The spark to start new businesses in Kentucky has dimmed the last few years, while other states have made strides in fostering entrepreneurs.
Data from the Kauffman Foundation show that new entrepreneurs are more likely to start businesses on the coasts, in Texas and even in Mississippi and Oklahoma than in Kentucky.
Last year, 240 out of every 100,000 Kentuckians became entrepreneurs, down 35 percent from 2013, according to the foundation. Nationwide, the rate was up nearly 11 percent during that span.
While some of Kentucky’s neighbors, such as Tennessee, also saw significant declines, others, including Indiana and Ohio, booked increases of around 5 percent. In Mississippi, 370 out of every 100,000 adults became entrepreneurs last year, up more than 19 percent from 2013. And in Oklahoma, 450 out of every 100,000 adults started a business, up 67 percent from three years earlier.
And for those who launched in Louisville, finding investors has become an issue. In 2016, the number of startups that received funding from venture capitalists fell to a six-year low of 33 — though the total amount funding increased, even without the $47 million investors pumped into Apellis Ventures.
From January to March of this year, investors funded five Louisville startups, down from eight in the first quarter of 2016, and 19 in the first quarter of 2015.
The decline can be blamed partially on the good economy, said Lisa Bajorinas, executive director of EnterpriseCorp., the entrepreneurial arm of the local chamber of commerce.
When people have good jobs and they feel secure financially, they have less of an incentive to leave and start a business, even if they think they have a good startup idea, she said.
Entrepreneurs often struggle to find startup capital, Bajorinas said.
“It’s particularly hard, I think, right now,” she said.
Sean O’Leary, a local entrepreneur — who also has pumped money into other startups — agreed.
“We definitely need more money in town,” he said.
O’Leary is the CEO of Edj Analytics, which uses data to help businesses overcome bias and other human shortcomings to make better decisions. He also is the former CEO and founder of the energy monitoring company Genscape.
Accessing capital in Louisville today is more difficult than it used to be, in part because there are fewer identifiable investment groups, he said.
O’Leary and Bajorinas also said that Louisvillians’ risk aversion is hampering entrepreneurial activity.
There’s no shortage of wealth in the community, Bajorinas said, but a lot of it is family wealth whose stewards are shying away from investing in high-risk, high-reward companies.
“That continues to be a challenge for the market,” she said.
Ironically, that risk aversion also represents a risk to the community: If entrepreneurs cannot find funding locally, they may be inclined to seek funding outside of Louisville and Kentucky — and that sometimes means they form the business elsewhere, closer to the funding source.
Another challenge, Bajorinas said, is that a lot of the available capital in the community is tied up in existing ventures, too few of which have been sold, which would make additional funding available for new startups.
Not enough ‘exits’
Marty McClelland, president of Regent Investment Management, agreed.
He said he understands that entrepreneurs would like to have an easier time accessing venture capital, but investors are holding back in part because the state and the city have not seen many entrepreneurial success stories: Too few companies have been sold for tens of millions or hundreds of millions of dollars.
Few people who have invested in a representative sample of startups have generated a good return, he said.
“You’d get more investors and more money if you had better returns,” McClelland said.
The venture capitalist is chair of the Enterprise Angels Fund, through which 53 investors have raised $4.65 million to invest in Kentucky startups. The fund has supported 11 companies, and has enough capital to invest in two more, McClelland said.
The fund’s largest investment rests with First Care, which operates walk-in clinics that provide medical services for people with non life-threatening illnesses or injuries that require urgent care, such as sinus infections, flu and broken bones. The company has clinics in 11 Kentucky communities, in some of which visits to emergency rooms have been cut in half, McClelland said.
“They’re doing very well,” he said.
The clinics can provide their care for much lower costs than emergency rooms, which helps patients, because they incur lower co-pays, and it helps insurers, including the state’s Medicaid program, because they incur lower costs, McClelland said.
The Enterprise Angels Fund has invested $636,500 into the company, but McClelland said a return on the investment is difficult to calculate at this point because the company is still young and growing. He estimates that the company’s value, at least on paper, has doubled.
Another EAF-funded company, Gun Media, also is generating some success. Gun, based in Lexington, last month launched a video game based on the “Friday the 13th” movie franchise. The online game allows one of up to eight players to control the movie’s antagonist, the hockey goalie-masked Jason, who has to try to kill all seven camp counselors, who are controlled by the other players and whose objective is to kill Jason or to merely survive.
Gun Media leaders expected that they would get a maximum of 30,000 simultaneous players, McClelland said, but during the first weekend, they saw more than twice as many. It was a good success story for the company, he said, though the employees worked around the clock during the first weekend to fix bugs and increase server capacity.
You can find live streams of people playing the game on YouTube. You also can find archived streams, such as this one, which is more than nine hours long. The game is available for PC, XBox One and PS4. A single-player mode is expected in summer.
Neither company could be reached by Insider.
McClelland said that both companies show promise, and First Care alone had created about 100 jobs, but both were still in the early stages of development.
Bajorinas said that Enterprise Corp. had introduced some new initiatives and had identified new areas of focus to help local startups find funds and customers.
The chamber is trying to drive home the message that entrepreneurs should try to acquire paying customers much sooner than they usually do. Company founders typically understand their business and market and how their product or service addresses a need in that market, but they sometimes struggle selling their service or product.
Enterprise Corp. is telling entrepreneurs that if their product or service truly addresses an existing need, customers will pay even before the product or service has achieved commercialization. And customer revenue is the cheapest way to finance a startup, Bajorinas said.
She said the community also had to do a better job of bringing large local corporations together with entrepreneurs. Corporate giants care about innovation, and they can serve as early customers, mentors and investors for local entrepreneurs. Fostering those connections would boost the local startup community, she said.
Enterprise Corp. also is mapping the Louisville community to identify innovation hubs where startups are more likely to occur because of the existing ecosystem — startups, mature companies, service providers, researchers, investors, coffee shops — and to figure out how to create more of them and to steer entrepreneurs to locations where they are more likely to generate success.
Creating a kind of “density,” Bajorinas said, increases the likelihood of informal conversation and an awareness of available resources.
Enterprise Corp. expects to publish that map in the summer.
Bajorinas also said that Louisville has to do a better job in telling people about its successes.
Louisville has a “fairly robust” startup community and has done a decent job of telling that story locally and regionally — but local stakeholders have to improve their marketing efforts to tell people beyond the Ohio Valley that Louisville is a great place to live, work and play — and to start a business.
The community’s story is compelling enough, she said, that Louisvillians should not hesitate telling it while “having a little swagger around it.”
O’Leary said that the entrepreneurial energy in Louisville is as good as he has seen it, and experienced entrepreneurs are more willing to provide advice to younger business owners. And nonprofits like Endeavor Louisville, which supports local entrepreneurs with broad range of services, also help.
While the community gets behind startups with great enthusiasm, he said, it also tends to want to hold on too long.
“We don’t fail fast enough in Louisville,” O’Leary said.
Other cities celebrate failure and then tell those people who have failed to try again, he said.
A flourishing entrepreneurial community, O’Leary said, has lots of moving parts and requires frequent adjustments.
“There no one easy answer,” he said.
GLI will report on Wednesday at the Venture Connectors luncheon at the Muhammad Ali Center which local companies received funding in the second quarter.