Planting for the future: Pre-seed funds help Ohio startups to grow

Brian Wildes had a sound idea for a product and a solid business plan when he was trying to get his company, Ecolibrium Solar, off the ground two years ago. What he didn’t have was a lot of capital.

“It takes a lot longer than you expect to get a business off the ground,” says Wildes, whose Athens-based company manufactures mountings for solar panels. “You have to have a business plan and get the funding to the point where it needs to be.”

If Wildes hadn’t received pre-seed funding from the East Central Ohio Tech Angel Fund and TechGROWTH Ohio, he might not have gotten his company started.

“There was no other choice (than to receive pre-seed funding) for us,” Wildes says. “We didn’t have the personal finances (to start the business by ourselves) and it was too early to get financing from a bank. We wouldn’t have made it otherwise. ”

“The old saying that it always takes longer and costs a lot more to get a company rolling is 100 percent correct,” says Mark Butterworth, the fund manager for the East Central Ohio Tech Angel Fund which helps startups in the Appalachian part of Ohio. “It usually costs twice as much money as the entrepreneur thinks it’ll take to complete a product and get it into the market.”

Pre-seed funding is the first source of money an entrepreneur needs to get a company off the ground outside his or her inner circle of friends and family. Lisa Delp, the interim executive director of Ohio Third Frontier, says pre-seed funding helps the entrepreneur prove concepts to get that initial launch and validates them to other stage-funding partners.

“What typically happens with many companies is they borrow from friends and families, take out a second mortgage on their home and try to make a go of it,” Delp says.

“Often those businesses don’t succeed because they just don’t have enough money or a network of mentors and experts that they’d get with a pre-seed fund.”

Delp knows how difficult running a startup can be. In 2001, Delp and her late husband, Terry, started the Delp Mixer Company, which manufactured laboratory mixers, without the benefit of pre-seed money.

“I experienced first-hand what happens when you don’t have adequate resources,” Delp says. “We struggled a long time with our business but ultimately we never got to the place we could’ve been if we had the backing of angel funds and the service community.”

Last year, Third Frontier awarded over $25 million to 15 angel funds and startup programs to help expand Ohio’s economy.

Third Frontier is particularly interested in growing Ohio businesses in six major areas: advanced materials, aerospace, biomedical, energy, information technology and the area of instruments, controls and electronics.

The missions of startup companies in Ohio are wide and varied. In Cincinnati, Coupsmart manages digital advertising campaigns so companies can offer and track coupons offered through Facebook and other social media. Medacheck invented a Virtual Pill Box, a home monitoring device that reminds patients what pills they are to take and when they are supposed to take them. Athens-based Global Cooling is working on piston-free, Stirling engines to create refrigeration units designed to meet the unique requirements of research, clinical and industrial applications.

All of these companies have taken advantage of pre-seed money offered by angel groups.

Angel groups, like East Central Ohio Tech Angel Fund, serve as Third Frontier’s intermediators to help fund startups. An angel group must match Third Frontier’s investment at least dollar for dollar. In some cases, angel groups provide $8 to every Third Frontier dollar that goes into a project.

“One of the things that makes Ohio unique is the cooperation between our pre-seed funds and our angel fund networks,” Delp says. “One angel fund will introduce (a startup) fund to another to make sure those companies are fully funded and have the right resources. In other states, you see competition between the funds.”

A startup can receive between $500,000 and $3 million to begin their business from Third Frontier. That represents a substantial increase from when Third Frontier first began its pre-seeding program. In 2006, the first year of the program, the most Third Frontier could award was $1 million.

Delp estimates only 10 startups out of every 100 receive pre-seed money from Third Frontier and angel funds. Jim Cunningham, the Queen City Angels’ chief operating officer, says his group has to be very selective.

“In the life science side, we’re looking at companies who have patented a product and are ready to start the clinical trials,” says Cunningham whose group is located in Cincinnati. “Outside of the life science companies, we’re usually looking at companies that have a product that is either completed or nearly completed but hasn’t rolled out into the marketplace yet or has a very small volume in sales (usually fewer than $1 million).”

One company that Queen City and Third Frontier has helped out was SpineForm out of Cincinnati. The company is working on a “Hemi-Bridge,” a spinal staple that will allow treatment for scoliosis without spinal fusion surgery.

SpineForm CEO Joe Reynolds says he couldn’t have gotten his project off the ground without the help of pre-seed funding.

“It’s very expensive to run a clinical trial, especially for an emerging pediatric technology, so (getting pre-seed funding) was extremely crucial,” Reynolds says. “We probably wouldn’t be having this conversation right now if we didn’t receive that funding.”

Cunningham says there are three criteria angel groups usually look at before agreeing to help fund a startup company. The first thing is the management team.

“The quality of people who are there are critically important,” Cunningham says. “Often a business has to change once it gets into the marketplace. You need an ‘A’ team of managers to handle that change. The old mantra says ‘it’s better to have an ‘A’ (management) team with a ‘B’ idea than the reverse.’”

“There are a lot of great ideas in Appalachia, but there aren’t many management teams who are experienced enough in building and completing a product or taking it to market,” Butterworth adds.

The second area angel funds look at is the market for the product. Cunningham says his group looks for products that have a potential market size of $200 million or more with the expectation that the company can exceed $10 million in sales after five years.

Butterworth says Ecolibrium Solar is a prime example of producing a product with a strong potential. Already the company is receiving out-of-state orders from Arizona, Nevada and California.

“Only one out of 20 companies achieves their first-year sales forecast,” Butterworth says. “Ecolibrium Solar surpassed their original projection. (Wildes) was able to design a new product that was able to hit the sweet spot of what customers were looking for.”

Sustaining the product’s growth is the final criteria. Angel funds aren’t looking for flash-in-a-pan companies that will only have a year or two of solid sales but ones that will continue to grow with the market.

“That’s the toughest thing,” Cunningham says. “Do they have a sustainable, competitive advantage? Is there some reason they can continue to be successful over time as opposed to having something that competitors can easily copy? That could be a patented technology, an elite industry experience, or trade secrets they’ve developed in their past careers.”

Delp says pre-seed funding helps the financial ecosystem of Ohio to attract new businesses.

“Ohio is very fertile ground for growing businesses,” Delp says. “Because the Third Frontier has helped stimulate activity, people see Ohio as a place with a lot of opportunities.

“It’s become a self-fulfilling prophesy. Come to Ohio and you find opportunity. The more opportunity you find, the more we create.”