How Kansas Plans to Boost Its Startup Environment

(TNS) — Some might consider Ottawa native  Nick Franano  a serial entrepreneur — a term used to describe those who repeatedly involve themselves in entrepreneurial endeavors.

Franano, a former physician, serves as founder and CEO of Artio Medical, a Prairie Village-based startup that develops innovative medical devices to meet the needs of patients with cardiovascular problems and other clinical issues.

"We started a new company without a clear idea of what we were going to develop," Franano said of Artio. "But I have lots of ideas, and I have lots of physician and engineer friends who have lots of ideas."

Franano co-founded the startup in 2014, after handing off his previous success story — biotechnology company Proteon Therapeutics, which was founded in 2006 because of a drug he created while doing research at Johns Hopkins University.

Though Artio Medical has also found success, Franano recognizes the company wouldn't exist without investment from outsiders who decided to give the business a shot.

"The first investment was from the founders to show that we're committed," he said. "And then we raised money from angel investors and subsequently venture capital firms. That's usually how it goes."

When Franano considers the startup scene in Kansas, one program in particular has been his company's saving grace: the Kansas Angel Investor Tax Credit program administered by the Kansas Department of Commerce.

"There are a few really well-connected entrepreneurs who have an idea and go straight to venture capital or private equity. It happens," he said. "But the vast majority of people start with angel investors. It's a critical part of the funding ecosystem."

Someone who is keenly aware of that funding ecosystem is state Rep.  Stephen Owens .

Entrepreneurship isn't a second-hand issue for the Hesston Republican, who has been involved in business ventures ranging from mobile app development to real estate. In fact, he still keeps a running list of potential business ideas on his phone.

Owens is also the type of person Kansas lawmakers are trying to keep around. Originally from Oklahoma, he met his wife while attending Bethel College in North Newton. Upon graduating, he opted to try his luck at business in the Sunflower State.

Owens pointed to his own backyard as an example of the entrepreneurial chops that Kansans possess, noting there are a range of manufacturing and agricultural companies that started out at kitchen tables in Harvey County and continue to employ scores of Kansas residents to this day.

"These are the success stories," Owens said. "(Kansans) need to believe that dream is still alive and that they can see a path to realizing their own hopes and their own dreams in their own entrepreneurial endeavors.

"But some of these people don't know how to start or where to start."

Guardian angels: Advocates push tax credit boost

One policy item that has been touted by lawmakers and startup founders alike as a way to help entrepreneurs get their business ideas off the ground in Kansas, and keep them here, is the tax credit program lauded by Franano.

The program encourages so-called angel investors to pump much-needed cash into budding businesses.

These angels don't blow trumpets or don halos but rather are responsible for providing funding to startup companies, often choosing to back a large number of ventures in the hopes that one or two will make it big.

In order to incentivize this somewhat risky investment, the state created the Kansas Angel Investor Tax Credit to encourage these investors to back young companies. To qualify for investment, a company must be based in Kansas, remain in the state for 10 years and can't be bringing in more than $5 million a year in revenue.

This type of credit is especially vital in a place like Kansas, where access to capital can be a barrier for entrepreneurs, said  Melissa Roberts , a senior program officer for the Kauffman Foundation whose work focuses on supporting small businesses in the plains region.

"It is something that is cited as a barrier by a higher percentage of entrepreneurs here locally," Roberts said. "I think what it all adds up to is a situation where entrepreneurs are struggling to access resources ... but also that is having an ultimate impact on some of the larger numbers that indicate the economic health in the region."

Though the program has proven useful, it isn't functioning perfectly, according to a report issued last year by the Legislature's auditing department.

The audit indicates businesses receiving a tax credit are slightly less likely to remain operational than their counterparts and also created fewer jobs, on average, than those that didn't participate.

The report also noted the Kansas Department of Commerce didn't punish several businesses that left the state before their 10-year minimum was up, prompting calls for tougher enforcement to "claw back" the tax credit if program rules are broken.

Owens, who has introduced legislation to reauthorize the tax credit, said more specific data collection is needed to see how the program is working and where it could be strengthened.

But, he added, the simple fact is that not all startups, including those using the tax credit, succeed. If the program didn't exist, the state would be even worse off in its attempts to encourage entrepreneurship, he argued.

"Chances are we wouldn't even have these other businesses if it wasn't for the angel tax credit because we're not the only state in the nation that does this," Owens said.

In a competitive market, Kansas searches for policy edge

Franano, co-founder of Artio Medical, is familiar with the national startup arena.

Being based in the greater Kansas City area, he has kept up with how startups are faring on both the Kansas and Missouri sides.

"And then now that I've done multiple venture-capital backed companies," he said, "I've had a chance to see that (startup) environment in other states like California and Massachusetts."

Franano said that when he first became interested in entrepreneurship in the mid-2000s, "90% of the impactful and important startups" were on the Kansas side of Kansas City, because the state had a greater number of resources for entrepreneurs than Missouri did.

He pointed to the Kansas Technology Enterprise Corporation, passage of the Kansas Economic Growth Act in 2004, creation of the Kansas Bioscience Authority and the state's funding of the Pipeline Entrepreneurial Fellowship program as key supports for the Kansas entrepreneurs.

But things have changed since, he said, indicating several policies under the administration of Gov.  Sam Brownback  stripped the state of its entrepreneurial edge.

"We've been through a period now where Kansas has had different priorities," Franano said.

Under Brownback, the Kansas Technology Enterprise Corporation was dismantled, funding for the Pipeline fellowship program ended and the state sold its investment portfolio created by the Kansas Bioscience Authority.

"I feel that the Kansas Angel Investor Tax Credit is the best of all of those programs," Franano said. "But that's really the last thing in Kansas for entrepreneurs and startups. If that were to go away, there really wouldn't be any particular programmatic support from Kansas for entrepreneurs."

Steve Radley , president and CEO of NetWork Kansas, an organization focused on the growth of entrepreneurship and small business throughout the state, said that with the COVID-19 pandemic, startups are also likely to need a longer trail of capital for the foreseeable future in order to get started.

"First of all, we've got to get to the end of this (pandemic) quickly," Radley said. "The other piece to that is for startups you probably need a longer runway of capital when you're starting than in the past, until this pandemic is over."

He argued the latest amendments to the angel investor tax credit are one attempt to increase that runway. And he noted new sources of revenue are also coming from the community level, as organizations such as community foundations look to provide support to entrepreneurs in their areas.

According to data from the Kauffman Foundation — a Kansas City, Mo.-based group that researches and supports entrepreneurship both regionally and nationally — startups in Kansas are more likely to go out of business within a year than in almost any other state.

Jason Wiens , policy director for entrepreneurship at the foundation, said lawmakers can often become too focused on one program, such as the angel investor tax credit, and neglect to direct resources to other areas.

He indicated more needs to be done on items ranging from creating more accommodating regulations to investing more heavily in child and health care, so that those who aren't independently wealthy can get in on the startup action.

"There can be a temptation," Wiens said, "to say, 'Hey, we did our thing for entrepreneurs, we started this program, we have this new policy in place and we can move onto another issue.' "

But creating a thriving, and lasting, entrepreneurial ecosystem in the state is going to take more effort.

Another part of that is ensuring Kansans are aware that entrepreneurship is even an option, which Owens believes should start as early as high school. That could mean changing curriculum in career and technical training programs or providing mentorship opportunities for young people interested in building their own enterprise.

"We've got to let kids know that you can be successful and start your own business," Owens said. "That you don't have to fall into the standard 'go to college, get a job, work hard and hopefully you get retirement' kind of mentality.

"You can work hard. You can build your own business. You can create your own products. ... We need to help them understand that it really isn't as complex as what they believe it is or it is portrayed to be."

Franano argued it is important to get to the point where every generation is involved in seeding the next generation of successful entrepreneurs. And he noted Kansas has a couple of advantages in that area — production costs and cost of living.

"It's becoming so expensive to run businesses in California now," he said. "I think it'd be very difficult and expensive to do our commercial manufacturing in California, so we're looking to bring it back here to Kansas where it's a lot less expensive to do that."

Ensuring rural Kansas can cash in

Another issue facing policymakers is ensuring rural Kansans can embrace their entrepreneurial spirit, which Roberts says is abundant.

"Innovation can happen anywhere, and great intellectual property can look like something developed in a lab at Wichita State or K-State," she said. "Or it can look like someone who has been working in a feedlot for 20 years and comes up with a new latch for a gate."

Most of the formal infrastructure, however, for getting a startup off the ground is likely to be found in places like Kansas City or Wichita. Networking events, organizations designed to support startups and venture capital are all more prevalent in the state's urban core.

"It is easier to start in the urban areas because of the resources around you," Owens said.

Radley, with NetWork Kansas, said connectivity is key for startups, which is one reason the nonprofit he leads is attempting to grow its network of "E-Communities" throughout the state.

According to the organization's website, an E-Community is a county or municipality that has made a commitment to promoting a local entrepreneurial ecosystem "by identifying and developing resources to help local entrepreneurs start or grow businesses." There are now 66 E-Communities in Kansas, up from just six in 2007.

"Community development and economic development go hand in hand," Radley said. "If you're an entrepreneur, you want to be able to have all the amenities no matter what community you live in."

Many Kansas counties, though, haven't yet tapped into that E-Community network.

The economic fortunes of Pittsburg and Crawford County, for example, have been up and down in recent years. And downtown Pittsburg has been in a "certain level of decline," said  Shawn Naccarato , chief strategy officer for Pittsburg State's University Strategic Initiatives.

But Block22 — the result of a partnership between Pittsburg State, the city and a Springfield, Mo., development firm — is aiming to change that.

Block22 is a mixed-use development that includes everything from a coffee shop to student housing. But most notable from an entrepreneurial angle is the development's business incubator, which provides training and support for startups, as well as co-working space where individuals can meet to collaborate or brainstorm ideas.

Typically, a resident of southeast Kansas would have to travel to more urban areas to access those types of resources. But Naccarato said he wants to develop a "hub and spoke" system, where similar centers for business development can spread throughout the southeast part of the state.

"I think we're hopeful that, by kind of going out on a limb and putting this in a place where it usually doesn't happen, in addition to growing southeast Kansas, we can demonstrate to similar communities across the country that it can be done," Naccarato said.

And the hope is those future partnerships will continue to grow, allowing students and community members to build prototypes of potential products and partner with Pittsburg State University's College of Technology to make those inventions a reality.

As it has for entrepreneurs across the country, COVID-19 has presented challenges to rolling out some elements of Block22. Naccarato said the co-working space was supposed to launch in spring of 2020 but was delayed because of the pandemic, and other elements of the development have been used in ways that are different from what was initially intended.

Still, the pandemic has pushed some Americans to open their own businesses out of necessity, experts say. Others have seen new niches crop up in the technology and health care spaces, spurred on by venture capital that is flowing as freely as ever to support those innovative ideas.

And with remote work becoming a new normal, there is chatter that people might be leaving Silicon Valley once and for all — perhaps choosing to settle down in such places as Pittsburg.

"There is a deep commitment to reversing the trend of exporting all of our talent," Naccarato said, "basically leaning into the idea that Pittsburg and southeast Kansas are a valuable component of the American fabric."

(c)2021 The Topeka Capital-Journal, Kan. Distributed by Tribune Content Agency, LLC.