From the January 2001 issue of Entrepreneur

For those of us who live in the cities that dwell in the spotlight (think NYC, LA, DC), it's sometimes hard to remember that businesses can exist just fine backstage. In the first of an occasional series, we take a look at one american community getting rave reviews from its entrepreneurs: Lexington, Kentucky. Mr. Ed would have liked this city, and so would Bill Gates. There aren't many places you can say that about.

To the uninformed entrepreneur, it's easy to see why one might pass up the chance to put down business roots here. As stereotypes go, Lexington should have more in common with the Dukes of Hazzard than the Duke of Edinburgh. But actually, Kentucky's second-largest city isn't just metropolitan; it's cosmopolitan, with universities and colleges, an opera house, theaters, nightclubs, coffee-houses and quaint book nooks to go with the Barnes & Nobles. Education is the biggest employer in the city, but it's still horses that Lexington is best known for.

In fact, the equine industry pumps "hundreds of millions of dollars into the community," according to Adam Edelen, vice president of the Greater Lexington Chamber of Commerce. Lexington is the thoroughbred horse capitol of the world. Downtown, the city courthouse has statues of not soldiers but stallions. This is where the Sultan of Dubai shops to fill his foreign stables. Queen Elizabeth has visited Lexington and has boarded horses here, and William Shatner owns a horse farm in nearby Woodford County. Equestrian or no, entrepreneurs could feel comfortable here. And judging from what several of them have to say, they do. That comfort goes beyond just the mere ability to make a living. "If you want to talk about the economy, you have to talk about the quality of life," insists Edelen. "It's what lures people here. You don't live in Lexington so you can take a direct flight to London or Milan. You live in Lexington because it's one of the greatest places in the country-in the world. It's one of the rare places, except maybe for [Northern California's] Napa Valley, where we really use the quality of life and natural beauty as an economic development tool."


Geoff Williams lives in Cincinnati, where he frequently writes for Entrepreneur. He has a vivid memory of his mother dragging him and his younger brother to a Lexington horse farm to watch Queen Elizabeth wave to an excited crowd as her limousine left the grounds. It was a three-hour round trip for a three-second glimpse.

Some Problems, Some Solutions

Lexington is indeed beautiful. It's a big city with a small-town feel, from its tree-lined Main Street to the fountains at Thoroughbred Park and Triangle Park. Few buildings here could be considered tall, so you're always aware of the sky above; there's no concrete jungle feeling here. And just blocks out of downtown are neighborhoods of stately 19th-century brick houses with sprawling lawns. Even in the midst of all the fast-food joints and strip malls, there are parks and pieces of green space, and throughout the city, you see numerous trees of beech and buckeye, poplar and pine. As cities go, it's beautiful all right, but, of course, that doesn't mean it's a utopia for all entrepreneurs.

"Unfortunately, Kentucky's economic policy is still [geared] toward recruiting manufacturing and chicken-plucking firms, and cutting ribbons. There's too much emphasis on that, instead of [nourishing] young, growing companies," says Janet Holloway, a business consultant in Lexington and former director of the Small Business Development Center and the Center for Entre-preneurship at the University of Kentucky.

Despite the lack of support, more and more young companies are forming in Lexington, according to Holloway. "They seem to almost be like genies out of the bottle; they burst into reality and grow themselves," she says.

The local government isn't completely falling short, however. It's helping fund Lexington United, a nonprofit group recently created to assist both monolithic corporations and scrappy entrepreneurs with problems such as finding venture capital and decent office space. Meanwhile, the private sector provides valuable resources for entrepreneurs, including the Center for Entrepreneurship at the University of Kentucky and the Kentucky Science and Technology Corp.'s newly formed Science and Technology Center, which encourages the use of technology and science in the economy.

But make no mistake: Lexington's nurturing persona is still in its infancy stage, says Lexington United president Terry Burkhart.

"One thing that puts us at a disadvantage is that Lexington is not like a Portland [Oregon] or Cleveland," says Edelen. "Those cities have made the transition from manufacturing-based economies to high-end, high-tech, new-economy-type communities. Lexington's a bit different because historically we were never a large manufacturing town. Lexington has always been an agricultural town. It has the world's largest burley tobacco market. We have the equine economy, and there are a lot of service jobs here. But we didn't have manufacturing."

That factor, combined with the local government's resistance to urban sprawl, has created strong demand for space in Lexington. As a recent issue of Midwest Real Estate observed, it's tough to get projects approved for new building here. As a result, the downtown corridor is being dusted off. Edelen points to a high-tech incubator setting up shop in an abandoned Woolworth's building and adds that local dotcoms are being encouraged to locate downtown.

Perhaps an even more daunting challenge than finding space for your business is finding investors who can help it grow. "There isn't a significant number of formal venture or equity capital firms in Lexington," admits Laura Tanno Boison, market manager at Bank One in Lexington. On the plus side, she adds, "The angel network in Lexington rivals only the angels in heaven. There are active angels who have made significant contributions in capital and management expertise to entrepreneurs. And Lexington United is working to get a major equity fund started."

The state of Kentucky has also taken steps to attract investors' attention. "About two years ago, we adopted a plan that West Virginia authored," Tanno Boison says. "It's a tax-incentive plan that gives a 40 percent state tax credit to those investing in venture funds that invest in Kentucky-based companies." Tanno Boison can tell success stories of Lexington entrepreneurs who had nothing and now have something. She cites Central Kentucky Research, a 3-year-old firm that provides clinical testing for major pharmaceutical companies. It was started "by two female nurses who wanted more in their lives," says Tanno Boison. "They had no money, no [experience] running a business, no good-old-boy network. They were turned down by banks but finally received traditional financing from Bank One. Now they don't need bank loans; business is that good."

Tanno Boison also tells the story of Junior Johnson, a former college basketball player turned entrepreneur, who owns PurchasePro, a B2B Internet firm. PurchasePro received financing from a number of angel investors, says Tanno Boison, which helped the company go public. Now Johnson is worth about $500 million.

The Job Market

If you live anywhere else, Lexington, Kentucky, might seem far off the map. That perception can be a problem in attracting bodies and minds to an employee-starved company. And it is just a perception: Lexington is a day's drive from 70 percent of the continental United States. And a number of Midwestern and Southern cities are within a few hours' drive: Cincinnati; Indianapolis; Knoxville, Tennessee; and Louisville, Kentucky.

Still, Randall Stevens, CEO of ArchVision, a company that builds software and constructs computer models of buildings, is a little worried. ArchVision cleared just less than $1 million in 2000 sales; by the end of this year, it could be much more-if Stevens can hire the team he wants. "It's been fine while we've been hiring [one or two people at a time], but if you kick into gear and start adding 30, 40, 50 people in a year, then you've got a real challenge," says Stevens, 33.

First, there's the hackneyed image strangers have of the area: "They know of Kentucky Fried Chicken," chuckles Stevens, "and whatever stereotypes they've gotten from television, and that's about it. But once they see that we actually do wear shoes, and that Lexington is a 'normal' place, I don't think it'll be a huge challenge to get out of those stereotypes."

"Our labor market is probably just as tight as, if not tighter than, the rest of the country," confirms Edelen. "We have between 300,000 and 350,000 people in Lexington, and unemployment is less than 2 percent. This causes some problems. But the bonus is that you have 11 institutions of higher education within the region. We're gradu-ating something like 9,000 degree-holding graduates per year. About one-third of our population has college degrees, which is amazing. We're able to leverage that kind of brain power into supporting the knowledge-based new economy. We have a strong work force. We're trying to strengthen it even more, and we're producing a large number of people who are ready to take jobs driven by mental capital."

While Lexington may have a tight labor market, Stevens bets he'd be worse off in a bigger city. "The sword cuts both ways in talent pools," he says. "When you're in an area with lots of talent, then you're fighting for the same talent, and you stand the chance of other companies luring your talent away. Here, we don't have that kind of competition for employees."

Opportunities In Lexington

If you can get employees to Lexington for an interview, you've probably got them hooked. "I think we have a lot of the big-city attributes without the big-city problems," raves George Freeman, 40, an entrepreneur in nearby Winchester and the fourth-generation co-owner (with brother Reid, 41) of The Freeman Corporation, a company that manufactures veneer for paneling, flooring and furniture. Freeman has watched his family's almost century-old firm evolve with the Internet. The company not only imports and exports veneer worldwide (only from logs harvested from a third-party-accredited managed forest), but also owns veneernet.com, an online marketplace for veneer manufacturers, and timbersource.com, an online timber listing and notification site.

The Lexington area has been good to The Freeman Corporation. "We don't have pollution, we don't have traffic, and we don't have much of a crime problem," says Freeman. "Yet we have wonderful restaurants, we've got a lot of talented people through the universities, we have the arts, and we have college athletics. It's a vibrant community, yet it still keeps a little of the small-town charm.

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"Even though Lexington is a little off the beaten track in technology and some other things, it's a wonderful city with a whole lot to offer, and it's enabled us to attract high-caliber employees and retain them," says Freeman. "We've never had an employee who wanted to leave the central Kentucky area."

Tim Campbell, 37, and Rick Ford, 48, tend to agree. In mid-1999, they launched iHigh.com, a network connecting sports and other school-sponsored activities at high schools in 33 states and counting. Campbell and Ford lived in Lexington before starting their company and considered moving elsewhere, but no other city seemed to make sense. COO Campbell says: "The 411 on Lexington is that it's a small city, and there's a good technological base here and a good pool of people to draw from. It doesn't have quite the feeling that San Francisco or Boston might have, but the upside is, the turnover is much lower because people want to live here because the quality of life is so good."

Adds CEO Ford: "We've got the Reds, the Bengals, all the sports activities taking place in Cincinnati and Louisville." Not to mention the Wildcats, the University of Kentucky's wildly popular basketball team.

Lexington has many commodities-the green grass, the trees and the horses that gallop underneath the big, blue sky-but it hasn't overlooked its entrepreneurs.