By Tom Ballard, Chief Alliance Officer, PYA
A Knoxville-based organization that is probably unknown to most of our readers is looking to have a significant impact on a problem that is pervasive throughout the Appalachian region: access to capital that propels new business formation in one of America’s most impoverished regions.
Formed as a nonprofit institution in 2018, the Appalachian Investors Alliance (AIA) was selected earlier this year by the Appalachian Regional Commission (ARC) as one of 149 grant recipients under ARC’s $120 million POWER (Partnership for Opportunity and Workforce and Economic Revitalization) initiative. POWER projects facilitate economic diversification in the region’s coal-impacted communities.
AIA Executive Director Jim Hart tells us his organization’s latest grant for $577,840 builds on accomplishments by another nonprofit with an earlier POWER award, RAIN Source Capital Inc. Collectively, the two grants have been designed to help bring more people into the angel arena and provide cost-effective back office operations to AIA’s micro venture funds – allowing fund members to retain a maximum amount of capital for entrepreneurial investments.
Improving access to private capital that will support small, local entrepreneurial businesses is clearly a strategic priority for ARC.
“Economic data shows a decline of approximately 34 percent over the past 20 years in the amount of private sector business openings,” Hart notes. “Where growth has occurred, the new businesses have been mainly concentrated in just five large metropolitan areas outside of Appalachia.”
Private capital investment fuels business and job creation. For that reason, both the RAIN and AIA grant projects have involved organizing and supporting angel and micro venture funds in Alabama, Kentucky, Mississippi, New York, North Carolina, Pennsylvania, Tennessee, and West Virginia. During implementation of the grant projects, Hart says the team learned some important lessons:
“Deployment (of capital) in a way that maximizes economic value can be just as difficult as putting together a new fund,” he told us. “Many member-managed organizations need support to efficiently deploy capital and use the most appropriate deal structure for the opportunities they are presented.
Hart said three of the challenges for small funds are: (1) getting the angels involved more directly as mentors and in other meaningful ways while also providing their funds; (2) screening applications efficiently; and (3) completing due diligence on the most promising prospects and closing the investment in a timely manner.
Those conclusions resulted in some changes when AIA applied for a 2019 POWER grant. While the AIA work plan calls for the creation of four new angel funds in ARC region, it also has components that address the key challenges that can occur once a new fund is established and allocates monies to provide support for existing funds created under the earlier grant.
“AIA will provide back office support for funds that need these services,” Hart says. Those will include screening and due diligence.
“Our goal is to help each member fund achieve their goals, thereby creating an impetus for starting larger, follow-on funds that capitalize at a high enough level to afford professional management without public subsidy,” he explains. “This is at the core of our sustainment strategy while supporting our mission to get more private capital working in the region and encouraging capital inflows into the region to build more resilient communities.”
In addition, AIA will provide expanded educational offerings for investors and entrepreneurs and sponsor a referral network of syndication and co-investment partners to increase investment in the ARC region. While ARC is providing base funding, Hart says AIA will need more dollars from other sources to develop and deploy the robust set of educational materials he believes are needed throughout the region.
“I’m excited about what happened in the previous grant,” he said. Over the previous two-year POWER grant period, 18 different companies from seven Appalachian states received $5.57 million in funding from new funds established within the region. Those investments leveraged an additional $52.5 million in additional syndicated funding, resulting in about 180 new jobs.
Under the latest grant, AIA is already off to a fast start. In the first six months of 2019, it screened 104 applications, did a “deeper look” at 38 of them, and its member funds invested $2.1 million in nine companies. Just as impressive, companies in the region that received AIA investments also received $17.6 million in syndicated investment during the same period.
These investments span 10 different industry segments in six different states in the ARC region. Over the two-year period, the goal is to invest in a minimum of 25 businesses, leading to 125 entrepreneurial jobs created.
Hart moved to the Knoxville area 19 years ago when he joined a food services start-up whose primary market was the military. As such, he spent a good deal of time overseas. Hart exited the company in 2014, earned his MBA, and started doing project-based work. That included working directly with regional micro venture funds and serving as a fractional Chief Financial Officer for Angel Capital Group.