Part #8: As you look at 2018, what do you see as the greatest knowns or unknowns that could positively or negatively impact the availability of capital for start-ups, particularly those in Tennessee?
- Jack Studer, General Partner, and Courtney Watson, Partner, Chattanooga Renaissance Fund: Exits. Plain and simple, as we come up on the 10th anniversary of TNInvestco, and if we aren’t starting to see enough exits to entice investors to put more capital into early stage vehicles, the whole ecosystem could collapse. Start-up investing is, among many other things, a game of momentum. And if that momentum stops, it can cause the funding to dry up. Exits (like profits) will cure all. But it requires focus, dedication, and both entrepreneurs and investors that are willing to push through the seven year itch and drive these start-ups across the goal line.
- Eric Dobson, Chief Executive Officer, Angel Capital Group: 2018 will either be a strong year of economic growth or a complete debacle. Although, not directly correlated to early stage private equity investing, the stock market continues to rise. Reportedly wages are expected to rise. And, that should lead to economic stability and consumer confidence in the middle class. If that occurs, more money will flow into angel investing in my humble opinion. Conversely, if there is general lack of consumer confidence, private equity investors tend to pull back in my experience. I think the current tax bill missed a massive opportunity to drive start-up growth across the country. The greatest impact the bill could have made would have been to expand qualified early stage investor tax incentives. But, that did not happen. As is, the Series A crunch is not expected to abate and if anything will get worse in 2018. That means angels will continue to support companies through multiple rounds, which will likely have the effect of limiting the number of new companies in which they invest. I also believe we are seeing a new move towards venture-based debt in the market. Simply put, investors are looking for ways to hold entrepreneurs more accountable.
- Tony Lettich, Managing Director, The Angel Roundtable: Entrepreneurship has been seeded in Tennessee, and the foundations continue to be established for an outstanding base from which start-ups are able to grow. However, entrepreneurship is robust in other areas of the country as well. Can Tennessee continue to grow at speeds which define it as one of the states leading this national start-up trajectory? We believe it has and will continue based on the momentum established. However, only time will tell if this reality can be maintained.
- Kristina Montague, Managing Partner, The JumpFund: Until some of the more active angel groups see more exits, the amount of early stage capital may be less in 2018 across the state and region. Good news is that several new funds and networks are continuing to form, particularly around women and minority-led ventures or with new, previously untapped angel investors that might continue to provide a steady flow of resources for seed capital. There is also some concern nationally that “unicorn investors,” who have realized big wins recently, are still sitting on the sidelines and have not re-engaged their capital in new ventures.
- John Morris, Fund Manager, The Lighthouse Fund: I see the recent tax reforms being a good thing for investment. The corporate tax rate is down, and there will be more dollars available that has been locked up or overseas. Putting that money back to work in the U.S., while not directly used for investment in SMBs (small and medium-size businesses), will have a positive effect.
- Grady Vanderhoofven, President and Chief Executive Officer, Three Roots Capital, and Managing Partner, Meritus Capital Management: I see several macroeconomic factors potentially in transition, any of which could affect the availability of capital nationally and in Tennessee, although I don’t know that the impacts would/will be felt immediately in 2018. One of those factors is the interest rate environment, and another factor is the performance of the stock market. Both of those factors affect capital allocation. A significant and sustained dip in the public stock market, and an increasing interest rate environment could negatively impact the supply of capital for venture-type investments. I am not an economist, but I do understand that a scenario involving high values in the public stock markets and low interest rates creates relatively more availability of capital for VC-type investing, and the converse is also true. It also remains to be seen what effect tax reform (at the federal level) might have on both the supply of investment capital and the demand for capital.
- Ken Woody, President of Innova Memphis: The economy in the U.S. and globally has been strong over the last year. Will it continue or do we see a correction? Is Cryptocurrency real or a bubble? So many investors are now looking at that as an alternative investment vehicle it could take away some of the funding for start-ups. It could also be a major opportunity for growth if new companies can “sell shovels to gold miners,” e.g., be supportive of the Crypto focus.