PART 1: An assessment of the angel/venture market in 2014

Dollar Sign(EDITOR’S NOTE: For the third year in a row, we asked angel and venture investors who live in East Tennessee to share their thoughts on 2014 and their predictions for 2015. This year, our prognosticators include one new face from Chattanooga – Kristina Montague of The JumpFund. They join stalwarts David Belitz of the Chattanooga Renaissance Fund, Eric Dobson of The Angel Capital Group, Tony Lettich of The Angel Roundtable, Geoff Robson of The Lighthouse Fund, Grady Vanderhoofven of Meritus Ventures and the Southern Appalachian Fund, and Ken Woody of Innova Memphis. Today begins the first article in a six-part series.)

TODAY’S QUESTION: How would you describe the angel and/or venture market nationally, in Tennessee and in this region in 2014?

David Belitz, Managing Partner, Chattanooga Renaissance Fund:

I believe the market remains strong overall. I do believe on the national level we are seeing some very high valuations and potentially the formation of a bubble again. Bill Gurley’s thoughts on burn rate pretty much sum it up for me.

I believe the market in Tennessee generally and in East Tennessee specifically remains strong as well. Due to the historic lack of capital in the southeast, as compared to the west coast, I do not think as many of the start-ups in our region have excessively high burn rates. Start-ups in our region have been forced to be better stewards of capital and thus more conscious of their burn rates.

Eric Dobson, Chief Executive Officer, Angel Capital Group:

Sweeping changes are coming in the national angel market. The advent of crowdfunding is creating a glut of online platforms. The challenges they face: (1) diligence, (2) majority of accredited angels are not engaging with these portals, and (3) lack of a unified portfolio approach at the investor level. Angel groups continue to proliferate and seem to be growing. In Tennessee, we are seeing the TNInvestcos closing additional funds, which bodes very well for the state. Angel groups are being formed around the state, and deals are getting done. Accelerator graduations, demo days, and start-up days are becoming more common place, but there is still a need for additional community education to get more nonparticipating accredited angels into the market. There appears to be a positive outlook for the market for the next two to three years.

Tony Lettich, Managing Director, The Angel Roundtable:

The Angel Roundtable invests in opportunities in Tennessee and throughout the Southeast.  We will also consider compelling syndication opportunities from elsewhere across the country. Our team is seeing increasing market strength across the spectrum. There is increasing interest in entrepreneurialism overall as exhibited by recent proliferation of hit television reality shows such as the “Shark Tank,” “The Profit,” and “Hungry Investor.” In addition, state governments across the country, from New York to Tennessee, are developing policies to encourage entrepreneurial activity. We believe this increasing interest is driving the market strength.

Kristina Montague, Managing Partner, The JumpFund:

The regional angel network has had a huge increase in the number of both individual and organized investors entering the start-up funding arena. Part of this is definitely spurred by the efforts of Launch Tennessee, which has been an active, organized regional leader connecting entrepreneurs and investors. It is also due to the entrance of “non-traditional” investors, including more women beginning to enter the angel space as well as organized angel groups that have a mission to invest in underserved groups, such as women and minorities. Nationally, new funding platforms, from Portfolia and Plum Alley to Alphaworks and SeedVest (recently partnered with GUST) will increase individual access to deals and provide new alternatives to fundraising for entrepreneurs.

Geoff Robson, President, The Lighthouse Fund:

Nationally strong, same for Tennessee and the East Tennessee region.

Grady Vanderhoofven, Co-Founder and Co-Manager, Meritus Ventures and Southern Appalachian Fund:

Nationally, angel and VC investment activity is near its peak relative to any time in the past five years. Nationally, fundraising activity for VCs is near its peak relative to any time in the past five years. In Tennessee, VC investment activity is lower than it has been in the past few years because of the slowdown of investment activity by TNInvestco funds, but I believe angel investment activity is fairly steady or possibly increased relative to recent historical levels. I do perceive there are relatively more pools of capital, many of them locally or regionally managed, looking for deals in Tennessee now than was the case five to 10 years ago. I also perceive more individual angels are active today than was the case five years ago. With respect to this region, my perception is that there is relatively more investment activity in Nashville and Chattanooga and in Greenville, SC (an area where I invest some time) than in the Knoxville area, but I see Knoxville as more active today than in the recent past. I perceive more entrepreneurial and incubation-type or acceleration-type activities in the Knoxville area than I did 10 years ago. I am also aware of initiatives underway to attract and aggregate more capital in the region.

Ken Woody, President, Innova Memphis:

After several tough years, the national venture/angel market is showing signs of rebound with more investors showing interest in speculative company investing. The Crowdfunding laws have stimulated interest, which overall is good. There are always challenges to newer investors since they may invest without proper due diligence or investment terms to protect both themselves and the companies. In Tennessee we are still going through the change from the TNInvestco days. A number of the former TNInvestcos have raised funds on their own but have changed their focus from early stage investing to later stage, creating even more of a challenge for start-up companies.

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