Where are Kentucky’s angels? A call for investment in Appalachian growth. | Opinion
If you live in Eastern Kentucky and aspire to start a brewery, kayaking guide service, construction company, or branch of a bank to boost your community’s economy, you are automatically ineligible for at least $10,000 in state-sponsored angel investor funds.
Why? Kentucky’s Cabinet for Economic Development offers a well-intentioned but narrow-minded 40% tax credit to angel investors who commit at least $10,000 to counties with high unemployment rates or “enhanced counties.” Yet this incentive excludes retail, housing, ecotourism, banking institutions, and construction investments.
Ironically, two of the three small business focuses recommended by the Ford Foundation to help “build the future of Appalachia” — banks and construction companies — are excluded from this potential funding, which is precisely the kind of support needed to drive systemic change in the region. While small businesses in Eastern Kentucky may not be high-growth or scalable in the traditional sense, they are essential for the region’s economic development and community engagement.
Angel investors seek opportunities with high risk and high reward, favoring opportunities with great growth potential. Opening a restaurant or a tech startup might be equally risky, but the potential payout is much greater with the tech startup. Given that Kentucky offers a 40% tax incentive for angel investors to invest in counties with high unemployment rates or enhanced counties (whereas it is only 25% in all other counties), the state should encourage these investors to pursue more moderate returns to align with regional needs. Investors drawn to Appalachian Kentucky will likely remain those with ties to the area, some disposable wealth, and a desire to support their roots. Altering the investment criteria, though, to support essential small businesses in Eastern Kentucky could substantially motivate this unique group of investors.
In Appalachia, “unmet capital demand from small businesses represents a $70 billion growth opportunity,” according to one report. In Appalachian Kentucky, a region covering 54 counties across the eastern part of the state, lack of capital severely limits growth, and existing resources are insufficient. Programs like the small business tax credit and loan initiatives require upfront capital or solid credit and collateral, both often out of reach in Appalachia. From 2017 to 2021, banks provided 97% of the total dollars lent to small businesses nationwide. However, bank consolidation and closure of local branches have limited community access to this critical capital. These closures are not just an inconvenience for small businesses, making up approximately 99% of all businesses in Appalachia, they are a roadblock prohibiting economic growth and stability. As a result, we see a mismatch between the demand for funding and the lack of viable avenues to secure it. It is a cycle that stifles entrepreneurial potential and holds back economic growth.
There is a way to attract Kentucky’s angels to Eastern Kentucky: change the incentives. Instead of offering a 40% tax credit for those investments made in fields excluding those most needed in Appalachian Kentucky, offer a 40% tax credit for those fields plus ecotourism, banks, construction and development, and retail. Although these industries may not offer the same financial return as a tech or health startup, the community impact would be incredible. Offering a 40% credit to investors for these sectors in enhanced counties could entice investors looking to make a meaningful impact in the future of Eastern Kentucky.
Thus, it is possible for angels to land in Eastern Kentucky, they just need the right kind of motivation. Kentucky has the power to give them that motivation by adjusting investment tax incentives so that the list of qualified investment areas keeps Appalachian growth in mind.
Kalista Pepper is a second-year Master of Public Policy candidate at the University of Virginia, with a focus on economic and community development in Appalachia.