Commentary: Kentucky must reverse its ‘startup brain drain’

By Alex Frommeyer

Alex Frommeyer

Alex Frommeyer

When I was a senior at Covington Catholic High School in Northern Kentucky in 2006, I was predictably wading through a mountain of college swag, admissions essays and scholarship applications.

Though I was interested in getting my engineering education at one of the highly ranked out-of-state schools, I visited the University of Louisville and fell in love with the urban vibes, the Speed School’s mandatory co-op program, and five-year master’s of engineering degree. I was sold.

My parents were sold because staying in state to go to a public university meant I could deploy my KEE’s money, a statewide program that rewards good grades with a small semester stipend (up to about $2,000). At the time, U of L was aggressively offering scholarships for high-achieving Kentucky students interested in their engineering program. I ended up accepting the Trustee’s scholarship, which covered my tuition for the extent of my time at U of L.

A few miles away, two other Northern Kentucky high school students were sitting around the kitchen table making similar decisions with their parents. Alex Curry would also become a Trustee’s Scholar, and Dan Dykes would accept a Hallmark Scholarship to get a full ride to Louisville.

In 2006, during our freshman year, the three of us would meet in our classes (deliberately grouping students from the same areas to help socialize us to the Speed School’s rigorous program) and become close friends. By 2010, we founded our first startup together and began a still-unfolding journey toward building an industry-defining company in Beam Dental.

During this time, our attempts at building our own company in a very raw entrepreneurial scene in Louisville were supported by grants and award programs administered by, or funded by, the state of Kentucky or other public organizations. The Kentucky Science and Technology Corporation, various economic development programs, and even the Vogt Awards (overseen by the Community Foundation of Louisville and EnterpriseCorp) all played a major role in stoking a very weak fire that is any early-stage tech startup. It is encouragement, solidarity and precious capital that buy more time to try to build something meaningful and valuable.

Then, the wonderfully Louisville-oriented nature of this journey came abruptly to a halt in August 2014. Beam had managed to raise a small private seed round comprised of local money that allowed the first version of the Beam Brush to launch and begin generating revenue, but it was clear that to expand the product line and have data that could impact the dental insurance field, we would need to raise a Series A VC round. Drive Capital, an Ohio-based $250 million fund, ultimately invested in that round, and Beam moved to Columbus where we now have a team of 23 — and growing.

The “tech companies are leaving” and the “brain drain” storylines are both well documented and somewhat tired, but there is an important and easily overlooked secondary story here: Kentucky got a huge portion of this storyline right.

It lured smart and high-achieving students to stay in the state for college, helped them afford to get master’s degrees in engineering, allowing them to mix together their raw ingredients to spark a new idea and new business. Then, it further supported their entrepreneurial endeavors to retain the business firmly within the walls of the state.

coins-istock-584I estimate that public sources have directly invested north of $300,000 in my co-founders and me to not only become highly educated, but then translate that knowledge immediately, directly and measurably into our own company that, at worst, has been a job creator and PR magnet, but, at best, becomes a billion-dollar corporation with the power to transform a local economy in the span of a decade or less.

But now, all of the value (read: jobs, tax receipts, cyclical investing, spin-off startups, capital attraction, talent development, philanthropy, brand building, etc.) resulting from these investments will be lost to another state.

This isn’t the classic “brain drain” discussion we have been hosting for the past quarter century — this is way worse. This is more than talented young people leaving the state for other opportunities at the big Chicago consulting firm, or a Fortune 500 in highly desirable cities like New York and San Francisco.

This isn’t the guy who gets his MBA in Boston but comes back to Kentucky in his late 30s to start a family.

This is the economic engine, in its purest form, seeded and nurtured with taxpayer dollars, not having the access to additional capital, talent and resources needed to create potentially massive value for the community.

Part of the problem is that the resources existing in Kentucky are not built to scale, and the private dollars that are present are not organized to elegantly identify and invest where the public money chain stops. And as the check sizes grow from the sub-$1 million range to the tens of millions, Kentucky’s ability to retain these companies becomes effectively zero.

To be a successful and dynamic economy in the 21st century, Kentucky must be able to attract real venture capital dollars and the talent and surrounding resources that are necessitated by it. Otherwise, every startup that makes it to that level will be forced to look elsewhere for help growing their businesses.

We have many tools at our disposal, from implementing institutional capital tax credits to encourage more investing or launching a new VC fund that only cuts checks for Kentucky startups, but there will not be a silver bullet solution.

This is hard work.

It is important for our leaders to aggressively court VCs to look at our best companies and help market our startups nationally. Some will still leave (and that’s OK), but some will stay. Imagine if ExactTarget (Indianapolis) had been in Louisville, or Rob May’s Backupify when Datto acquired it.

Until Kentucky can provide the resources needed for growing tech startups, the remarkable accomplishments and progress of the state in reversing the brain drain will be lost.