Tom Martin Q&A: Putting together a network of "angel investors" in Kentucky

Dean Harvey, executive director of the Von Allmen Center for Entrepreneurship housed in the University of Kentucky Gatton College of Business and Economics.
Dean Harvey, executive director of the Von Allmen Center for Entrepreneurship housed in the University of Kentucky Gatton College of Business and Economics.

Dean Harvey is executive director of the Von Allmen Center for Entrepreneurship, housed in the University of Kentucky's Gatton College of Business and Economics. He talked with Tom Martin about the Kentucky Angels Network. Announced in late November by Gov. Steve Beshear, the network was created by the state Cabinet for Economic Development to link new businesses pursuing funding with would-be investors from across the state.

Tom Martin: Could you give us some background on how the Kentucky Angels Network came to be?

Dean Harvey: There are people across the state, as well as the Cabinet for Economic Development, involved in trying to help entrepreneurs — the growth engine for the Kentucky of the future. Entrepreneurs often need investors to launch a business. And, of course you need entrepreneurs if you are interested in investing in that kind of thing. You want to find the best opportunities. There are lots of great things going on around the state, including what are called Angel Investor groups — groups of private investors that invest in some of these early stage, often high-risk adventures. But each community can't make it on its own, so what we need to do is network that across the state. So after several discussions, the Cabinet for Economic Development decided to fund what we are now calling the Kentucky Angels Network.

Martin: How does this work now? Is it like a webinar?

Harvey: Yes, it will be an online meeting. We'll be able to take an entrepreneur anywhere in the state and then we'll have investors anywhere in the state and we'll do an online webinar where the entrepreneur will be able to present their business. The investors can be sitting in a group somewhere, they can be sitting in their office watching this, they can be sitting at home watching on their laptop.

They'll be able to hear the investor and to see the presentation. To start, we have entrepreneurs that have already raised some money, but need more to complete their deal. We will also have what are called "lead investors" on the call.

So if I'm an investor sitting anywhere in the state, I hear the presentation, I hear what the entrepreneur has to say, I can hear why the lead investor has already committed some money and I can ask questions. For an entrepreneur, it's trying to open up those opportunities and reach investors anywhere in the state. For an investor, it's trying to find the opportunities that are of most interest to them.

Martin: To participate, do you have to be a member of an established angels group or can you be an independent investor?

Harvey: You have to be a credited investor. That's not something we defined, that's the Securities and Exchange Commission's criteria. It essentially says you have enough wealth to withstand some losses because these are early stage private investments. Many of them are high risk. So the SEC defines that. So the investor has to meet that criteria to be able to participate in these monthly online calls.

From the entrepreneur side, there are really two criteria. One is you have to be a client of this statewide innovation network. So you have to already be involved with the people statewide who help out entrepreneurs. And the second is you already have raised some money and have negotiated terms for that investment. And the goal there is to make it easier for people who are not familiar with that particular deal. They don't have to worry as much about negotiating a deal.

Martin: I take it these investors are willing to take some risk?

Harvey: That's the kind of investors we are looking for, mostly high-risk investors. They're called angel investors. Investors of this kind usually like portfolio investments. They know that on some they will lose their money and on some they'll get a nice return and hopefully a few will get a great return. So the idea of this network is to give those investors a broader look at the kinds of deals that are going on in Kentucky.

Martin: Okay, I'm an entrepreneur. How can the Angels Network help me get to the next stage with my business?

Harvey: As an entrepreneur, you would have already raised some money so you already have some commitments to investors. But you need more money to make your commitments — more than you've been able to raise say locally in your community. The idea of this network is hopefully you'll find some investors in other parts of the state who are interested in that kind of deal.

Martin: How can the entrepreneur make sure an investor has credibility? How can they verify that?

Harvey: Two ways. Every person that gets the notice to sit in on these calls will have signed a piece of paper that says they meet the criteria that the SEC (Securities and Exchange Commission) has defined. The second step is before any investor actually makes an investment, then the entrepreneur has legal documents that need to be signed and the investor will reconfirm that they meet those criteria.

Martin: What is the angel investor looking for?

Harvey: They are looking for an idea that they can relate to; something that is scalable, that has a fairly large market opportunity. Often it's not just the idea, they look at the team.

Martin: Do we have a robust entrepreneurial community?

Harvey: We have a very robust entrepreneurial community and a lot of great things going on in all parts of the state. But Kentucky is a large, rural state, so finding out what's going on in one part of the state isn't so easy if you are sitting in a different part of the state. One interesting statistic on a national level is that over 70 percent of the money received by the entrepreneur comes from investors within their own state. So if you are in Kentucky for the most part you're going to have to find that early money in Kentucky or you won't be able realize your opportunity.

Martin: From the entrepreneur's perspective, why this sort of capital as opposed to going to the bank for a loan?

Harvey: We are talking about people that have ideas, new ideas, great business ideas, but when you go to the bank to try to get a loan they won't secure it just on an idea alone. They'd be looking for some sort of security and often the entrepreneur doesn't have the ability to do that. In addition to private investors, the state of Kentucky has some pretty aggressive programs where they will co-invest with private investors. But the bank is ideal if you can get it. Often it's a bit down the road before you are going to be able to qualify for that.

Martin: Some investors are looking to affect change, to encourage new technologies let's say. Is this investor a lot more patient when it comes to anticipating a return?

Harvey: I think that's true of most angel investors. Clearly their hope is to make some money because they are investing their own personal money. On the other hand they all live in communities and they all are loyal to those communities and want to see those communities thrive and entrepreneurs are what helped to make that happen. And so they do have some patience on these investments.