through 2020.

Home-Grown Resources

Since 2010, downtown Denver has added an average of almost 16,000 residents per year, resulting in a population increase of over 13% in the past five years. This remarkable growth has been accompanied with an increase in the number of homegrown startups. As a result, there is a significant number of resources available for Denver entrepreneurs.

Established in 2012, Denver Startup Week draws entrepreneurs from across the country. In 2016, Denver Startup Week attracted 12,500 people from across the country with 300 events, making it the biggest free entrepreneurial event in North America. Entrepreneurs participate in an elevator pitch competition and interact with VC fund representatives.

The Commons on Champa is a high-tech co-working space that brands itself as “Denver’s public campus for entrepreneurship.” Entrepreneurs have access to networking events, panels, workshop and onsite mentors.

The Rockies Venture Club (RVC) helps to bridge the gap between Denver entrepreneurs and investors. RVC is a Denver angel group that provides educational programs. In addition, RVC hosts events where entrepreneurs and investors can meet and make deals.

The University of Denver’s entrepreneurship initiative, Project X-ITE, brings a number of resources to students. Ranked as one of the top 30 entrepreneurial universities in the United States by Forbes, Project X-ITE is a cross-disciplinary initiative focused on the intersection of innovation, technology and entrepreneurship.

The second quarter of 2018 will mark the opening of Catalyst HTI, which will serve a dual role as incubator and accelerator. Catalyst HTI will bring together entrepreneurs in technology and health care to create state-of-the art incubator and accelerator in downtown Denver. Companies such as CirrusMD and Revolar have already committed to joining the community.

Entrepreneurship for Women

In 2013, Denver was named one of the best places for women to start a business as by Nerdwallet. There are several female-focused resources in the city. Denver’s female entrepreneurs have found support from startup accelerator program MergeLane, which specifically invests in female-led companies. Recently, the Commons on Champa also launched Women on the Rise, an initiative aimed to support and celebrate the success of female entrepreneurs.

Other notable resources include The Coterie, Denver’s first women co-working community, and Women Who Startup, which hosts monthly meetings. SheSays, an international trade organization based in the UK, launched in SheSaysDenver in 2014 and counts over 1,000 women as members. SheSaysDenver provides free mentoring and events to women working in technology and business.

Venture Capital

Overall, Denver VC investment is reflective of nationwide trends, with investment decreasing after the Great Recession, and recovering around 2010. Denver firms such as the Foundry Group, Grotech Ventures and Access Ventures are anchoring investment in the ecosystem.
Local VC received a significant increase in 2015 after Welltok raised a massive $45 million round of investment. VC investment has stabilized around $500 million in investments each year since 2014. However, the 2016 Colorado Startup Report notes that the total funding raised in 2016 was distributed across more than 129 different technology companies, indicating a greater distribution of capital. The Downtown Denver Startup Report indicates that in 2015 alone, more than 165 tech startups were founded in Denver in 2015.

Data indicating the number of first round deals in Denver illustrate a stable ecosystem with an average of around 50 first-round deals per year.

Looking to the Future

Denver entrepreneurs have noted that there is a significantly lower amount of early stage fundraising in the ecosystem. However, this is a reflection of a nationwide trend of cautious investing in early-stage investment.

Denver does have early stage VC investors, but in many cases, does rely on angel investors to supply funding. The University of Colorado’s Silicon Flatiron recommends the continued support of Colorado and Denver super-angel funds, also known as Micro-VCs, which are about $2-$10 million in size and specialize in early stage investing.

In the coming years, it is likely that Denver’s ecosystem will reach critical mass and consolidate as an attractive option for local and out-of-state entrepreneurs. With a strong and growing infrastructure for entrepreneurship, Denver’s startup growth and success is likely to continue.

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McNair Center Startup Ecosystems

Development of Research Parks and Innovation Districts in Houston

On May 4, Houston Mayor Sylvester Turner stated his support for building a data science center. The next day, he endorsed plans for an Innovation District. How would these types of development promote entrepreneurship, innovation and economic growth in Houston?

The Basics

What are Research Parks, like the proposed data science center, and Innovation Districts?

Research Parks promote research, technological development and commercialization by creating a high density of universities and research institutions within a small area. By placing many innovative researchers and developers in close proximity, Research Parks encourage growth of new companies and collaboration across fields, driving technology-based economic development.

The Brookings Institution defines Innovation Districts as dense areas that bring together research institutions, high-growth firms and startups through thoughtfully designed and resource-rich commercial and residential spaces.

Research Parks and Innovation Districts slightly differ in their implementation, but both spaces aim to accomplish similar goals; they want to create physical hubs for innovation and entrepreneurial development. Typically, developers build Research Parks on new land, cultivating previously undeveloped space. Innovation Districts, however, use old land. This land was previously developed but is no longer in use.

Attribution: ShareAlike 2.0 Generic (CC BY-SA 2.0)
Silicon Valley is a well-known Innovation District.

Both Research Parks and Innovation Districts are generative and can be helpful in stimulating local economies. Stanford Research Park in Palo Alto and Research Triangle Park in Raleigh-Durham are some of the most well-known examples in the United States. Research Triangle Park is the largest in the country and one of the largest in the world. Stanford Research Park played a key role in the creation of Silicon Valley.

Successful Innovation Districts include Kendall Square in Cambridge, Massachusetts, South Lake Union in Seattle and Over-the-Rhine in Cincinnati.

What Makes These Areas Special?

Research Parks and Innovation Districts are highly productive areas. Innovation leads to new ideas and job creation. According to the Association of University Research Parks, each job in a Research Park generates approximately 2.57 additional jobs. Thus, the more than 300,000 Research Park employees in the United States lead to 700,000 additional jobs.

Innovation Districts can also produce strong results. By placing many innovators in close proximity to one another, they facilitate collaborative interactions. As Innovation Districts vary greatly in size and productivity, an accurate estimate for job creation is unavailable.

Key Factors: The Capital Stack

Layered financial tools known as a “capital stack” are necessary to promote the development Research Parks and Innovation Districts. For a capital stack that attracts investors, an area must have access to multiple types of equity, incentives and debt to provide flexibility to developers and innovators.

Developers may be able to secure planning grants through the U.S. Economic Development Administration to create the Research Park or Innovation District. These are “designed to leverage existing regional assets and support the implementation of economic development strategies that advance new ideas and creative approaches to advance economic prosperity in distressed communities.” Even though Innovation Districts are built on previously developed land, the government still issues planning grants because they “advance new ideas and creative approaches to advance economic prosperity in distressed communities.”

Tax credit bonds are also common debt instruments. Instead of taking on loans, municipal governments sell bonds, which provide tax credits in lieu of interest payments. Some examples are Build America Bonds, Recovery Zone Economic Bonds and Clean Renewable Energy Bonds.

Equity is also an important necessity. Investment can be incentivized from a variety of sources, like New Market Tax Credits. These give tax credits to investors who make equity investments in Community Development Entities in developing and low-income communities. Housing and Urban Development community development grants and state or federal tax relief programs can also incentivize investment.

Key Factors: Social Factors

The final piece of the puzzle to create a Research Park or Innovation District is social organization. In order to facilitate collaboration and innovation, physical, intellectual and social resources need to be readily accessible.

Networking assets—“the relationships between actors—such as individuals, firms and institutions—that have the potential to generate, sharpen and accelerate the advancement of ideas”—are essential for the development of Innovation Districts. The lines of communication between developers, researchers and sources of funding must be open and easily accessible. This synergy is enhanced in Innovation Districts through the close proximity of ecosystem participants and access to shared meeting and collaboration spaces.

The Potential for Research Parks and Innovation Districts in Houston

Many cities have developed Innovation Districts in effort to grow local entrepreneurship and innovation. Turner’s announcement of the planned Innovation District earlier this month mentioned the 40,000 jobs created by Chicago’s efforts to spur innovation. Turner noted, “It is now time for us to be more competitive, to further diversify and expand our economy. What Chicago can do, Houston can do better.”

In 2015, the University of Texas bought 332 acres of land in southwest Houston with the hopes of developing it into a small Research Park. However, in March 2017, UT Chancellor William McRaven canceled the site’s plans for development. The Houston Chronicle cites timing and lack of transparency as the main causes for the cancellation.

However, there may still be potential for a Research Park in Houston. Mayor Turner also expressed support for the proposed data science center, urging the University of Houston to take the lead. The Chairman of the University of Houston Board of Regents, Tilman Fertitta, has spoken positively about this idea, mentioning excitement about the prospect of collaborating with Rice University, Texas Southern University, Texas A&M University and the University of Texas through the development of a data hub.

Bill Gropp, the acting director of the National Center for Supercomputing Applications, recently stated that there is far more demand for Research Parks than there is supply. It is clear that the development of a Research Park or Innovation District would stimulate the economy and create jobs. If Houston wants to take advantage of these opportunities, the time to act is now.

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McNair Center Startup Ecosystems

Gateway to Entrepreneurship: St. Louis

You probably know St. Louis as the Gateway to the West, but the city is emerging as a strong entrepreneurial ecosystem. For decades, St. Louis followed the economic development model of attracting and keeping large out-of-town companies with generous tax breaks and subsidies. In the 1990’s, political and business leaders became frustrated with the slow economic growth under these policies and began implementing entrepreneur-friendly policies.

While the city has not abandoned tax breaks and other subsidies to attract big companies, it has adopted an entrepreneurship model driven by state and private efforts. This model appears to be working. Data from the Census Bureau show 9.7 percent of businesses in St. Louis are startups less than three years old. St. Louis can now boast the second best rate of startup growth in the country.

Venture Capital

St.LouisFirstRounds
Author’s calculations based on data from SDC Platinum VentureXpert

It is widely believed that an ecosystem should be producing 30 to 35 deals per year to beconsidered stable. St. Louis saw three consecutive years of 30 or more first-round deals from 2013 to 2015. While 2016 reflects a poor year for St. Louis VC investment and first rounds, this decline reflects a nationwide trend.

StLouisVC
Author’s calculations based on data from SDC Platinum VentureXpert

 

 

St. Louis boasts sizable venture capital investment. Like many ecosystems, St. Louis suffered from the dot-com bust in the early 2000’s, but a strong pattern of VC investment seems to be emerging. How has St. Louis achieved venture capital growth?

History

The first entrepreneurship-focused programs established in St. Louis were the Donald Danforth Plant Science Center and Skandalaris Entrepreneurship Program.

The Donald Danforth Plant Science Center provides support for plant scientists who work directly with the agriculture technology startups. The Danforth Plant Science Center cofounded the Ag Innovation Showcase, the premier agricultural technology and innovation showcase in the nation.

The Skandalaris Entrepreneurship Program began in 2001 at Washington University, but expanded in 2003 to the Skandalaris Center for Interdisciplinary Innovation and Entrepreneurship. The Skandalaris Center provides entrepreneurial training, networking opportunities and a mentoring program.

When the Great Recession hit in 2008, St. Louis suffered. The “corporate jewel” Anheuser-Busch laid off hundreds at their St. Louis headquarters. St. Louis’ per capita personal income shrunk by 5 percent. The metro unemployment rate reached over 10 percent. Despite Danforth Plant Science Center and Skandalaris Entrepreneurship Program, there still was not much positive entrepreneurial output. Researchers and politicians blamed the national economy and the greater time required to establish agriculture-focused startups.

The St. Louis entrepreneurial ecosystem remained largely unsupported until 2012 when the nonprofit Information Technology Entrepreneurs Network (ITEN) began to catalyze the ecosystem. Jim Brasunas, a former telecommunications manager turned entrepreneur, founded ITEN by utilizing the public-private investment fund, Missouri Technology Corporation (MTC).

While ITEN was founded in 2008, many of the programs were not active until two or three years after its founding. Many entrepreneurs credit the development of the entrepreneurial ecosystem to Brasunas and ITEN.

Resources

St. Louis has the requisite components of a successful entrepreneurial ecosystem; highly ranked universities, research-focused centers, accelerators, incubators and venture capital funds. However, the strong private-public partnerships and women-focused accelerators make SSt_Louis_nightt. Louis’ ecosystem unique.

In 2012, MTC put a significant amount of seed money into a new economic development model, Arch Grants. Arch Grants runs a global competition to identify potential entrepreneurs from almost any industry sector. Arch Grants then provides entrepreneurs with $50,000 equity-free grants and pro bono support services if they agree to build their businesses in St. Louis. Over 100 startups have been awarded Arch Grants including RoverTown, which was named the fastest growing tech startup in St. Louis.

Accelerators

Accelerators are key components of any healthy entrepreneurial ecosystem, and St. Louis has a plethora of accelerators. Capital Innovators is a 12 week accelerator program that provides $50,000 in seed funding to startups. The accelerator focuses on IT and consumer product startups, such as LockerDome, Bonfyre and Fluent.

Another notable accelerator is BioSTL. The investment arm of BioSTL, BioGenerator, has worked to grow bioscience startups in the region since 2001. MediBeacon, BacterioScan and Galera Therapeutics are among the startups that have gone through BioGenerator.

SixThirty is St. Louis’ largest and most famous accelerator with corporate partners like State Farm and the St. Louis Regional Chamber. The accelerator provides up to $100,000 in funding and sponsors two cohorts per year. SixThirty’s expertise is venture capital and revenue acceleration for startups that are at the late-seed stage.

St. Louis’ agricultural-technology industry is back, and Yield Lab, opened in 2014, focuses on accelerating this industry. Its nine month AgTech program provides early-stage companies with $100,000 in funding and looks to add value to companies that from a nonfinancial standpoint. The Yield Lab opened a second accelerator in St. Louis’ sister city, Galway, Ireland in January of 2017. Graduates of the Yield Lab include S4, Arvengenix and Holganix.

In 2012, St. Louis ranked a disappointing 25th in a national survey of women’s entrepreneurship. Prosper Women Entrepreneurs (PWE) was born when community leaders realized that the region could significantly improve its economy and entrepreneurial ecosystem if women reached their entrepreneurial potential.

Women now own a higher share of startups in Missouri than in any other state. PWE offers support to a woman-owned company focusing on technology, health care IT and consumer startups. Graduates of PWE include Appticles, Bandura System and SixPlus.

Co-Working Spaces

In addition to accelerators, St. Louis has a significant number of co-working spaces such as Exit 11 Workspace and Hive44.

Founded in 1999, CIC St. Louis is the most famous of the St. Louis co-working space. CIC focuses on biotechnology and bioscience startups. $2.1 billion in VC has been raised by companies originally based at CIC and more than 800 companies call CIC home.

Venture Capitalists

St. Louis has a significant number of venture capitalist firms. While venture capitalist firms invest around the country and world, it is important to have firms in ecosystems as they often provide VC stability. Advantage Capital Partners, BioGenerator and RiverVest Ventures appear to serve as long term midsize anchor funds for St. Louis. Cultivation Capital raised its first fund in 2012. Lewis and Clark Ventures emerged in 2014 and are a midsize fund.

Looking to the Future

St. Louis is emerging as a stable and strong startup ecosystem in the Midwest. Efforts to increase private and public support for resources, as well as funding and tax credits for research, will facilitate St. Louis’ continued growth.

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McNair Center Weekly Roundup

Weekly Roundup on Entrepreneurship 3/24/17

Weekly Roundup is a McNair Center series compiling and summarizing the week’s most important Entrepreneurship and Innovation news.

Here is what you need to know about entrepreneurship this week:

Congress Turns Its Attention to Entrepreneurship and Innovation — But Does It Take Effective Action?

Anne Dayton, Research Manager, McNair Center
The 115th Congress has passed 3 bills this legislative session relating to entrepreneurship and innovation. The tally seems abnormally high considering that only 10 bills have been passed in total since Congress first convened on January 3rd, While this wave of legislation might appear to indicate that Congress has set its sights on promoting entrepreneurship and innovation, the McNair Center’s Anne Dayton notes that out of the three bills passed by Congress, only one substantiates effective policy.

Out of the three bills passed, Dayton highlights the TALENT Act as likely to “make a real world impact.” The TALENT Act essentially codifies and formalizes the Presidential Innovation Fellows program, an initiative originally introduced by President Obama. The bill falls under House Majority Leader McCarthy’s Innovation Initiative for spurring higher rates of innovation in the private sector. For more insight into the work done by Innovation Fellows, check out Julia Wang’s post for the McNair Center on President Obama’s efforts to generate an “innovation nation.”

The other two acts, Promoting Women in Entrepreneurship and INSPIRE, aim to support women in entrepreneurship but are unfortunately, according to Dayton, “devoid of meaningful changes to public policy.” If you’re interested in how policy can increase women in STEM and innovation-based fields, check out this post from McNair’s Tay Jacobe.

Notwithstanding the results of the recent legislation, Dayton acknowledges that “all three acts passed Congress with bipartisan support”; hopefully these unified efforts are a function of “a shared interest in furthering innovation in government and expanding access to careers in entrepreneurship and STEM” among U.S. politicians.

In Silicon Valley, a Voice of Caution Guides a High-Flying Uber

Katie Benner, The New York Times, Reporter

Bill Gurley is a general partner at prominent Silicon Valley VC firm, Benchmark. Gurley spotted Uber early on, claiming a 20 percent stake in the successful ride-hailing app six years ago. Since Benchmarks original investment in Uber in 2011, the startup’s value increased 1,100-fold. Despite the startup’s huge successes, Uber has run into a host of problems in recent weeks, including legal disputes, stiff competition from rival ride-sharing app Lyft and negative press attention for employee allegations of sexual harassment and discrimination.

In light of the startup’s series of blunders, Gurley decided to take a more hands-on approach in advising Uber’s damage control strategy and will reportedly assist in the search for a COO for the startup. Since joining Benchmark, Gurley has been involved in the firm’s profitable investments into GrubHub, OpenTable and Zillow. However, with a successful public offering, Uber could become Gurley’s greatest tech investment yet.

Gurley is famous in Silicon Valley for his often unorthodox and unpopular advice to successful tech firms. During the dot com boom, he advised tech startup Net Gravity to go public as soon as possible, rather than to delay their IPO for further funding rounds. According to Gurley, “taking on too much venture funding…can fuel a lack of discipline” and lead to the absence of “rigorous financial and operational controls” among startups.

Will the Gig Economy Make the Office Obsolete?

Diane Mulcahy, Harvard Business Review, Reporter

Harvard Business Review’s Mulcahy reports on the potential of the gig economy going forward. In a traditional economy, companies demand employee attendance – in other words, the five day, eight-hour workweek. Under a gig economy, however, companies value employee performance over attendance and allow employees to disconnect their work from the office space. Options that allow employees to work remotely or in co-working spaces cut real-estate costs for employers and provide productive and flexible work environments for employees.

According to Mulcahy, “the most impactful lesson that traditional companies can learn from the gig economy is to judge all workers, including employees, on their results, not on when and where they do their work.” Perhaps entrepreneurs and startups might take a hint from the benefits of the gig economy. For most firms, and especially small businesses, labor is the most costly input into the production process. In fact, according to a study from CBRE, the average U.S. company spends roughly $12,000 per employee per year on office space alone. A survey of 8,000 employees conducted by McKinsey’s Global Institute reveals that employees who work outside of the typical office lifestyle report higher levels of satisfaction and productivity.

MuleSoft Stock Soars after Latest Tech Unicorn IPO

Mikey Tom, PitchBook, Contributor

PitchBook’s Tom covers MuleSoft’s IPO from last Friday. The IPO secured the VC-backed startup a market cap slightly above $3 billion. Mulesoft is 2017’s first large tech enterprise to go public. The San Francisco-based company develops software platforms that integrate data, devices, and APIs (application programming interfaces). Although 2016 was a slow year for public offerings (in comparison to M&A deals), Tom predicts that 2017 could reverse this current trend in VC exits. Tom predicts that the market’s “warm” reception to Mulesoft public offering could signal a shift in the “public market’s appetite for enterprise.” Just last week, tech unicorn Okta filed for its IPO. Okta provides identity management technologies, a hot sector in the tech industry right now.

How Spotify Is Finally Gaining Leverage over Record Labels

Josh Constine, TechCrunch, Reporter

Music-streaming startup Spotify has come a long way since its founding in 2008. In 2012, Constine wrote an article for TechCrunch explaining how Spotify’s success has always hinged on the cooperation of record labels; as a result of Spotify’s limited bargaining power in negotiating with artists, the startup pays huge royalties to their record labels. Despite limited leverage over record labels, the popular company now boasts over 50 million paid subscribers. In his latest post for TechCrunch, Constine notes several ways that Spotify has fundamentally shifted the power balance between streaming platforms and record labels.

First, Spotify has become a vehicle for music discovery, with its Discover Weekly feature shaping a many listener’s music preferences. Going forward, Spotify might take further advantage of the selection process for these recommended playlists to gain bargaining power when negotiating with artists. Currently, Spotify attributes a large proportion of the total royalty payments for many large record labels. If record labels want to rethink their partnership with Spotify now, they will potentially jeopardize a substantial stream of revenue. What’s more, Spotify has recently made moves to diversify its service offerings to include videos, limit content access by offering a tiered subscription system for new releases, and own the rights to the music it streams so that it can eliminate royalty payouts completely for some artists.

According to Constine, if Spotify successfully capitalizes on these strategies, the startup may achieve lower royalty rates and negotiation power before going public.

A Physician’s Open Letter to Health Tech Startups

Dr. M. Christine Stock, Guest Author, VentureBeat

In her post for VentureBeat, Dr. Christine Stock sends a clear message to health tech startups: start inviting physicians “innovation process.” According to Dr. Stock, who is a tenured professor of anesthesiology at Northwestern University, doctors want to be involved in the process that will transform how medicine is practiced going forward. The current model of implementation leaves physicians out of the development process.

Dr. Stock comments that “many new technologies work well after the period of adaptation,” but “leaving end-users (physicians) out of the product development process leads to unanticipated problems such as unintuitive and frustrating workflow, taxing documentation requirements and nonsensical and inaccurate cut-and-paste progress notes.” To increase the productivity of physicians during the rollout period and more effectively promote the well-being of their patients, tech startups should openly communicate with physicians. Through feedback from medical professionals, tech innovators might realize that flooding doctors with a flurry of new digital tools often leads to poor workflow and patient dissatisfaction on the consumer end of the chain.

Dr. Stock also notes on areas of the medical field that urgently demand innovation from the startup sector, including patient ownership of personal medical information and creating an open platform for EMR (electronic medical records) systems, so that healthcare providers can easily access medical records from and communicate with providers using different systems.

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McNair Center Startup Ecosystems

A Tale of Untapped Potential: Cincinnati

When you think of an emerging entrepreneurial ecosystem, you probably think of Austin, Texas or Boulder, Colorado, not a moderately sized city deep in the heart of the Midwest. But Cincinnati’s entrepreneurship ecosystem is positioning itself as a good place to start a high-growth, high-technology startup firm.

Picture of Cincinnati Skyline, Creative Commons

The Fortunate 500 companies that call Cincinnati home, such as Kroger, P&G and Macy’s, have been investing in their local ecosystem through a nonprofit organization. The resulting increase in resources and capital in Cincinnati’s entrepreneurship scene has led industry commentators, including TechInsurance and Entrepreneur.com to enthusiastically expound the city’s positive trajectory. In this blog post, I explore the driving forces behind Cincinnati’s transformation and ask whether it is real.

History of Entrepreneurship

Local and state governments have historically helped maintain the Cincinnati ecosystem. Individual grant programs provided the Cincinnati Children’s Hospital Medical Center, University of Cincinnati and the Cincinnati Regional Chamber with funding for high-tech projects. However, until recently, the Fortune 500 companies have been largely absent from Cincinnati’s entrepreneurship ecosystem, and there was no depth to the ecosystem’s support and service organizations. For example, less than a decade ago, there was not a single startup accelerator anywhere in the region.

Accelerators in Cincinnati

The past few years have seen an emergence of a spate of entrepreneurial resources available in and around Cincinnati. Accelerators  – 12 to 16 week entrepreneurship boot-camp programs for startups that typically end with a pitch day – now span the tristate area of Ohio, Kentucky and Indiana.

Cincinnati now boasts The Brandery, UpTech, OCEAN, First Batch, Founder Institute, a minority business accelerator housed in the Cincinnati chamber of commerce, and two university affiliated accelerators. There are also several incubators in the local area.

The Brandery

The Brandery, located in Cincinnati and founded in 2010, was inspired by successful accelerators such as Austin’s Capital Factory and Boulder’s TechStars. The Brandery offers a three-month program for seed-stage companies that use Cincinnati’s existing strengths: branding, marketing and design. Companies receive $50,000 in seed funding, office space, branding identity, legal support and more in return for 6% equity stake in the startup.

The Brandery has a portfolio of twenty-nine startups. Notably, the Brandery accelerated FlightCar, “a marketplace that allows owners flying out of an airport to rent out their cars to arriving travelers” that was acquired by Mercedes Benz and Skip, “a mobile checkout solution that allows you to scan items as you go through the store and skip the checkout line.” The Brandery has been ranked a top-ten U.S. accelerator.

UpTech and Ocean Accelerator

Launched in 2012, UpTech is a Greater Cincinnati tech accelerator program for data-driven startups. Located across the river from Cincinnati in Covington, Kentucky, UpTech was established as an effort by Northern Kentucky University College of Informatics and the Greater Cincinnati community. Up to ten startups per cohort participate in a six-month accelerator program and receive up to $50,000. UpTech differs from traditional accelerators in that it draws its hundreds of support staff from community volunteers and interns from Northern Kentucky University. Successful UpTech startups include online walking-tourism planning platform, Touritz, and software and data management company, Liquid.

The third and newest accelerator in Cincinnati is three-year-old, faith-based OCEAN Accelerator. Ocean runs a five-month program that provides mentorship, monetary support in the form of a $50,000 note, branding and legal advice. OCEAN claims to be the the only faith-based accelerator in the nation, and its curriculum features weekly bible studies. Alumni of Ocean include Casamatic, a real estate technology company that increases buyer engagement, and Cerkl, a startup that provides personalized email campaigns.

University Resources

The University of Cincinnati and Xavier University both have academic accelerator programs. The University of Cincinnati’s Technology Accelerator for Commercialization provides full-time faculty and staff with the opportunity to develop intellectual property at the University of Cincinnati. In order to be eligible for the TAC program, the technology must be developed at the University of Cincinnati and have a focus on commercialization. Start-up companies are not eligible for the TAC program.

Xavier University offers a business program aimed to boost the Greater Cincinnati economy. Called X-LAB (short for Xavier Launch A Business), the seven-year old competition provides want-to-be entrepreneurs – particularly including students – opportunities to launch a business. The Williams College of Business supports the winners by providing the business expertise of its professors, executive mentors and MBA students.

Seed-Stage Funding

Cincinnati has had stable seed-stage investors for some time. These include CincyTech and Queen City Angels, as well as some early stage venture capitalists and some nonprofits that provide grants to startups. In recent years, CincyTech and Queen City Angels appear to have had some successes and grown considerably, which bodes well for the future of the ecosystem.

CincyTech

1074px-Over-the-rhine-mapCincyTech, a public-private partnership focused on seed stage investments, was the first effort by the local government to jump-start entrepreneurship. Established in 2001, CincyTech’s mission has been to strengthen the regional economy through the creation and expansion of technology companies in Southwest Ohio. CincyTech is now investing out of its fourth and largest fund, a $30.75 million seed-stage fund, which is bigger than its first three funds combined.

CincyTech garnered considerable national attention after providing Lisnr, a company that has invented an ultrasonic technology for transmitting data through sound, with Stage A capital. Lisnr came to fruition aboard the 2012 StartupBus, a competition where participants launch a company in 72 hours on a bus headed to Austin for the South by Southwest Festival. Since Lisnr’s establishment, they have received $10 million in Series B funding from Intel Capital and garnered accolades from CNBC’s Disruptor 50 list, Cannes Lions International Festival for Creativity and Fast Company’s Innovation by Design Awards.

Queen’s City Angels

Likewise, Queen City Angels is the region’s longest running angel group and is currently investing out of its largest fund of $10 million. Queen City Angels provided the initial stage funding for Assurex Health. Now ten years old, Assurex grew out of research at Cincinnati Children’s Hospital Medical Center and the Mayo Clinic. Its singular product is the GeneSight Test, which analyzes twelve genes that influence mental health and psychoactive drugs that treat a spectrum of mental health disorders. Myriad Genetics purchased Assurex Health in April 2016 for $225 million with another $185 million to come when performance stipulations are met.

Coordinating the Ecosystem

Two organizations provide the glue for Cincinnati’s entrepreneurship scene. StartupCincy is a grassroots organizations that first registered its domain name in 2010. Cintrifuse is an example of a successful municipal government intervention in an entrepreneurship ecosystem.

StartupCincy

StartupCincy  describes itself as “the driving force behind [Cincinnati’s] new economy…a rallying cry.” In addition to maintaining a long list of upcoming network, education, accelerator and developer events in the city, Startup Cincy connects venture capitalists and angel investors to startups. StartupCincy is credited by the Cincinnati Business Courier as “one of the most influential groups leading the renaissance of Cincinnati’s startup community.”

Cintrifuse

However, the most important element of Cincinnati’s ecosystem is probably Cintrifuse. Established in 2011 with the goal of creating a sustainable technology driven economy for the Cincinnati metropolitan area, Centrifuse primary manages a fund of funds. This fund of fund has created a network of venture capital funds, including Allos Ventures, Mercury Fund and Sigma Prime Ventures, that invest in Cincinnati startups.

For big companies, like Kroger, USBank, the Greater Cincinnati Foundation and Duke Energy, investment in Centrifuse isn’t just about financial returns. Corporate investors get access to new companies and new ideas, while the startups receive mentorship and connections that help them access potential partners and customers.

Cintrifuse also provides co-working space in Over-the-Rhine, a neighborhood of Cincinnati, and entrepreneur-focused educational programs. More than four hundred companies have gone through Cintrifuse’s programs, and both CincyTech and the Brandery are located in Over-the-Rhine just feet away, providing unique collaboration opportunities.

Cincinnati’s Venture Capital Woes

CincinnatiFirstRound
Author’s calculations based on data from SDC Platinum VentureXpert

Despite all of its great resources, Cincinnati is still not producing enough successful startups to be considered a mature and effective ecosystem. Although there is no consensus among experts, ecosystems that close around thirty to thirty-five deals a year are markedly more stable. Cincinnati falls far below this. While the number of first rounds has been increasing, it appears that the city’s ecosystem may be leveling out at an average of just five first rounds per year.

CincinnatiVC
Author’s calculations based on data from SDC Platinum VentureXpert

The largest barrier to Cincinnati’s emergence as an entrepreneurial ecosystem is probably the quality of its deal flow. Despite the recent increase in startup activity, Cincinnati’s venture capital investment peaked in 2002 at $343 million. The recent maximum was $235 million in 2014, with 2016 reverting to pre-2010 levels. Since the turn of the millennium, the venture capital investment has averaged just $139 million per year. Mature ecosystems, like Austin or Denver, are much bigger.

Untapped Potential

Cincinnati’s entrepreneurship ecosystem is small but does genuinely seem to be growing in an exciting way. From 2000 to 2009, Cincinnati saw an average of around two new venture capital deals each year. From 2010, when the Brandery opened its doors, to the present, the number of Cincinnati based startups receiving venture capital for the first time has more than doubled to almost five each year.

There have been many factors at play: more venture capital, more seed stage investment, more mentorship and engagement with established firms, the arrival of accelerators, a co-working space, and specialist training and professionalization programs, and, just possibly, that the Over-the-Rhine neighborhood has achieved a critical mass of startups in close proximity. These factors appear to be working together to reinforce each other and grow the region’s startup ecosystem and the local economy. Cincinnati is surely a startup city to watch!

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McNair Center Startup Ecosystems

Keep Austin Entrepreneurial

Austin, Texas

Ranked number one for startup activity in the last two years by the Kauffman Foundation, Austin, Texas is one of the strongest emerging entrepreneurship ecosystems in the United States. Austin’s history of entrepreneurship and supportive government has facilitated Austin’s emergence as an entrepreneurial ecosystem.

Austin’s History of Entrepreneurship

During the 1970s and 1980s, Austin’s entrepreneurial ecosystem focused on computer and semiconductor manufacturing. Efforts by the Austin Chamber of Commerce, such as low mortgage rates for relocating staff and tax incentives, fueled the move of several major companies to Austin: IBM in 1967, Texas Instruments in 1969 and Motorola in 1974. A doubling in student attendance at the University of Texas in the early 1970s increased the educated workforce in the region.

The selection of Austin as the home of the Microelectronic Computer Corporation (MCC) in 1982 accelerated this concentration of high-tech companies. Facing fierce competition from Japan’s Fifth Generation Project, major U.S. companies banded together and created MCC, one of the largest computer research companies at the time. MCC chose Austin instead of Silicon Valley and Route 128 because the University of Texas offered MCC a subsidized lease and the Chamber of Commerce facilitated low-cost loans and reduced mortgage rates for staff moving to Austin.

Austin, Texas
Austin, Texas

Initially, the Austin ecosystem was primarily large businesses, such as IBM and Texas Instruments. This focus changed after the oil slump and savings and loan crises of the late 1980s and early 1990s crippled the Texas economy. Austin was not spared. It had one of the highest commercial real estate vacancy rates in the country and companies laid off large numbers of employees.

In response, the University of Texas formed the Austin Technology Incubator (ATI) in 1989 to jumpstart the local economy through high-tech startups with high-growth potential. In 1989, Greg Kozmetsky, the brain behind ATI, founded Austin’s first angel network, the Capital Network. These initiatives provided a foundation for growth during the 1990s dot-com boom. Austin companies such as Garden.com, an online gardening shop that raised $50 million in venture capital, and DrKoop.com, an “Internet-based consumer health-care network,” that was worth more than $1 billion, found success in Austin.

In 2000, thirty Austin venture capitalists invested over $2 billion in entrepreneurship ventures. The subsequent burst of the dot-com bubble in the early 2000s hurt Austin. After the 2001-2003 economic downturn, the region experienced major industrial restructuring and a renewal of entrepreneurship.

In 2003, the business community raised $11 million for Opportunity Austin, an economic development program. Opportunity Austin focused on recruiting new businesses, marketing Austin effectively and stimulating entrepreneurship and emerging technology sectors.

Less than five years after the last economic downturn, the Great Recession of 2008 set back many new Austin businesses. While venture capital and small business creation are not at the level they were during the dot-com boom, the rate of startup growth is currently 81.23 percent.

Entrepreneurship in Austin Now

Austin is experiencing yet another entrepreneurship boom. Austin now has the supportive policy structure, mentors and sector diversification required to finally establish a lasting ecosystem.

Austin’s cultural support of local businesses and responsive state and local government policies are fueling its start-up growth. The absence of state income tax incentivizes young professionals to work and settle in Texas. The local Austin government provides services for people considering starting a business such as BizAid Business Orientation and Small Business Program. The Entrepreneur Center of Austin and the Indus Entrepreneurs of Austin specifically provide support for start-ups. The University of Texas’ Herb Kelleher Center for Entrepreneurship, Growth and Renewal connects Austin entrepreneurs with resources.

As a result of Austin’s strong history of entrepreneurship, mentorship opportunities for nascent entrepreneurs are readily available. Austin companies, such as Dell, offer mentorship and accelerator programs. Entrepreneurial hubs, such as Tech Ranch Austin and Capital Factory, serve as an intersection between Austin incubators, accelerators, coworking spaces and also offer mentorship programs for entrepreneurs.

While known as “Silicon Hills,” Austin’s entrepreneurship economy is much more diversified than the computer chip and semiconductor industry that first enabled its growth. According to a 2015 Austin Technology Council report, approximately 14 percent of the $22.3 billion value of Austin’s tech companies came from semiconductors. Computer and peripheral equipment contributed 31 percent. Both Austin-born and transplanted companies focus on the bioscience, energy, clean-technology, water and IT/wireless industries. Austin has an extremely strong tech-focused entrepreneurship industry, but it also has successful media, education and social and craft/lifestyle ventures.

Venture Capital in Texas and Austin

Texas’ venture capital investment has decreased by 19 percent over the past ten years. To maintain a healthy entrepreneurship ecosystem, it is imperative that venture capital investment increases in the coming years.

Austin’s ecosystem lacks capital. In 2014, Austin saw 99 venture capital deals worth $739 million. In contrast, Silicon Valley saw 1,333 deals worth more than $27 billion. While there is no shortage of capital in Texas, there is a lack of capital access, information and government support. The majority of Texas capital is invested in oil, gas and real estate. These are considered by many to be less risky than entrepreneurship ventures. However, as oil prices fall, Texans should consider trying to raise growth and investing in entrepreneurial ventures.

Austin’s most prominent venture capital fund, Austin Ventures, closed in 2015. Phil Siegel and David Lack left to form Tritium Partners to provide capital for startups in Austin. Its first fund of $309 million is a fraction of the $900 million Austin Ventures raised at its peak. Silverton Partners and S3 Ventures have tried to fill the void left by Austin Ventures. However, none of these Austin venture capital funds have the capital or assets that Austin Ventures had.

Entrepreneurial Resources in Austin

Austin has a plethora of resources for entrepreneurs. The annual South by Southwest Festival provides networking opportunities. Companies are taking advantage of the 100,000 college students that graduate each year in the greater Austin area. The University of Texas at Austin boasts the Austin Technology Incubator under the IC² Institute, which has raised almost $700 million in investor capital to achieve this goal. Additionally, the Central Texas Angel Network provides capital and mentorship support for entrepreneurs in the Central Texas region.

What Starts in Austin, Changes the World

Austin’s entrepreneurial ecosystem is moving towards national recognition. Favor, a food delivery app, is an alumni of ATI and backed by Austin’s S3 Ventures and Silverton Partners. HomeAway, an Austin based online rental marketplace, was established in 2005 and acquired by Expedia for $3.9 billion in 2015. In the upcoming years, it is critical that capital investment continues to support new ventures such as Favor and HomeAway. Austin’s ecosystem has the policy, talent and mentorship to be successful, but private and public efforts must continue to ensure its success.