The best and worst of startup Cincinnati comes down to its Fortune 500s

By Carmel DeAmicis , written on June 27, 2014

From The News Desk

It’s fitting that of all the stops on Steve Case’s Rise of the Rest tour, the U.S. Secretary of Commerce chose to join up in Cincinnati. It is, after all, a place where corporate America meets the startup world. The two converge, clash, cooperate, compete, help each other, hurt each other, and generally exist in a fucked up synergistic relationship. They represent both sides of America’s economic past and future, and as we covered, Penny Pritzker was there taking it all in. (In case you missed it, here's our rundown on the Detroit and Pittsburgh stops).

Cincinnati is home to Fortune 500s like Procter & Gamble, Macy’s, Kroger, the American Financial Group, and Western & Southern Financial Group, among others. In a strange contradiction -- their existence both stymies the Cincinnati startup culture and supports it.

On the one hand, the Fortune 500s propel the startup scene in a variety of ways, by mentoring startups, and becoming clients of these emerging companies, and most importantly, by backing Cintrifuse, a VC firm that’s kickstarting investment in the region.

But Fortune 500s also suck up all the technical talent in the area, making it difficult for startups to recruit engineers and stopping potential founders who could start companies. It’s difficult to convince someone to take the risk of starting a company when there are few tentpole startup successes as inspiration. “What we haven’t had in Cincinnati yet are very many exits,” says Tim Metzner, partner at Cincinnati startup studio Differential. “We can’t point to, ‘Hey this guy quit his job at Kroger and now he’s rich.’”

Differential is trying to help early stage startups get over the technical talent hump. It works a bit like an accelerator. If Differential likes a company’s idea, it will build an Minimum Viable Product and give the startup advice on getting off the ground in exchange for a fee and equity. At the same time, Differential tries to recruit technical talent to leave their safe, comfy, prestigious jobs at the bigger corporations.

“We’ll tell developers, ‘Are you interested in doing consulting work on the side?’” Metzner explains. “It’s like giving them a taste of candy working for startups until they want more.”

“You gotta get them addicted,” Ry Walker, a fellow partner at Differential says. "We're the gateway drug to startups.”

It’s only in recent years that there’s been a shift in Cincinnati to convince potential entrepreneurs to take the plunge. The accelerator The Brandery has risen to national prominence, with high profile early successes like FlightCar. At the same time, the VC firm Cintrifuse, founded in late 2012, brought more capital into the region which made corporate careerists a little more intrigued by the possibility of starting a company.

“My story to a developer is no longer, ‘Quit your job and we’ll figure out how to raise money some day. It’s quit your job and we’ll raise a few million and give you somewhat competitive salaries,” Metzer says. “That wasn’t the story even just a few years ago.”

Cintrifuse has an unusual model for a VC firm. Instead of investing in Cincinnati startups, it invests in other firms, under the promise that they’ll take a closer look at Cincinnati companies. Such funds recipients are urged to come out and visit Cincinnati once a quarter, meet with the investment backers of the firm, and visit local startups. “[This fund of funds model] exponentially increases our influence,” Eric Weissman, head of marketing at Cintrifuse, says.

Early results appear to be working. Cintrifuse has acted as an LP in Mark Suster’s Upfront Ventures, Midwest fund Allos Ventures, Boston’s Sigma Prime, and — most recently — Lerer Ventures.* 

As a result, Mark Suster recently took a trip out to Cincinnati. For Suster, the appeal of Cintrifuse’s investment is the access to the big Fortune 500 companies. In a post he penned later for Inc., Suster explained why he immediately wanted in on Cintrifuse’s offer.

It might not surprise you that VCs have no problem meeting just about any startup entrepreneur and have no problems getting to know senior executives from every major company in Silicon Valley. VCs generally have had an easy time fostering relationships with large ad agencies and media companies given how much our businesses have intersected over the past 20 years.

The hardest relationships to establish have been with the biggest product companies (auto makers, consumer product companies), retailers (Walmart, Kroger) and big transportation (UPS, FedEx), logistics, energy, healthcare, shipping and telecommunications companies. Its just that with such big, historic companies often based all across the US its hard to know the right entry point from which to establish relationships…

What Cintrifuse was selling was help in facilitating meaningful relationships to Cincinnati's great consumer product, retailing and healthcare companies and an instant filter on who some of the most promising young startups are in the region.

In other words, Suster wanted Cintrifuse’s money because he wanted access to the Fortune 500s. That’s an easy enough string for Cintrifuse to pull, given that Proctor & Gamble and Kroger are some of the investors backing the fund. In fact, P&G’s former CEO is the chairman of the fund.

As a result, Cintrifuse can also pull strings like turning corporations into startup clients. “We’ll go to P&G and say, ‘What problems are you trying to solve?’” Weissman explains. Cintrifuse will then round up startups to apply to solve that problem using their product. Win-win for everyone. “And P&G is like, ‘I never thought of that!’” Weissman says.

See what I mean about this weird conciliatory competitive relationship between the corporations and the startups in their midst? The Fortune 500s may stymie the startups by hoarding all the technical talent, but they propel them forward with roundabout funding and project opportunities at the same time.

Cintrifuse’s Weissman agrees that a lot of Cincinnatians (Cincinnites?) are chicken shits. The culture of Silicon Valley supports experimentation and failure. “But here it's shameful -- oh god I can't screw up,” Weissman says. “We've got to overcome that. We've activated the corporations but we need to activate the entrepreneurs. I call it unplugging from the Matrix.”

 “We’re recovering conservatives,” Metzner agrees.

As he’s done on every stop on the tour so far, Steve Case sounded the rallying cry for Cincinnati during his fireside chat. Each city has received its own flavor of the pep talk. For Detroit, it was the big comeback story and emphasis on positivity. For Pittsburgh, it was to “get more braggy.” In Cincinnati, Case proved to be particularly attune to the challenges facing the ecosystem. He told them that with bigger corporations waking up to the promise of startups, Cincinnati entrepreneurs can benefit by harnessing the behemoths in their midst and turning them into paying clients. But he didn’t promise sunshines and roses. “I’ve learned that revolutions happen in an evolutionary way,” Case says. “It takes patience and perseverance.”

[illustration by Brad Jonas for Pando]

*Lerer Ventures is an investor in Pando