Welcome to the May 18 Monday Business Briefing, your private business intelligence digest from Insider Louisville.
Every city in America wants to have a thriving startup scene. But not every city has the capital — or the talent, or the ideas — to support one. In fact, most don’t.
So where does Louisville stand? It’s not Silicon Valley. Or Boston or Austin. Or Nashville or Cincinnati, frankly. This city is home to legitimate startup wins — from ZirMed and Genscape to Red e App and Katie Bush Design, for instance. But tech entrepreneurs behind companies like Backupify and Beam Technologies also have had to leave town in search of more capital and talent to scale their companies.
This conversation has been ongoing among Louisville’s business leaders and entrepreneurs for years, and it will continue long into the future. Insider Louisville is exploring these questions at our next meetup, today at 4:30 p.m. at Red e App’s headquarters, 216 S. Shelby St. (Details and RSVP here.)
In anticipation of that, we reached out to various entrepreneurs and investors — including some who will be at today’s meetup — to get their takes. What we found is that while virtually everyone recognizes the need for Louisville’s economy to grow and advance beyond its logistics and distribution strongholds, how to get there most efficiently — and profitably — is up for debate. As is the present state of the scene.
It begins with figuring out what Louisville wants to be.
“They want a place where entrepreneurs with really good ideas can build their business to grow in their community,” said Wright Steenrod, a partner at Chrysalis Ventures who focuses on tech investing. “That involves a culture of encouraging entrepreneurship and accepting failure. Generally it involves the academic institutions being enthusiasts about their intellectual property being developed. It involves investors’ willingness to invest. A whole bunch of things go in to that equation.”
Steenrod said good businesses in Louisville get funding. But, he added, “everybody would benefit if we had more really smart money investing in businesses in Louisville.”
That gets at a common complaint about the city’s startup scene. If you have a good idea and the talent to move on it, you can find seed funding. But once you’re ready to grow, second-stage funding here can be elusive.
“If you have proven that your business model is working, can work, and that you have the ability to scale your business and have identified the short-term immediate talent required to do so, and you can do it on a million or $2 million to get to a next level — whatever that level agreed upon is a meaningful milestone or threshold — you can find a couple million dollars (here),” said Dale Boden, president of BF Capital and a partner behind the Yearling Fund, a leading seed funder. “Finding the next tranche of capital that may require an additional two, three or $4 million becomes more problematic.”
While Chrysalis is the largest VC funder, there are only a handful or two of angels — both funds and individuals — in the state right now, from Christy Brown and Ed Glasscock to the Bluegrass Angels and the Sequel Fund. Angels can also get incentives via a state program that backs such investments.
Still, second-stage funding remains nascent, if that.
“Raising $5 million or more doesn’t happen in the state anywhere, really,” said Sean O’Leary, who founded Genscape and now runs Edj Analytics. “Although I’ve found that larger investors — B-round VCs and private equity — outside the region are willing to fund companies from this area if the business is sound.”
Alex Frommeyer, founder of Beam Technologies, moved his company to Columbus, Ohio, in search of more capital.
“What we have typically seen (in Louisville) is entrepreneurs ‘hacking together’ $1-2 million rounds with angels, and small institutional investors, which is slow, sloppy and likely doesn’t come with great resources,” he said. “A better model would be to create a ‘fund of funds’ and continue to invite VCs investing in the Midwest to look at Louisville companies.”
But money isn’t the only issue — far from it. A good startup scene requires a supportive culture and a welcome mat for talent.
“I think capital is an easy thing to point to, and it doesn’t really require us — as a community or as individuals — to make hard decisions or do the hard work to grow our city,” said consultant Campbell Boyer.
That includes investors getting more attuned to tech and accepting of risk — not recklessness, but industry-appropriate exposure. It also means cultivating community awareness of and support for a startup scene — a place where Louisville has made quantum leaps in the past several years, with the advent of accelerators and support systems such as Velocity, EnterpriseCorp and LaunchIt.
“To me, it’s not about only money but an ecosystem that supports risk and inspires more people to start businesses that can be competitive at a national or global level,” said Jonathan Erwin, founder and CEO of Red e App. “Therefore, people who dispense money — yes, ‘dispense’ like a candy machine — need to have a strong awareness of competitive winds to make solid decisions so we can have more wins and more entrepreneurs giving back to the local needs with a sophisticated and aware take.”
A good startup scene also needs talent, and workforce weakness is a near-constant problem for tech and other forward firms in the city. The region consistently ranks low in terms of its engineering and related workers. And while the University of Louisville Speed School has taken steps to crank out more and better engineers, and Mayor Greg Fischer is using his Code Louisville initiative to train a tech-savvier workforce, it remains a deficit.
“Capital flows toward ideas and talent,” said Rob May, founder of Backupify, who moved the company to Boston several years ago in search of talent to help him expand. “In most ecosystems, the three are symbiotic and grow together. I would say Louisville has capital that is sufficient for the base of ideas and technology talent in the region. What I mean by that is, if you have a good idea and sufficient talent, you can build a company in Louisville that will eventually get outside capital.”
The risk in inviting more capital here — even as billion-dollar startups are rising nationally — is that it gets deployed behind weak ideas.
“If Louisville suddenly saw a huge influx of capital to the region, it would have a good long-term impact, but I think most of it would see a negative return initially,” May said. “There would be too much capital chasing too few good ideas and a small talent pool, so bad ideas and mediocre teams would get funding and fail. But they would learn a lot, and the industry experience and startup ecosystem would now be bigger and better, and ready to take much more capital than before.”
Katie Bush, founder of the eponymous design firm, said there is capital locally to support a strong startup scene, as well as adequate institutional support from the city’s corporate base to spur innovation.
“Louisville should not be trying to copy Silicon Valley. Rather, we should be thinking about our specific category of innovation — food tech, health care, data analytics/supply chain — and encourage entrepreneurs to go after the opportunities that lie within them, as well as fostering relationships between the entrepreneurial community here and the very large companies we are so lucky to have based here in our region. The right ideas and the right technologies will get funded and will be a win-win for everyone.”
So maybe that’s the sweet spot for Louisville — at least for now.
“Locally, it’s important to remember the old axiom: Private investors, generally speaking, are betting on the team,” said Terry Gill, head of GLI’s EnterpriseCorp. “They’re not betting on the idea. They’re betting on the depth of experience that the startup has. I think that’s another reason why oftentimes the perception is there’s not enough active investors, or maybe there’s not enough capital to be invested.”
Steenrod, of Chrysalis, said you can build a successful business in Louisville. But can you build a successful startup scene the same way?
Renovation, reuse set for Norris Place Ice Cream building
What’s old is new again.
The historic Highlands-Deer Park building that was most recently home to Norris Place Ice Cream is getting a makeover courtesy of its soon-to-be new owners, Acudent. The company, a fixture at the Douglass Loop for nearly 10 years, plans to return the building’s facade to its earlier design as a service station, preserving the porcelain panels on the exterior and reopening garage bays closed when it became an Ehrler’s.
Acudent is a specialty shop that does paintless dent repair. The company, which is four technicians and an office manager, is a preferred provider for body shops and insurance companies in Louisville. And its process is green: no sanders, paint or fillers. Owner Gavin Reherman says that fits in nicely with the broader ethos of the neighborhood.
And while he’s planning a throwback facade design — think Texaco stations of yore — he’s investing in state-of-the-art upgrades elsewhere. Those include a new roof with R-30 insulation, new windows and garage doors with one-inch tempered glass, and retrofitting exterior lights and signage with low-volt LED lights. He says the HVAC, windows and insulation will bring the building up to California-level standards of efficiency.
“I’m certainly excited because I remember getting ice cream there as a kid,” Reherman says. “It’s a Highlands staple, and I can’t wait to get started on it.”
Acudent is scheduled to close on the building Monday afternoon. Reherman says he hopes to have it open by July. Republic is financing the buy.
We’re a little more than two years into the joint operating agreement between KentuckyOne Health and the University of Louisville for U of L Hospital and the James Graham Brown Cancer Center. And on Thursday, the university’s board of trustees got its most comprehensive update yet on how things are going. The short answer? Pretty well. According to Jim Taylor, CEO of University Medical Center, the former operating entity of U of L Hospital, KentuckyOne has paid more than $239 million to the U of L Health Sciences Center so far under the agreement — well on its way to meeting the $543.5 million in investments to university medical operations promised under the JOA. In addition, KentuckyOne has invested $51 million in IT upgrades at U of L and UMC — much of which are necessary to meet Affordable Care Act requirements.
More than seven years after it was first proposed, the Willow Grande is moving forward. Metro Council on Thursday gave final approval of the project at Willow and Baringer avenues in the Cherokee Triangle. The 15-story, 24-unit luxury condo building, designed as a counterpart to the nearby 1400 Willow and the Dartmouth-Willow Terrace, faces three separate lawsuits from neighbors who’ve opposed its construction. Still, Cogan — who has faced such opposition with other Highlands projects — was upbeat after the vote, saying he hopes to begin marketing the units in July. “After more than seven years of effort, our plan for this project has come together. I simply feel that it will be the next ‘Louisville Landmark.’ We are committed to deliver a project that will rival the world’s best residences.”
Speaking of Cogan, his Jefferson Development Group owns the former pet store at 2509 Grinstead Dr., near the corner where it meets Lexington Road. That will soon become a new location for Parkside Bikes, the popular bicycle sales and rental shop on Bardstown Road. They’ve signed a lease with JDG that owner Ben Botkins said would allow them to renovate and move in now, establish a presence there, and be part of whatever new development Cogan and his team are planning for that corner in the future. “I reached out to Kevin in late 2014 and we both realized how underutilized that corner was,” Botkins said. The new store is set to open June 5 — the company’s six-year anniversary — with a party and a weekend-long blowout sale.
Welcome back, Colonel! Multiple inside sources tell MBB to expect a major rebranding of KFC franchises in the coming weeks and months, with a revived focus on founder Colonel Harland Sanders. We’re told parent company Yum! Brands is planning to begin the effort by renovating 1,000 franchises under the Colonel’s watchful gaze, the first of which is the restaurant at Taylorsville Road and Breckinridge Lane. Multiple inquiries to Yum! about this went answered.
Louisville ad firm Scoppechio recently parted ways with three director-level employees: Digital Creative Director Judson Snell, Group Creative Director Chase Ramirez, and Senior Art Director John Mahorney. Snell had been with Scoppechio for more than three years, Ramirez three, and Mahorney more than two. MBB called Scoppechio’s office and was told Chief Creative Officer Dan Franklin is taking calls that had been directed to Snell and Ramirez. Snell emailed MBB, saying only: “Restructuring. That’s advertising.” Additional calls to Scoppechio weren’t returned. Multiple ad industry sources say these departures could be linked to Scoppechio losing the account for Long John Silver’s. IL called the LJS corporate office but hasn’t heard back yet. —David Serchuk
The Kickstarter for Funtown Mountain, Will Russell’s Roadside Attraction that’s scheduled to open June 19, closed on Friday, surpassing its goal of $25,000 by more than $1,000. The successful Kickstarter was thanks in big part to a fan of LebowskiFest who pledged $10,000 to the campaign in exchange for a statue of himself in character as John Goodman’s Walter Sobchak at the theme park. The artist is Louisville’s Raymond Graf. Despite the tremendous amount of work already going on there, closing on the former Guntown Mountain is still not official. Russell told The Glasgow Times it will happen Tuesday. We’ll be checking in with him soon to hear how things are rolling on the Mountain. —Melissa Chipman
Driving the Week
The city’s collective freakout about the possible takeover of Humana by health care giant Aetna seemed to have subsided by the end of last week (for a rundown of the many ways such a sale would hurt Louisville, click here). The company’s stock surged, closing the week up almost 5 percent, at $175.90 per share. And frankly, at every event MBB attended where people of a certain cloth also were, it was the topic of conversation.
But at least one analyst — which is the same number of analysts who declared an acquisition “imminent” — was pouring cold water on the heated discussion. Sterne Agee’s Brian Wright was the man with the ice bucket:
We cannot rule out the potential for Humana to be acquired. However, we believe an acquisition would be unlikely to occur at current elevated levels. … Should the company lower 2015 EPS guidance more materially and consolidation not occur, we believe on a near-term trading basis, Humana shares could go temporarily well below our $150 price target. Risk to our thesis would be an acquisition of the company at a much higher multiple.
In other words, all eyes on Humana this week.