A critical component of an entrepreneurial-economy is investment-capital; specifically, equity financing. Equity financing differs from debt financing in a couple of fundamental ways.
First, it’s not a loan repaid per a rigorous schedule. With equity funding, investors buy a percentage of the company. In most instances, they expect to be repaid when the company’s value increases and their shares are sold.
Another difference is the lack of traditional collateral. Go to the bank and request a loan and you’ll expect to pledge collateral- your home, real-property, other tangible assets… With equity financing, an investor is taking a chance on the entrepreneur’s ability to execute and other intangible “assets”, such as a patent or a company’s good name.
A third difference is in the nature of the investors. To borrow money, you typically go to a bank. If you want equity investment, you’ll probably start your search with a fairly wealthy individual- usually someone who is a successful entrepreneur. Ask most folks where you get equity financing and Venture Capital firms would be a frequent answer. A more likely source would be so-called “Angel Investors.” Wikipedia defines an angel investor as “an affluent individual who provides capital for a business start-up, usually in exchange for convertible debt or ownership equity.”
Equity investment allows entrepreneurs several advantages over traditional debt. Many entrepreneurs would struggle to borrow capital through traditional means. Oftentimes, they lack collateral and even after the investment would struggle to pay a monthly loan. Another plus for equity financing is that it can bring needed experience to the table: investors often seek a seat on the company’s board and lend their experience and connections to making a venture a success.
In the Bluegrass state, no organization has worked to promote “Angel Investing” like the Kentucky Innovation Network. Its staff has been the critical catalyst for investor networks in Lexington, Louisville and Northern Kentucky. More recently, the network has been focused on extending this investment statewide, including to East Kentucky. In November, Governor Beshear launched the Kentucky Angel Investors Network. KAIN is an online network connecting Kentucky entrepreneurs to potential investors via web based meetings held monthly.
In Ashland, the network has been working to create East Kentucky’s first Angel Investment fund. Mick Fosson, our Director there, was recently recognized for his work by the Appalachian Regional Commission. Once this network is formed, it will provide a forum for entrepreneurs to pitch to area investors.
In June, our network will be working to promote Angel Investing across the region. Starting in Ashland and continuing with events in Richmond, London and Pikeville, we’ll be hosting what we’re calling “The Kentucky Angel Investors Regional Pitch Competition.” These events will allow local entrepreneurs a chance to hone their presentation skills in front of actual “qualified investors.” Winners receive cash prizes and- hopefully- position themselves for future investment.
An entrepreneurial-economy requires an entrepreneurial-ecosystem. Equity financing is a key component. It’s exciting to be a part of the network that’s leading the way in creating this ecosystem in Kentucky.
Johnathan Gay is the Director of the Kentucky Innovation Network at Morehead. He provides free business assistance to area entrepreneurs. To learn more, visit www.kyinnovation.com or contact Johnathan at 606-783-9536.