OUTLOOK SERIES PART 2: An assessment of 2019 and beyond

(EDITOR’S NOTE: Thanks to the participation of Angel and Venture Capitalists located in East Tennessee, we are able to annually offer their insights on the past year’s activities and their outlook for 2019. This is the second article in this year’s series.)

Today’s question that we posed was as follows: “What is your outlook for 2019 and possibly 2020? What concerns you in terms on the economy and other issues that could impact the availability of investment capital for start-ups in general and those in your portfolio particularly?”

Tony Lettich, Managing Director, The Angel Roundtable: It is our perspective that the economy is strong, and we are optimistic about the economy in general and the potential availability of investment capital for start-ups in the short-term. However, we are very cautious as we look to the latter months in 2019 and into 2020. Our primary concern lies with the potential impacts on the economy related to higher interest rates and the impact of future federal government debt service cost.

Kristina Montague, Managing Partner, The JumpFund: We are seeing some companies hit heavily by the trade tariffs and uncertainty with global trading partners, especially those that manufacture overseas. Investors are also a bit more conservative with the prospect of another recession on the horizon. Fintech start-ups that are disrupting financial institutions and providing alternative lending vehicles could see advantages in a downturn when banks are less likely to be a resource for capital.

John Morris, Fund Manager, The Lighthouse Fund: We plan on adding two to three more deals to our portfolio over the year. While the economy remains strong, the adjustment of the trade imbalance could impact investment capital. The recent legislation defining Opportunity Zones will open-up significantly more capital, but those investments will be restricted to defined geographical areas. How funds organize around that and how companies respond will be interesting to watch.

Grady Vanderhoofven, President and Chief Executive Officer, Three Roots Capital: If Opportunity Zones and Opportunity Funds really get traction – and it’s not entirely clear to me right now that they will – I think we could see a lot of investment activity in 2019.  I believe the vast majority of cash flows into O-Zones and O-Funds will be related to real estate investment activity, but I do believe some of it will be supportive of operating companies, including start-ups and other young companies. Uncertainty in the economy and in the public market could negatively affect the availability of private capital in 2019 and 2020.

Courtney Watson, Partner, Chattanooga Renaissance Fund: In thinking about the availability of capital and what lies ahead from a regional perspective, we hear there is more of a scarcity of truly early stage/seed capital. We do see better availability of regional capital for those companies beyond product-market fit and delivering on strong business metrics, particularly at the Series A stage. Getting local and regional companies to a Series A position of attractiveness is requiring more time and resources; therefore, making the on-going need for seed and bridge capital important for building a healthy on-ramp. Companies that are stronger at managing their burn, creating realistic plans and projections, preparing for longer fundraising cycles, and bolstering their financial strength and flexibility with non-dilutive funding will be better situated to weather tighter capital markets and other volatile conditions.

Ken Woody, President, Innova Memphis: Many of our agtech companies are facing challenges in “Farm Country” due to the trade wars. Soybeans are hard to move, revenue is down, and workers are harder to attract. For non-ag companies, many are facing challenges obtaining raw and finished materials. Quality products continue to prevail but even though the overall economy is up, early stage sales are very difficult. Investors are most cautious with blindly investing into a start-up when their portfolios have just taken a hit in the stock market, too.

Eric Dobson, Chief Executive Officer, Angel Capital Group:

  • Angel investing is largely decoupled from the macro markets, which is good. Wealthy people generally remain wealthy during downturns and do well in upswings. When the market is up, angel investing is generally up. When the market is down, angel investing dips, but rarely drops significantly. Even the 2008 credit contraction barely impacted the market, and primarily because of the regulatory changes. Despite the economic panic, the angel market was one of the strongest asset classes in the 2010 – 2012 period, demonstrating its resiliency and disaggregation from the macro markets. Smart investments in great companies can thrive in all but the worst market conditions.
  • We have been on a big run for the last 18 months. It’s hard to see that continuing. We are seeing signs the Federal Reserve is trying to cool the run and stave off inflation. In my experience, I see the private equity market continuing as is or even growing as money tends to flow into alternative assets, like angel investing, when the big markets get spooked. If I am correct, then a healthy deal flow, combined with continued money flowing into the system, should create a fertile 2019 for angel investing. The 2020 year is too far out right now, but some of the pundits are predicting we will have a hard landing within the next few years (continuing to spook the macro market). A major downturn will certainly impact the angel investing market, but our most recent experiences say, “not catastrophically.” Let’s hope that continues!
  • I am concerned about a trade war with China exacerbating the concerns of the big picture domestic economic outlook. I am concerned with a lack of consistent policy and leadership in key positions at the highest levels of our government. Uncertainty, especially in middle-class consumer confidence, is the crux in my humble opinion.

 

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