Finding capital has been one of the biggest complaints among Kansas City’s young and growing companies. Too many entrepreneurs say they can’t find the loans or investments they need to build their businesses and create jobs.
Now, thanks to KCSourceLink and its partners, there’s an official diagnosis of the problem—and a four-part plan with possible remedies. It’s all part of a new report, “We Create Capital,” that’s being released today.
“We’ve heard about challenges in the funding space for years,” said Maria Meyers, network builder and founder of KCSourceLink. “We wanted to figure out what’s really happening with loans and equity for early-stage businesses and, more importantly, what we can do to improve the situation.”
Increase the Availability of Alternative Loans
Kansas City’s microloan program, which provides loans of $500 to $50,000, is in high demand and has a default rate of less than 3 percent. But there’s a limited amount of money available—about $3 million. That’s not enough to serve all the “unbankable” companies that can’t qualify for loans from traditional lenders.
It may be possible to grow the existing microloan fund from $3 million to $5 million, and to create a second SBA-backed fund worth up to $5 million. With the use of New Market Tax Credits, CDFI funds and other programs, Kansas City’s base of alternative loans could increase from $3 million to as much as $17 million.
Boost Grant Funding for Early-Stage and R&D Businesses
It’s notable how little Kansas City attracts in SBIR and STTR grants compared to the surrounding areas. These are federal grants that help small businesses develop products and services based on innovative technology.
Between 2010 and 2014, Kansas City companies won about $2.1 million in SBIR grants per year. The St. Louis region, meanwhile, received nearly three times that. Even outstate Missouri—the regions that don’t include Kansas City and St. Louis—beat Kansas City, pulling in $3.4 million in grants on average per year.
By building awareness among local entrepreneurs, and increasing training on how to apply for SBIR and STTR grants, it may be possible to take that $2.1 million to $5 million.
The study also recommends continued financial support for Digital Sandbox KC, which provides grants to local companies needing help with prototyping and commercialization. The Sandbox awards about $20,000 in resources to each business accepted into the program.
Grow Seed Capital Investments
Seed capital—funding that’s available to startups in their earliest stages, typically before they even have a prototype—is another weak area, the study found. Between 2009 and 2014, the Kansas City area attracted about $668 million in equity investments. That sounds impressive until you realize that Kansas City ranked 11th among its peers.
The study recommends the creation of a new $5 million seed capital fund and doubling the number of local angel investors. The region’s ultra high net worth individuals should be recruited for a “super angel network.”
It’s also important to build capacity, both at organizations supporting angel investors and among angels themselves. That includes more networking events for local investors and more educational programs on successfully completing angel deals.
Another idea? Push for renewal of Kansas’ angel tax credits, which have helped spur investment. Kansas City should also back the creation of angel tax credits in Missouri.
Kansas City has the potential to increase its seed investments from $2.9 million to $13.5 million.
Scale Up Venture Capital to $200 Million
Right now, the Kansas City region produces about $43 million in venture capital investments. The study says that we need to shoot for $180 million to $200 million by 2020—basically doubling the number of investments worth between $1 million and $10 million.
Otherwise, young companies will seek help from investors from outside the region, leading them to move away from Kansas City.
The locally based Flyover Capital has done great work supporting Kansas City companies, and the study recommends that investors increase their support of Flyover. That could grow Flyover from $43 million to $80 million. The study’s authors also call for the creation of a new $50 million VC fund. Kansas City needs a fund that can qualify for an SBA Small Business Investment Company “early stage” license, which could enable access to more federal support.
The community should also try to recruit at least two VC firms from outside Kansas City to open offices here, which could lead to $20 million in VC investment.
For a copy of the report, visit www.wecreatekc.com after noon today.
