With a resurgence of entrepreneurial growth in Ohio, local startups are grappling with increased competition for funding, changes in seed programs, and the push to become the next Dayton success story.
When Alex Bowman started his company Casamatic — a website that matches millennials with their perfect homes — he found funding in a variety of ways in 2015. He and co-founder Chris Ridenour were accepted to two different Cincinnati-based accelerators — OCEAN and The Brandery — and landed initial funding through the programs.
Mixed in between were angel investors before other substantial opportunities for capital came to fruition.
Dayton-based Accelerant — an initiative of the Dayton Development Coalition — also invested $200,000 in Casamatic in February, with an additional $200,000 available if specific milestones are achieved by the company. The startup also moved up north. Casamatic is the six investment for Accelerant Fund I, and is considering the addition of a seventh seed-stage company.
The investment from the Dayton initiative aided Casamatic in expanding its services from two cities to seven cities, hiring additional employees, and even launching an iPhone app this week.
But Casamatic’s success marks a change in what investors are looking for in companies — they want established start-ups with “effective growth strategy” and data to back up their business plans.
“You look at five years ago and you could’ve raised a pretty decent amount of money based on a working prototype of your product,” Bowman said. “Now, it’s more competitive to even have discussions. A lot of investors want to see more revenue. They want to see a finalized product.”
For the past two financial quarters, startups across the nation saw a dip in certain funding opportunities. According to CB Insight — a venture capitalist database — the second-straight decrease in funding is the result of public market uncertainty, larger macro-economic concerns, and skepticism of sky-high start-up valuations.
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New companies looking for early-round investment need to change their pitch, according to Conor Moore, national co-lead partner of KPMG Venture Capital Practice, in a statement. Moore advised entrepreneurs to focus on the size of the market. Potential revenue is no longer enough, and startups must have a clear vision of their road to profitability.
“When there is less money and more competition, VCs want more than just a big idea to bank on,” said Beck Besecker, co-founder and CEO of Dayton-based Marxent Labs.
Kettering-based Marxent Labs creates augmented and virtual reality experiences for manufacturing and retail and virtual 3-D products. It is the gleaming example of a flourishing startup hatched in the Miami Valley.
Besecker said the company was built on a “slow and steady” foundation. Marxent Labs is backed by Detroit Venture Partners and Stage 1 Ventures, according to its website. Marxent pursued the support of venture capitalists aligned with the company’s strategy and philosophy.
Change in funding plans
Startups are finding several different avenues to funding — everything from pre-seed funds to angel investors, venture capitalists and grants, said Roger Edwards, Accelerant’s entrepreneur-in-residence. However, Dayton entrepreneurial leaders will change the way they support and mentor growing companies.
According to a Dayton Daily News investigation, the Ohio Third Frontier Commission rejected the Dayton Development Coalition Accelerant’s request for $1.8 million for the Entrepreneurial Services Program in June 2015.
Edwards said the Dayton coalition will not apply for the ESP funding this year. Instead, The Entrepreneurs Center of Dayton will submit a proposal for the Third Frontier ESP funding, said Scott Koorndyk, the center’s president. Proposals are due June 30, and Koorndyk categorizes conversations with the Ohio Development Services Agency about future funding as “positive.”
Koorndyk said the center works closely with the Dayton Development Coalition’s Accelerant, and have discussed the future of the ESP in Dayton. He said the center is not trying to replicate or take the place of the former Accelerant ESP. Instead, they are taking a “different approach to past practices.”
“I don’t want to split hairs. I would not characterize it as a failure,” Koorndyk said. “They’re a critical part of entrepreneurship in this city.”
State sees resurgence
As the Dayton business community continues to fine tune the startup programs, Ohio saw an uptick in entrepreneurial growth for 2016. According to the annual Kauffman Index, entrepreneurial growth is still on a long-term decline but growth edged slightly upward in most states in the past year.
Among the largest 25 states, five — including Ohio — experienced the largest increase in rank on the index. Ohio jumped from No. 16 last year to No. 12 in 2016. Midwestern states have not been lauded as prosperous areas for start-up growth in the past, but some entrepreneurs see a unique opportunity grounded in Ohio.
Besecker said the tech start-up industry is “hot” right now. It has not been impacted by VC funding decreases. Marxent pursued initial investment for the advisory capacity and support that came with it, and they were able to sustain the business in the early days.
“We spent a few years figuring out our business model, designing a product, responding to the marketplace and proving out our concept before we raised the substantive capital needed for rapid growth,” Besecker said. “During those years, we had a cash flow positive business that largely funded our research and development efforts.”
Besecker, who grew up in Dayton, said the city’s cost of living, resources and talent makes Dayton a vibrant hub for entrepreneurial activity.
“Not everyone wants to live on the coasts, drowning in debt and far away from family,” he said.
Located in the Historic Oregon District, Nucleus CoShare is the creative hot spot for local entrepreneurs. The nonprofit is a communal working facility complete with a recording studio, private offices available for rent, a video studio and a boardroom.
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Dayton native Charles Nick recently launched his Dayton-based company, The Wright Cup. The small startup is founded on “Ohio pride” and a love of coffee, Nick said. The company produces mail-able boxes of different types of coffees exclusively from Ohio roasters. He bootstrapped the funds to get The Wright Cup up and going during the incubation period, but he hopes to move into the acceleration period now.
“In larger cities, you have to prove yourself more,” he said. “It doesn’t mean we’re incompetent, but people here are more willing to try and help you get off the ground. There are a lot of start-ups popping up, and Dayton seems like a really opportunistic city.”
Entrepreneurs like Bowman and Nick frequent Nucleus to bounce ideas off of one another while networking with other business owners. The co-share is trying to attract, retain and help incubate startups in the city.
Bowman said the area is attractive for small businesses because they will spend less per employee, for office space, housing and even initial startup costs, compared to an established area like Silicon Valley.
“Dayton is still a little earlier in the process than even Cincinnati is as a start-up community,” he said. “But in terms of where it can go, I think the sky is the limit. I think 12 months or 24 months from now, the city is going to look a lot different. That’s what excited us about Dayton.”
On the side of a building near Nucleus is a mural splashed with color and dawning the words, “Dayton inspires.” Bonnie Kling, Nucleus collaboration coordinator, said that building’s slogan and entrepreneurship are rooted in similar meanings. Both are about moving past failures and finding new ways to collaborate.
“The question we pose here at Nucleus is: ‘What else is possible?’” she said.
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