Kentucky’s entrepreneurs depend on venture capital to invest in their dreams, and while investment of this type is down with the economy, the bright spots of its existence and persistence remain.
Roughly 10,000 new jobs a month are created from venture-backed companies in the United States – an average cited by Mark Heessen, president of the National Venture Capital Association, who spoke at the Venture Club of Louisville in January. Venture-created market sectors dominated by venture capital investments in the United States include: telecom (74 percent), software jobs (81 percent), semiconductors (55 percent), and electronics/instrumentation (67 percent).
The barbells of strength in the economy nationwide are in the fields known as clean tech (energy interests) and life science firms (intellectual property often taken from our universities). Kentucky, following the trends, started its own fledgling $5 million energy fund through the Kentucky Science and Technology Corp. The Kentucky Enterprise Fund, Rural Innovation Fund, and Kentucky New Energy Ventures provide seed-stage capital for high-tech startup companies across the state.
According to KSTC’s mission (startupkentucky.com), advancing science and technology in Kentucky is accomplished by:
• Providing seed capital for companies
• Creating business strategies to encourage success
• Working in collaboration with Kentucky colleges and universities
Deals that occur outside the state can also have tremendous impact in Kentucky as is evidenced by the largest deal of the year. Nationally, in the biggest venture-backed deal of the fourth quarter 2009 and the year, Amazon.com acquired Zappos.com Inc., a Henderson, Nev.-based online shoe retailer, for $930 million. Zappos has extensive distribution warehouse and fulfillment operations in Kentucky, including a 280,000 s.f. facility in Bullitt County housing over 1.5 million pairs of shoes.
Kentucky ranks 36th of the 50 states in overall venture capital investment, according to a recent report of the National Venture Capital Association. From 1970-2008, venture capitalists invested $731 million in 90 companies in Kentucky. Public companies in the states that were once venture-backed accounted for 32,734 direct jobs alone.
According to Heessen, the annual average venture capital investment in Kentucky from 2003-2008 was $32.1 million. Some of the top venture-funded Kentucky companies in recent years in the state have been Potential Pharmaceuticals Inc., The First Thirty Days Inc. (online self-help content), Mersive Technologies Inc. (multiprojector high-resolution display technology), Hosting.com (enterprise co-location cloud computing and disaster recovery), Petsuites of America LLC (animal daycare), Wazoo Sports Inc. (high school/college regional sports network), and OrthoData Inc. (develops spinal fusion diagnostic products).
Kentucky VC firm favors healthcare
David Jones Jr., founder of Chrysalis Ventures in Louisville, finds that healthcare is a strong sector for investment for his venture capital firm, Kentucky’s first and largest VC operation with more than $400 million under management. Since September 2008, Chrysalis Ventures has had seven new investments – six of which have been in healthcare. The firm invested $4.75 million in Open Kernel and $22.9 million in the six other healthcare deals – a total of just more than $27.6 million.
His firm was able to successfully exit two healthcare deals in recent years despite market conditions that made exits fewer nationally, including Michigan-based HealthMedia that yielded 18 times the initial investment with its acquisition by Johnson and Johnson. Under the leadership of HealthMedia’s CEO Ted Dacko and with the active guidance of Chrysalis managing director and HealthMedia board member Koleman Karleski, the company migrated from the business it had pursued prior to Chrysalis’ investment – customized marketing campaigns for pharmaceutical companies – into an organization that deployed sophisticated knowledge of behavioral change and advanced communications technology to help individuals improve their health and manage chronic illnesses.
Chrysalis, which has offices in Louisville, Cleveland, Pittsburg and Ann Arbor, Mich., has also been vested over the years in several venture-backed companies that are doing well in Kentucky, including Genscape and SinglePipe Communications.
Nationally, venture capital investment peaked in 2000 at $100.5 billion during the dot.com frenzy. It subsided to roughly $40 billion by 2007, with investments down nearly 10 percent in 2009 to $17.7 billion.
Kentucky part of VC’s education trend
Investments in companies involved in education will continue in the venture sectors, and Heessen surmised that universities as we know them today may not be around in 20 years – replaced in many cases by virtual and online-type classes and knowledge management. In fact, Jones said Chrysalis has invested in five distance education companies.
“Online education has exploded over the last few years due to economic factors and demands for more flexible learning options,” said Steve Huey, COO of Louisville-based Learning House. “Learning House has experienced an increase in revenue of 94 percent over the last two years. Furthermore, our 71 schools that span over 20 states have seen an increase in enrollment of 39 percent in 2009. Some of our Kentucky schools have seen an even greater increase in enrollments of 46 percent in 2009.
“Locating our business in Louisville, Ky., keeps our costs low so that the business can expand rapidly,” he said. “I predict we will see more venture capitalists enter this market in the next year as education remains one of the few areas of financial growth.”
Venture capital for firms is coming from many market sectors, not just the United States. Jones and Hessen pointed out that China, India and Israel have seen an increase in true venture capital firms.
“This is a net positive for the world. It enlarges the market possibilities and helps fund sectors focused on innovation in wellness and health,” said Jones.