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Venture capital: Start-up funding seeds sprouting

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Kentucky entrepreneurship boosters are making progress toward building an funding-investment network to help start-up company founders find money from individuals and groups willing to place bets on innovative business ideas.

Kentucky’s largest and oldest venture club is Venture Connectors in Louisville. At a recent monthly meeting were, from left, Paul Moses of Purdue Research Foundation, board member; Suzanne Bergmeister of Sunflower Business Ventures, president; and Robert Brown of Bingham Greenebaum Doll, chair.
Kentucky’s largest and oldest venture club is Venture Connectors in Louisville. At a recent monthly meeting were, from left, Paul Moses of Purdue Research Foundation, board member; Suzanne Bergmeister of Sunflower Business Ventures, president; and Robert Brown of Bingham Greenebaum Doll, chair.

Public and private efforts are creating a base of expertise with state government’s Kentucky Innovation Network – an improved, expanded and rebranded version of its Innovation and Commercialization Center program – as well as community-based venture clubs, which are spreading outside the largest cities. Neighborly cooperation often plays an important role.

The decade-old Lincoln Trail Venture Group in Elizabethtown is the model for a fledgling Nelson County Venture Club that has drawn interest from young entrepreneurs, retired corporate leaders and governmental leaders.

“The idea actually came to us from our friends in Hardin County,” said Kim Huston, president of the Nelson County Economic Development Agency in Bardstown, where Kentucky’s newest venture club is forming. “We participate in many regional projects together, and they thought because of our economic vitality and significant growth that we were primed for a club of this type in Nelson County.”

“I was pleasantly surprised that our first informational meeting in December hosted 70 people from Nelson County, all very interested in learning about the venture club concept,” Huston said. “If half those people choose to be charter members of the club, I will consider that an excellent start.”

The Bardstown effort is an example of how groups in the state are reaching out to one another to help capital flow to those with innovative ideas and solid business plans.

“The Lincoln Trail Venture Group is a true success story and has been gracious to instigate this project and welcome Nelson County with open arms,” Huston said. “With the guidance of their members and their investment experience, I feel strongly that the Nelson County Venture Club will be investing in some great, innovative projects in 2013.”

Seasoned business veterans such as Mo Miller, a retired commercial stockbroker, are part of the reason for Lincoln Trail’s success. Miller runs several businesses in the Elizabethtown area, primarily Stone Works Inc., a natural stone fabricator.

“I was raised in Elizabethtown but left after college,” Miller said. “I lived all over the United States and was in Philadelphia for a long time.”

When he moved back to the area 10 years ago, Miller knew he had knowledge to share. He saw that Kentucky was severely lacking in venture capital compared to the East Coast and became one of the original founders of the Lincoln Trail Venture Group. He is vice chairman of its eight-person investment committee.

“It was pretty evident that a key element of economic development would be to have a group or a club that would be committed to providing venture (funding) to startup companies,” Miller said. “The value of that would be for those companies to be located in our region, which would bring jobs to the area.”

PrintLincoln Trail members may back a business individually, Miller said, or the group as a whole can decide to invest after a thorough vetting process, much of which is done by the Bowling Green Innovation and Commercialization Center.

The Bowling Green ICC began in 2002 as a result of the Kentucky Innovation Act of 2000 and is housed at the Western Kentucky University Center for Research & Development. The director of the ICC’s satellite office in Elizabethtown, Lisa Williams, is working closely with Nelson County.

Like other ICCs across the state, Williams’ office helps coach and prepare entrepreneurs before they head to their first venture club meeting so people like Miller get properly prepared and focused “elevator pitches” to assess.

“The great part for the members/investors of the venture group is that the clients that I bring to them each month have been screened, coached and due diligence has been performed,” Williams said. “Sometimes these presenters have already received a grant, and KSTC has performed a very intensive screening.”

KSTC is the Lexington-based Kentucky Science and Technology Corp., a 25-year-old private nonprofit that promotes innovation-focused entrepreneurship and economic development.

Funding groups approach start-up investment in various ways, Miller said, but typically in the “venture capital arena, certainly for ‘angel’ investors, our maximum investment is about $50,000.”

The Lincoln Trail group also sponsors entrepreneurial programs and series through WKU and stays involved in the community, Miller said. It eagerly makes in-kind investments in educating and mentoring young business people, which provides a non-monetary payoff that members value.

“It’s a pretty good feeling, quite frankly, just to be able to sit down with people and talk through the mechanics of starting a business,” he said.

There is often a financial payback, too, however. According to Williams, Lincoln Trail at one point was in the black on 75 percent of its investments.

Filling gaps in a transitioning economy

There is much more work to do statewide, Miller said, to get past Kentucky’s traditional status as a “flyover state” with paltry private venture capital investment.

“We continue to have a state that is in a transition from an agrarian economy to a light-industry economy,” Miller said. “By and large the mindset is still somewhat agrarian and, as you know, farmers are the most independent people in the world. Now all of the sudden you have to go to work and be a team member and accept realities. That’s not an easy transition, and that’s a generational thing. I think we’re still an emerging economy.”

Education in the commonwealth needs continued improvement, and a broader approach is needed for cultivating and promoting start-ups.

“We leave out vast areas of the state,” Miller said. “We focus on Jefferson County, Northern Kentucky, the Lexington area and just somewhat in the western part of the state – and nothing in the far eastern part of the state. So we have these pockets.”

Good things are going on around the state, said Gene Fuqua, executive director of the Office of Commercialization and Innovation, which leads the Kentucky Cabinet for Economic Development’s efforts to create innovation-based business. He likes the recent push to upgrade and rebrand what now is the Kentucky Innovation Network, whose Innovation and Commercialization Centers and their satellites are “working on the ground.” Fuqua also mentioned the Commonwealth Seed Capital fund and various local business incubator networks, adding, though, that much more needs to be done.

“We are still very low in venture capital availability here in the state,” he said “It will get better over time. There has been a big contraction in the whole country, and not a lot of people are investing.”

Kentucky has typically been considered a “fly-over state” because most venture capital investment is by large investor funds on the East and West Coast who simply won’t consider projects outside the top U.S. financial centers. But Fuqua said there are good things going on in the state in the way of innovation and angel networks.

“I just think people have a good attitude in Kentucky,” he said. “I think you have to stay optimistic and work hard.”

Louisville is becoming a global center for long-term care in the healthcare industry, Fuqua said. Lexington is starting to develop a video-gaming business cluster, and Northern Kentucky last year launched its UpTech initiative, with a funding component, to recruit and support start-up companies at the NKU College of Informatics.

“I think we’re doing very well,” he said. “Kentucky’s known for a lot of things and is thought to be a good place to do business. I think we’ve got a good workforce, a good location and a pro-business climate.”

Venture clubs create support networks

Venture clubs date back nearly 20 years in Kentucky. Founded in 1995 as the Louisville Venture Club, today’s Venture Connectors averages about 150 people per month at its meetings, said Robert Brown, its chair.

“The key to our success is we’re sort of the networking place,” he said. It invites high school and college students on a regular basis. “We’re one of the best shows around, even larger than the Cincinnati and Indianapolis venture connectors.”

Brown got involved 10 years ago when he moved back to Kentucky from venture-intensive Silicon Valley in California. He noticed a lack of education and networking.

“I think the underlying issue is critical mass, getting everyone together,” Brown said. “But entrepreneurs didn’t know where to go. They didn’t know who was investing, who was funding.”

Start-ups directorsAt Venture Connectors there is an emphasis on reminding innovators that people are getting funded and that “there is money in Kentucky,” he said. On the other end, the challenge is put forth to investors to continue to put money back into the state and invest in promising new ideas.

Williams said Lincoln Trail is great simply for its support network.

“Our venture club is different than probably any other around the state that you’re going to find,” she said. “Our club has a pool, a fund, that (members) put together. Each member is in for $10,000. So they have a pool already, and they have the board and it makes the decisions on whether they’re going to invest in the company.”

People who present to the club are always given feedback, positive or negative, Williams said. It is similar to the “Shark Tank” TV show, she said, “except our sharks are a lot nicer.”

“Another thing about our club: it’s always looking to create jobs,” she said. “They’re looking to make money just like any angel investor, but creating jobs is always foremost in their minds.”

Williams gets calls from people around the state interested in presenting at clubs or who want to talk about starting new clubs. She helps people pursue seed-money grants and entrepreneurs organize into groups of angel investors or venture capitalists.

Most investments are made in high-tech companies, medical devices, smart phone applications and software programs, Williams said. In 2012, the Kentucky Innovation Network made $127 million in private investment, she said.

Investment figures and the success rate Lincoln Trail has had with start-ups vetted by her office prove the value of innovation support activities, said Williams, who wants to see the number grow.

“We work with entrepreneurs, inventors and start-up ventures and have been doing so since 2002,” Williams said. “We work to help them turn their good idea into a business venture. We assist in various ways – connecting them to patent attorneys, marketing professionals, prototype builders, etc. We help seek and secure funding to get their ventures off the ground.”

Northern Kentucky participates in the Greater Cincinnati Venture Association, which dates to 1985. Casey Barach, director of the Covington ICC, is a former president of that group.

The Lexington Venture Club founded in 2002 brings together entrepreneurs, service providers and investors. The club itself does not offer funding or grants, but it does gives entrepreneurs access to potential investors, new ideas and businesses to network with.

“The Lexington Venture Club is one of the many assets supported by Commerce Lexington, the University of Kentucky and the (Lexington-Fayette Urban County Government) that provides a great forum for entrepreneurs, investors and those people who support their efforts to come together to share ideas as well as encourage and celebrate the successes of Lexington’s ever growing start-up community,” said Warren Nash, director of the UK/Lexington Innovation and Commercialization Center.

Lexington also has a Bluegrass Angels group whose members do invest individually and through a fund.

The Lexington Venture Club tracks regional start-up company funding from venture capital, angel investment, grants and money from family, friends and others. In January, the club’s annual Who Got The Money event recognized 87 companies that self-reported receiving nearly $84 million in funding. Those companies employ 823 people at an average salary of $68,000 for full-time personnel; they hired 201 full-time and 103 part-time positions in 2012.

Find out more

• For a list of all private and public seed venture capital organizations in Kentucky, click here.

Click here for a list of some of the many grants offered by the Kentucky Innovation Network visit.

View the Kentucky Cabinet For Economic Development’s annual report.

• Learn more about the Kentucky Innovation Network at kyinnovation.com.

Abby Laub is a correspondent for The Lane Report. She can be reached at [email protected].