2018 OUTLOOK PART 1: Positioning of angel vs. venture capital
For the past four years, we have asked Angel and Venture Capitalists in East Tennessee to share their thoughts about the past year and their thoughts on the year ahead. Our nine-part series begins today, and we thank our participants for their willingness to be involved.
Part #1: One of the questions that was addressed in our 2017 series dealt with the evolving positioning of angel versus venture (i.e., later in a start-up’s evolution). Has that trend continued in the past 12 months and what do you portend for 2018?
- Jack Studer, General Partner, and Courtney Watson, Partner, Chattanooga Renaissance Fund (CRF): Venture continues to be a moving target in the Southeast. Being an entrepreneur in the South has always been a different journey than in one of the coastal cities and that trend continues. However, the investor community realizes this situation, and there is activity in almost every major city to address both the lack of organized early stage (seed and angel) as well as understanding how to position portfolio companies for growth stage ($5 million plus rounds). At CRF, we spend almost every partners’ meeting discussing how best to support our portfolio companies, and fundraising is always near the top of the list.
- Eric Dobson, Chief Executive Officer, Angel Capital Group: If anything, it has gotten worse. Tennessee is blessed with some early stage venture capital (VC), but the rest of the industry is almost devoid of it. We are seeing more and more private equity firms joining the fray. They are cherry picking deals in the gap between traditional angel and new VC sweet-spots.
- Tony Lettich, Managing Director, The Angel Roundtable: The referenced trend appears to be continuing. The Angel Roundtable is encountering growing numbers of companies which have received significant friends and family, pre-seed and bridge financing. There also appears to be increasing levels of investment by angel groups in the earlier rounds. However, venture capital appears to be migrating toward the later stages. As such the gap between the two continues.
- Kristina Montague, Managing Partner, The JumpFund: The national conversation is that angel money is not flowing as freely as early stage investors are waiting on returns before they re-invest. That said, many new funds and investor groups focused on diversity (both gender and race) are launching and bringing new sources of capital into the ecosystem. As of 2016, women now make up 25 percent of all angel investors in the U.S. And funds like Backstage Capital and Atlanta’s Black Tech Fund are harnessing new dollars for historically underfunded minority entrepreneurs. We could potentially finally see a significant shift in capital flowing to early stage ventures led by women and minorities in 2018, though upstream capital from VCs is still not as available for these demographics. This was a hot topic at the ACA’s (Angel Capital Association) “Women Investors Forum” in Boston where many of the female-focused angel groups were challenged that we are setting companies up for failure if we cannot help them secure the next stage growth capital. Same issue in the Southeast, and one we continue to need to address across the board.
- John Morris, Fund Manager, The Lighthouse Fund: I don’t see the trend changing. Until more venture capital is focused on the state, it will continue in 2018.
- Grady Vanderhoofven, President and Chief Executive Officer, Three Roots Capital, and Managing Partner, Meritus Capital Management: I have observed an increasing level of angel investor activity over the course of the past 12 to 24 months, and I see that trend continuing in 2018. When I use the term “angel investor,” I am including individual angels, groups of angels, and even funds capitalized by angels. I don’t see angels displacing VCs, but I do believe angel investors are more often a source of capital for young and small companies than was the case a decade ago.
- Ken Woody, President of Innova Memphis: PitchBook and other investment monitoring services shared a recent study showing that early-stage investments have dropped dramatically nationally over the last three to four years. I think that is accurate but a bit misleading. I would suggest venture capital investing in early stage has decreased while angel investing in early stage has increased. I would also premise that traditional venture capital style of investing, e.g., straight equity or even convertible notes, has decreased in favor of SAFE agreements and others like that. In Tennessee we continue to see an increase in angel investing in true early-stage deals.