The Rise of Angels

Lane Report

The Lane Report cover, February 2005

Cover Story

The Rise of the Angels

In urban and rural Kentucky, expanding angel investor networks are a sight for sore entrepreneurial eyes

By Robyn Davis Sekula

The Lane Report, Lexington, Ky., February 2005

Driving through Louisville neighborhoods looking for a house, Randall Standard was intrigued by real estate signs advertising a phone number to call for more information on a home. It seemed like a good idea, but Standard thought it could be better.

So he launched VoicePad, a company that allows potential home buyers to call a number, get instant information on a house for sale, and connect with a real estate agent if they need to – all for a flat monthly fee.

But getting start-up funds wasn’t easy. Standard, a telephone industry veteran, pitched his business plan to venture capital firms, which generally didn’t bite. A Pittsburgh firm eventually took interest, but Standard didn’t like its terms. “I like my job. And by and large what you see the first thing is they get rid of the entrepreneur and put a Silicon Valley whiz-kid in,” he said.

So he turned to friends and family members and a few private investors, known as angels, to raise $1 million to fund his business, which began operating in March 2002. Now with 10 employees, Standard expects his business to turn a profit this year.

Angel investors are increasingly finding a warm reception for their low-key, community-development approach to funding in largely rural but economically diverse states like Kentucky. And where venture capital firms these days are rejecting nearly every entrepreneurial proposal to come their way, angels are giving a second wind to ideas that otherwise would not have seen the light of day.

“Starting a tech company in Kentucky is a burden and a blessing,” he said. “It’s a burden because it’s hard to get funding. But it’s a blessing. You can roll it out, get revenue on it, perfect it, and nobody on either coast knows what you are doing.”

Scarce funding

For entrepreneurs like Standard, finding capital in Kentucky probably has never been easy. But since the technology bust in 2000, venture capital money has been especially scarce, said Richard Furst, dean emeritus of the University of Kentucky Gatton College of Business and Economics, and currently manager of the Lexington-based Bluegrass Angels, an investment group.

“Venture capitalists have shifted their position,” Furst said. “Historically, VCs have invested in early-stage companies. After the Internet bubble burst, VCs moved away from early-stage and began investing in later-stage companies. That left a huge void where these large angel networks have moved in.”


Venture capitalists, too, are largely located on the East and West coasts, which is also where most of their deals are centered. Kentucky and neighboring Cincinnati have a few venture capital firms, but they don’t always invest in Kentucky companies.

Many angel investors are doing so at least partially to help grow their own communities, said Tom Jameson, a Lexington-based angel investor and member of the Bluegrass Angels. Jameson believes Kentucky’s future is in angel investing. “If we are going to bring this state up to par, to be competitive with creating the kinds of jobs we want in Kentucky, we are going to have to do it ourselves,” Jameson said. “If we keep waiting and hoping for the kind of jobs and economy we hope will land in Kentucky, it will not happen.”

Furst and others in Kentucky have begun building ways for investors and would-be entrepreneurs to meet. Lexington held its first Venture Club meeting about two years ago. Dean Harvey, director of the Von Allman Center for Entrepreneurship at the Lexington Innovation and Commercialization Center, said that in 2003, $14.5 million in funding were awarded to businesses in the Lexington area, which included some of the businesses that found capital through the Lexington Venture Club.

But angels represent a more grass-roots approach to investing that’s spread into rural areas across the state. Clubs began meeting last year in both Pikeville and Ashland, inviting participation from surrounding communities. In Lexington, Furst formed the Bluegrass Angels group about a year ago.

All of these groups are ways for investors and entrepreneurs to meet and marry money with business ideas, Furst said. And ultimately, that marriage builds a family of jobs that keeps Kentucky economically buoyant.

“Historically, when researchers would come out of the university here and attempts were made to commercialize that research, there was nothing in place in Kentucky, particularly in Lexington, to handle that process,” Furst said. “In many cases, the university intellectual capital was captured by out-of-state investors. We were losing the value of that intellectual capital.”

Drawing distinctions

Much of the angels’ ascent to popularity has to do with the fact that angel investors and venture capitalists are two entirely different types of business people.

Angel investors are those that give funds to help businesses get off the ground. Typically, angel investors are older, established people who made their money in real estate or other profitable lines of traditional investing. Most of them don’t want to run a company – they want to fund someone else to do it. The business may or may not be up and running, but usually is in its infancy when the angel investor and entrepreneur strike a deal.

“When we talk about angel investing, we are talking about getting the idea up off of the ground and running for 18 months,” Jameson said. “If we can get the idea off of the ground for that long, then the venture capitalists can come in.”

On the other hand, venture capitalists tend to give money to companies after those businesses are open and creating revenue. In some cases, venture capitalists may want changes in management structure or a seat on the company’s board to help make sure their money is invested wisely.

Some venture capital firms, though, operate more like angel investors – their mission being more about job creation than wealth building. Kentucky Highlands Investment Corp. in London, Ky., funds local companies within a 22-county area that want to bring jobs to the region. Elmer Parlier, vice president of investments, said his company has funded some investments that other venture capital firms probably wouldn’t, including manufacturers, and in one instance, a day care center for elderly adults. It’s what’s hot where he is, though he’d like to see other kinds of business plans. “We crave techy deals,” Parlier said. “There’s no doubt that’s where the future is. The deals that we do are a lot more mundane, a lot less sexy” than those of larger, metro venture capital firms.

Kentucky Highlands funded Bluegrass Spring Co. in London. Jack Grosswiler, managing member of Bluegrass Spring, said his company needed to buy a new piece of equipment to help the business grow. “Our bank told us they wanted to finance cars or things like that, so if they got their hands on it, they could sell it,” Grosswiler said. “They didn’t have any way to sell spring coiling equipment.”

Kentucky Highlands funded that piece of equipment, and today, Bluegrass Spring has 10 employees working in a factory in London making specialty springs. “Without Kentucky Highlands, I wouldn’t be this large,” Grosswiler said. “I would have quit a long time ago. You can’t do it without venture capital.”

Going another route

For those areas that simply don’t have a Kentucky Highlands-style venture capitalist, venture clubs are a way to connect rural entrepreneurs with investors. Louisville has long had a venture club that allows entrepreneurs to present their business plans to potential investors. In fact, that’s how Darrell Maynard, now president of Southeast Telephone in Pikeville, got his funding to start his company 10 years ago. He had some money, but needed more, so he headed to Louisville to make his presentation.

Maynard has helped start the Mountain Ingenuity Venture Capital Club in Pikeville, which he hopes will draw in a regional crowd to help angel investors break out of the familiar and into new areas of investing.

Furst points out that angel investors have built wealth over time, and therefore tend to be older and established. They may not have had the exposure to technology to be comfortable enough investing in tech start-ups.

Maynard agrees. “It’s just a matter of getting a new mindset for some of the people who are in the community,” Maynard said. “They don’t understand it. They have not invested in anything besides their own business and industry… It’s easier to invest in technology when it’s a stock on the NASDAQ, but harder to invest when it’s someone in your community who has an idea.”

In Lexington’s Bluegrass Angels group, some of the younger members are coaching the older ones on technology, Furst said. The youngest members are in their 40s, he said. The group has about 30 members and would like to have more. Members have to prove a certain net worth before being invited to join and come to meetings. Furst declined to give the exact amount.

Much like a venture club, the group makes investments as individuals rather than as a whole. Through Bluegrass Angels, one company has received a commitment of $700,000, and members of the group are negotiating with a second for $1 million in financing. The group is also putting together a pool of about $500,000 for a fund and hoping for matching funds from the state and the University of Kentucky, Furst said. The group’s only rule is that if a member develops a term sheet with a particular investor, they must give others in the group an opportunity to invest, Furst said. “We don’t want our angels competing against each other to present proposals to the same company,” Furst said.

More rural areas

What excites Furst and others in similar industries is the expansion of groups that help people find funding outside of Louisville, Lexington and Northern Kentucky, an area known as the Golden Triangle. Mel White, executive director of the eastern region of the Innovation and Commercialization Center, said the Ashland-based Tri-State Capital Investment Club’s purpose is at least in part education. “There is no shortage of brilliant entrepreneurs out there who want to transform their ideas into significant businesses,” White said. “There is no shortage of rich people in eastern Kentucky either. But most of those people have not made investments in technology companies. They’ve made investments in real estate…We need to educate them as to what it means to be angel investors, and give them a forum to see each other.”

And ultimately, funding for new businesses means curbing the exodus of entrepreneurs and good ideas from Kentucky’s most rural areas.

“Throughout all of rural Kentucky, we are looking for those role models, those sparks that give the younger generation hope that they don’t have to leave home,” White said. “We are relatively new at this, but if it’s a good idea with a great management team behind it, it will get funded.”


Venture Capital in Kentucky

While venture capitalists invested more nationally in 2004 than in any year since the dot-com crash, it’s rare these days for Kentucky entrepreneurs to get venture capital funding. But venture deals are still being made here, and a handful of firms have offices in Kentucky.

The largest of those is Chrysalis Ventures in Louisville. David Jones Jr. is chairman and managing director of the firm, which he started with a partner in 1994. Today, Chrysalis is making investments from a fund that closed in 2002 with $143 million in assets, Jones said. About one-third of that fund has been invested in 17 companies. Chrysalis gets about 700 business plans a year, but only invests in a few of those companies.


The trend in Kentucky venture capital is toward investing in health care and education, Jones said. “Five years ago, in 1999, the Internet was very big,” Jones said. “There was virtually no interest in health care services, or anything other than e-health. For the geography that we serve, the Southeast and the Midwest, the bread and butter of our economy is health care…But health care has become busier for us and attractive nationally.”

Other new areas include education and training. “The education system, like health care, has been slow to adopt new tools,” Jones said. “We think there are productivity enhancements to be made there.”

The National Venture Capital Association’s figures show that from 1999 to the third quarter of 2004, about 32 percent of venture capital investments in Kentucky companies went into telecommunications firms, and 18 percent went into industrial and energy firms. About 14 percent went into biotechnology, and approximately 10 percent into health care services.

NVCA figures also show that venture capital invested in Kentucky companies peaked in 2000, just before the tech bust, with $198.48 million invested in 11 companies. In 2003, only $7.1 million was invested in four companies. But 2004 has shown a slight rebound, with $54.41 million invested in seven companies through the third quarter of last year.

Nationwide last year, venture capitalists invested $20.9 billion, up 11 percent from $18.9 billion in 2003.

Dale Boden, president of BF Capital, a private investment company in Louisville, said there simply isn’t much money in Kentucky for venture capitalists. His firm plans to close an investment fund soon that will have about $3 million in funds available, and wants to make most of its investments in Kentucky. He thinks that will help fill the void. “So much of it has to do with where the wealth is in the U.S.,” Boden said. “There is greater wealth concentration on the West Coast and the East Coast.”

One way to secure more venture capital money for Kentucky companies is to get institutional investors to consider putting some of their funds into venture capital. In 2003, Louisville-Jefferson County Metro Mayor Jerry Abramson made a pitch to several large state retirement funds to put some of their money into venture capital.

Kent Oyler is Abramson’s liaison for venture capital and entrepreneurship. “How the economy of the state looks in 20 years will be based on how successful we are in attracting venture capital today,” Oyler said.

And, Oyler added, investors are more likely to meet success if they put money in venture capital in Kentucky. “The deals are not picked-over here,” Oyler said. “It’s like going to the bargain barn.”