Our team is dedicated to connecting local startups and small business owners with the resources you need to grow and thrive. One of the most significant barriers Eastern Kentucky entrepreneurs face is getting the funding they need to expand.
Today, we’re highlighting a funder that supports leading startups and changemakers in our region.
The Kentucky Science and Technology Corporation (KSTC) recently announced a new name for its investment division: Keyhorse Capital. Over the last 20 years, KSTC has funded more than 160 Kentucky-based startups.
Keyhorse Capital will continue this trend by partnering with entrepreneurs and small businesses with significant potential for growth.
We recently sat down with Kelby Price, the Managing Partner of KSTC. Read the complete discussion to learn about Keyhorse Capital, their funding criteria, and how to develop a pitch that’ll catch their eye.
What is Keyhorse Capital?
Keyhorse Capital is the investment arm of the Kentucky Science and Technology Corporation (KSTC).
We manage seed and early-stage investments through the Kentucky Enterprise Fund (KEF) — sponsored by the Commonwealth of Kentucky’s Cabinet for Economic Development.
Keyhorse Capital is proud to work with rural communities.
20% of our investments each year go into projects that meet our criteria and come from rural areas of Kentucky.
While we’ve invested $38 million in total, our companies have gone on to receive an additional $1.5 billion in investment. We’ll issue $4.5 million in funding in 2022 — an amount set by the Cabinet for Economic Development.
We accept applications every quarter and do our best to make funds available to applicants year-round.
What is the Kentucky Enterprise Fund? And what businesses might be a good fit for it?
The Kentucky Enterprise Fund is a venture capital-like fund powered by the Commonwealth that invests in Kentucky-based seed and early-stage technology companies.
Companies that are a good fit for the KEF are building an innovative, tech-enabled solution product, service, or process.
The most important criteria for applicants comes down to the size of the total addressable market (TAM).
Applicants need to have the potential to reach a market outside their backyard. In other words, they should be able to sell nationally — if not internationally. You have to know who you’re solving a problem for, how many of those people are out there, and what means you can reach them.
We’ll also require that you have an externally-validated prototype of your idea to consider your application.
Can you give us an example of what you mean by a tech-enabled business?
When Zoom first started, its founders had the idea to host meetings over video. At the time, that might have been far-fetched. But today, it’s the standard.
Initially, investing in a company like Zoom might have been high risk. But today, of course, their founders’ vision for a tech-enabled future became a very high reward investment.
On the other hand, if your business is dog walking services and your market is the neighborhood, you’re likely not doing something that’s tech-enabled. Unless, of course, you started Rover, and you’re using software to hire third-party dog walkers, and your market is the entire US.
How does Keyhorse Capital support economic development in Kentucky?
It’s hard to talk to profit-minded investors and bring up economic development — but not us. It’s one of our goals.
Ultimately, we’re trying to stimulate growth and create value for Kentucky, particularly for the broader benefit of the workforce. However, it’s subjective because people interpret that differently.
Previously we’ve worked at the state level to bring in matching federal dollars. At one point, we received around $100 million in federal funds to match state-based initiatives. These funds came specifically from the Small Business Innovation Research Program (SBIR) and the Small Business Technology Transfer program (STTR).
We have another program in the works that we can’t speak to just yet, but stay tuned.
How does the Kentucky Enterprise Fund work?
The Kentucky Enterprise fund has invested over $38 million in tech-enabled, high-growth startups since 2002. Some of today’s investments are funded by the returns from successful projects. The remaining funds come from the Commonwealth.
When I (Kelby Price) joined the organization in 2014, the program was starting to become profitable. Today, we estimate somewhere around $24-25 million in returns. We expect that to continue growing as our current projects develop.
In the meantime, we receive Commonwealth funds to carry on our work. The ultimate goal is that we become a fully self-sustaining fund in the future.
Does Keyhorse Capital partner with angel investors and other private firms across the Commonwealth?
Yes. We aim to partner with the private sector to grow the Kentucky economy. Keyhorse Capital fills in funding gaps where we can.
If private investors are betting on an idea that could be impactful, and we believe in it, we want to help back it, too.
And on the flip side, if Keyhorse Capital shows interest in investing in a project, that enables the business owner to reach out to other private investors with additional credibility.
Let’s explore a hypothetical scenario
Say there’s a funding applicant who started a software business.
Their platform will match grant writers with organizations in need of grant writing services. The TAM has the potential for national reach.
What does this applicant need to apply for funding with Key Horse Capital?
We can’t work with ideas that aren’t proven yet.
To apply for funding with us, you’ll need to have already taken your first steps. It can’t just be on paper. You’ll need hard facts and figures to prove you’ve secured a product-market fit and can effectively solve a specific problem for your customers.
And importantly, you have to show that you can do it repeatedly at scale.
Back to this hypothetical case: First, show us that target organizations will trust you, a third party, to source a grant writer that meets their needs. Next, you must prove that you’ve completed several successful grant writer matches with customers in an efficient way.
The more external validation you have for your concept, the better a position you’re putting yourself in to receive funding.
What are some of the criteria you consider when reviewing applications?
When we evaluate applications, we’re asking the following questions:
- Do they have a prototype?
- Do they have external validation — and do we believe it?
- Have they thought through and documented what they’ll do with funding if they receive it?
- Has the applicant started a business before? What’s their experience in this industry?
- What are the risk factors for the business model?
- How does this business contribute to economic development in Kentucky?
What size investments does Keyhorse Capital make?
It’s subjective, and each case is different. For higher risk investments, we may fund around $50,000.
We could fund as much as a half-million for projects with strong evidence, which sometimes includes having additional funders on board. This level of investment is rare, but it happens.
What’s the next step for the applicant in this hypothetical scenario?
They need to be working through what they’d do with the money if they receive it. This has to be well-thought-through.
For example, are they considering other adjacent problems the business can solve once they’re up and running with their grant writer matching platform?
Your funding application shouldn’t only be about how you’ll grow the one idea you have at hand right now. It’s about how you’ll leverage the funds to expand the business in new and profitable directions.
And what’s Keyhorse Capital’s next step?
If they pass the initial round of questioning, we move into due diligence.
We need to validate the claims the applicant has made about the business. That includes past performance as well as future projections.
Keyhorse Capital will evaluate whether you can service a market that isn’t local.
We’ll look at the potential for earning a healthy profit margin, the ability to generate revenue, or the potential path for it down the line.
Since the business will be based on an innovative concept, we have to look at it from every angle since there won’t necessarily be existing examples to look at.
Check out our investment process checklist for more insight into our process.
How can Eastern Kentucky produce more people and businesses that are developing tech-enabled solutions?
It’s a chicken and the egg situation. Eastern Kentucky needs more accessible risk capital to fund ideas. We also need more successes from our region to encourage more private firms to invest here.
What’s your advice to early-stage entrepreneurs figuring out how to push their ideas forward?
Read as many books as you can about entrepreneurship.
Ask yourself the questions we’ll be asking ourselves about applicants.
And when you apply for funding, make sure you come to the table with external proof that validates your idea can work.
Conclusion: Start your business and apply for funding
For help with starting your first business, download the Complete Guide to Entrepreneurship in Eastern Kentucky. We outline the work you need to put in to prepare to apply for funding with a group like Keyhorse Capital.
If you’ve read through this Q&A and believe your business might be a good fit for an investment round with Keyhorse Capital, reach out to SOAR today.