Cintrifuse's Sarah Anderson talks about her 'fund of funds' and how it benefits local startups

Where does she find the funds to invest in?
Cintrifuse's Sarah Anderson talks about her 'fund of funds' and how it benefits local startups
Posted at 8:00 AM, May 10, 2017

CINCINNATI -- In 2013, the fund of funds managed by local startup advocate Cintrifuse invested an undisclosed sum in the Houston-based Mercury Fund, an early-stage venture-capital fund.

Since that investment, Mercury Fund has invested in three local startups, said Managing Director Blair Garrou. They are Donde, which was later acquired by Vancouver-based Mobify; Strap; and LISNR.

That's how the fund, formally known as Cintrifuse Early Stage Capital Fund I, is supposed to work. It invests in funds around the country, which in turn invest in local startups. The idea is to help bring much-needed capital to the Tri-State.

( previously reported Cintrifuse was planning to create a second fund of more than $100 million. Cintrifuse officials declined to comment on where that effort stands now.) recently talked with Sarah Anderson, the fund's manager, about how she finds funds like Mercury to invest in. What follows is an edited and paraphrased version of that conversation.

What kind of funds do you look to invest in?

The first of the three main criteria is performance. We're trying to build a tech-based economy, and in order to do that, we need investors who can build and exit great companies. That spins off money to build more companies.

Since we're a for-profit fund, we have to give our shareholders a return on their capital. So we're looking for funds with returns among the top 25 percent of their peers.

The second criterion is access to innovation. Our investors are large corporations (click here for a list) that want to partner with startups on new technology. So we want funds that invest in startups that are creating technologies that our investors can use.

The third criterion is that we want fund managers who will get engaged in this community. They don't have to invest here, but that is our hope. As our ecosystem matures, more funds will have the opportunity to do so. Five of the 14 funds in our fund have already invested in startups here.

What recourse do you have if they don't invest here?

We can't get our money back, but we don't have to invest in them again. They typically ask for reinvestment every three years.

How do you know the funds are meeting the "access to innovation" criterion?

One measure is to keep track of how many pilot programs testing new technology our large corporate investors, or Big Cos, are doing with startups. Cintrifuse is currently tracking 60 of them, and about half of them involve startups in this region.

How do you find the right fund managers?

The offense is building market maps around those managers who perform well. We take info on successful exits that have happened over the past five years, and see who the early-stage investors were.

The defense is that we get a lot of introductions to fund managers from our limited partners, which we follow up on.

The early-stage venture capital universe is about 1,500 funds in the United States alone. We have met with representatives of about 500 of those funds, but we want to develop relationships with all of them. We want them to know about Cincinnati, and we want to know about them.

The thing with early-stage VCs is that there are a lot of emerging managers, a lot of new funds. We are constantly on the lookout for these new managers.

What's a typical day like for you?

Meetings, meetings and more meetings. We have introductory calls, diligence meetings, reference calls. A lot of it is digging into the universe of early-stage managers.

I travel a lot to meet these managers and spend time with their teams, as well as investors in the market. The more you know a manager the better. It takes 10 years for a fund to fully exit, so you need to be comfortable being friends with them for that long or longer.

How much of the fund is left to invest?

We have committed about 80 percent of the capital in Fund I, which started with $57 million. We will probably have 16 funds in the portfolio when it's all invested.

What can local startups do to attract investment?

Investors are very interested in the Midwest, because it's cheaper to invest here -- they get more return for their dollar. That's something that startups here can obviously benefit from.

Startups here need to get more traction to get investment than they do on the coasts, where sometimes all one needs is an idea.

Here in the Midwest, you find startups finding customers, getting some traction and then raising funds. They already have a market and customers, and that's so attractive to venture capitalists.