Posted: Lane Report, March 11, 2014
By Robert Hadley
When serial entrepreneur Matt Bellis, CEO of Lexington-based 3D imaging camera startup Seikowave, was planning his company, neither Kentucky nor anywhere else in the South or Midwest was on his radar screen as a potential location.
“All of my prior startup experience had really been in California,” Bellis said. “So that was my natural inclination, to set up the company in Silicon Valley.”
That was before he met Dean Harvey, executive director of the University of Kentucky’s Von Allman Center for Entrepreneurship, and was introduced to the state’s thriving ecosystem of accredited or “angel” investors.
“I had flown out to sign a license agreement for intellectual property that UK had, and Dean convinced me Lexington was the place to actually set up the company,” said Bellis, who has a masters in electrical engineering from UC-Santa Barbara.
It helped also to be close to the inventor of Seikowave’s camera, UK engineering professor Daniel Lau, patent holder for the technology behind the 3D imaging device, Bellis added.
Raising more than $2.5 million via the Kentucky Science and Technology Corp., Commonwealth Seed Capital LLC and the Bluegrass Angels investing group, Seikowave has been manufacturing the $15,000 camera and selling it to oil and gas industry customers since 2011. Beyond employing some 13 software and optical engineers, the company is behind other area economic stimulation by contracting Blue Grass Manufacturing Co. of Lexington to make the device.
Bellis is one of a growing number of entrepreneurs tapping into Kentucky’s active community of accredited investors who are pooling their resources to spur small-business growth and job creation. The growth in accredited investing coincides with Kentucky’s high marks in entrepreneurial activity. Since 2011, the Kaufmann Index of Entrepreneurial Activity has ranked Kentucky among the top states in the nation.
No one tracks how many accredited investors the commonwealth has, but building startup funding accredited options here has been a focus of public and private elements of the economic development sector.
“Entrepreneurial growth is really taking off across the state in both rural and urban areas,” said Casey Barach, director of the Northern Kentucky Ezone. “We’re somewhat of a reflection of nationwide growth, but Kentucky seems to be doing a little better than average, according to government statistics. I feel there’s explosive growth going on right now.”
A key component of making Kentucky a friendly place for startups is providing ample sources for seed money, which often comes from “angel” investors as accredited individuals are nicknamed.
Startup investing considered high-risk
The Securities and Exchange Commission defines an accredited investor as an individual who has an income of $200,000 or more over the past two years ($300,000 counting a spouse’s income) and a net worth of at least $1 million, not counting their primary residence. SEC rules allow organizations, such as banks, insurance companies and employee benefit plans with assets of at least $5 million, to also serve as accredited investors.
According to the SEC’s website, these rules were established in 1933 to let businesses raise funds outside the stock market. Because accredited investments are in startups, rather than in established firms, they are categorized as being high risk – hence the SEC income and net worth requirements.
“The rules on accredited investing are the SEC’s way of protecting investors from potential high risk,” said Warren Nash, director of the Lexington office of the Kentucky Innovation Network. “But there’s also potential for huge returns.”
Accredited or angel investments occur during the nascent stages of a company’s life cycle, somewhere after friends and family have been tapped but well before the point of seeking larger infusions of cash from venture capital firms, shopping for an acquisition by a bigger firm or planning an IPO to enter the realm of public ownership, explained Gene Fuqua, president of Commonwealth Seed Capital.
“I think Kentucky is young in this area (angel investing), and hopefully we can get people interested in making these types of investments,” Fuqua said.
With approximately $28 million under management, Fuqua said Commonwealth Seed continues to work with angel investors in the state to find startup companies.
It makes sense to distinguish between accredited investors and venture capital firms, explained Dale Boden, who co-founded the Yearling Fund I and II with partners Bill Lomicka and Ty Willburn. Angel investors tend to make smaller investments than venture capital firms.
“Angel investors invest out of their own pockets, and many times they invest with an alignment of co-investors that they have worked with before and have confidence in,” Boden said.
Through the Yearling Fund I and II, Boden has co-invested in some 20 companies, making investments ranging from $150,000 to just over $500,000.
With money often comes advice
The angel investor often also mentors a startup’s founders, an arrangement less likely among venture capital firms that invest in established enterprises. Even though he is a startup veteran, Bellis said having investors who previously took a rugged, outdoor thermal camera to the marketplace helped him market his 3D imaging camera.
“At this point, the board of directors of (Seikowave) is all drawn from either angel or institutional investors,” Bellis said. “So it brings up a very nice cross section of expertise.” (Seikowave also accepted some early-round institutional money from Mitsubishi.)
Tom Jameson, owner of ShelfPlus Automated Storage Concepts in Lexington, is a member of Bluegrass Angels, a group of accredited investors. He explained the personal value of becoming an angel investor.
“Most of us who are investing angel capital are of the age that we don’t want to start something ourselves,” Jameson said. “Yet we would like to participate monetarily, and we have a world of advice for a lot of the young guys starting companies.”
Kentucky’s investor activity reflects national trends increasing in the wake of recovery from the 2008 economic downturn. Corporate downsizing has glutted many marketplaces with qualified individuals who look to jumpstart their careers with entrepreneurship.
It’s also become more mainstream to secure financing through angel investing and its sibling, crowdfunding, a process that allows small contributions to come to a company from non-accredited investors at any income level.
Carolyn Fritz, president and CEO of Allylix Inc., a company with offices in Lexington and San Diego, Calif., said the business received startup money from Bluegrass Angels and KTSC, as well as state money through Commonwealth Seed Capital.
Jameson, an Allylix board member and investor via Bluegrass Angels, has been on the board for some eight years.
“I think anyone with entrepreneurial spirit, when they’ve been successful and want to continue that success, investing in startups is a good way to do that,” Jameson said. “You really become a part of the company you invest in, and you’re investing in something you believe in.”
A manufacturer of chemicals for the flavor and fragrance, food ingredient, pharmaceutical, agricultural and biofuel markets, Allylix raised $3 million of accredited investor funds.
“In our industry – industrial biotech – it is a common source of funding, and I think from the perspective of getting a biotech company off the ground, an essential source for funding,” Fritz said.
Allylix subsequently raised an additional $25 million in later rounds of financing with venture capital firms. It employs 25 workers, mostly scientists and research associates.
Creating an investor community
Recognizing the growing activity of angel investors, Kentucky state government in 2013 launched two initiatives designed to foster entrepreneurship and facilitate seed investments. In July, Gov. Steve Beshear announced the Office of Entrepreneurship within the Cabinet for Economic Development.
In addition to state government programs and other small business entrepreneurial programs, a number of private angel investor clubs and groups exist across the state that allow accredited investors to network, hear pitches and fund projects on an ad hoc basis.
“Small and young companies are vital to our economic health, not just in Kentucky, but across the United States,” the governor said in a press release. “By helping entrepreneurs early and broadly and by promoting innovation and entrepreneurial activity, we can improve Kentucky’s competitive position in the world and enhance job creation at the same time.”
The Cabinet for Economic Development also operates a dozen Innovation and Commercialization offices across Kentucky that can help entrepreneurs access state and federal grants through the Small Business Innovation Research and Small Business Technology Transfer programs, often referred to jointly as SBIR-STTR.
Last year’s state government efforts supplement a plethora of other small business and entrepreneurial programs across Kentucky:
♦ The private, nonprofit Kentucky Science and Technology Corp. operates the Startups@KTSC program to help early-stage companies find seed capital.
♦ Eastern Kentucky University has four Innovation and Commercialization offices that mentor entrepreneurs through the phases of assessment, business planning and capitalization.
♦ The University of Louisville offers both an MBA and a Ph.D. in entrepreneurship through its College of Business. Bloomberg Businessweek and the Princeton Review/Entrepreneur magazine have given UofL’s entrepreneurship degree programs national rankings of No. 11 and No. 20, respectively.
♦ The University of Kentucky operates the Von Allmen Center for Entrepreneurship and Lexington Innovation and Commercialization Center. It provides mentoring, access to funding and business planning assistance.
In addition, a number of private angel investor clubs and groups exist across the state that allow accredited investors to network, hear pitches and fund projects on an ad hoc basis. These include Bluegrass Angels,Lincoln Trail Venture Group, Louisville Angel Investor Network, Northern Kentucky Angel Investor Network and several others.
Until recently, there was no centralized clearinghouse where all the various angel investor groups and government programs could effectively interact. That changed in November, when Gov. Beshear announced the Kentucky Angel Investors Network, an online matchmaker for startups and potential investors. The network will allow monthly virtual meetings where entrepreneurs can pitch their ideas and should also facilitate more investor collaboration.
Larry Hayes, secretary of the Kentucky Cabinet for Economic Development, said 33 potential angel investors have signed up to participate in the Kentucky Angel Investor Network so far.
“This is one more tool in our toolbox to push us forward to become a place where you can grow a business, get it funded and push it forward,” Hayes said.
Robert Hadley is a correspondent for The Lane Report. He can be reached at editorial@lanereport.com.
