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January 16, 2014 | Tom Ballard

INVESTMENT OUTLOOK #5: What does Tennessee need in the future?

(EDITOR’S NOTE: This is the fifth article in our six-part investment outlook series.)

We asked the region’s leaders in angel and venture capital for their thoughts about the outlook for investment capital in 2014. In the fifth of a six-part series, we posed the question: “Does Tennessee need a follow-on to the TNInvestco program and, if so, what would you say is most needed? Is there a model from another state that you think is a very successful approach?”

  • David Belitz, Chief Executive Officer (CEO) of The Lupton Company, LLC, and Partner, The Chattanooga Renaissance Fund. I don’t think the political environment would support a new TNInvestco program.  I think the state could do more by improving air access to Tennessee and by providing “incentive” packages that matter to start-ups.  If we want to attract outside capital, we need to make it easier to travel to and from current capital centers like the Valley, New York and Boston to multiple parts of Tennessee.
  • Eric Dobson, CEO, Angel Capital Group. I think the TNInvestco (TNI) program was visionary.  I think it established a new bar for others to emulate.  But, politically, TNI 2.0 is not going to happen.  They concentrated too much of the investible cash in Nashville and in one sector, healthcare/biotech/med device.  There simply are not enough quality deals in that market segment in the state to take up the capital that was invested effectively.  And, those in the industry know it.
  • Scott Ewing, CEO, Venture Incite, Inc. I think SC Launch in South Carolina and the Ohio Capital Fund have been good efforts.  I applauded the creation of the TNInvestco program and would be pleased to see the state continue its commitment as a capital partner in Tennessee-based technology businesses.  There’s a frequently mentioned concern here that while seed- and early-stage funding became available through TNInvestco, there has been no targeted effort to provide growth-stage capital to companies that survive as startups.  I’d echo those concerns, but my own focus is primarily on the earlier stage funding.  I’d like to see a return of a Technology Maturation Fund that was restructured to strictly support commercial development activity, not to fund academic research.  To fund the early “D” effort and not the big “R” in R&D. Too often we see laboratory technology mistakenly billed as a TRL 5 (Technology Readiness Level 5 – a prototype that has been validated in a relevant operational environment).  After due diligence, we discover that the technology’s true state of commercial readiness is perhaps TRL 3 (laboratory proof of concept validation).  It costs a start-up time and precious cash to uncover the true TRL.  If the technology is not “off the shelf” development ready – what I will call “business ready” – at the time of licensing, a start-up is very likely to founder.  Seed grants of $5-10K are too small to accomplish business readiness validation; $300K venture-sized investments are too ambitious for technology that is not already business ready.  I envision a Maturation Fund for for-profit businesses that would help fill a $50-150K gap to transition technology from “R” to “D.”
  • Tony Lettich, Chair and Managing Director, The Angel Roundtable. We believe a follow-on to the TNInvestco program would be helpful, and we would welcome it. The steps that the State of Tennessee has taken to develop the entrepreneurial ecosystem within Tennessee have had a significant positive impact. Continuing these broad-based efforts, including the TNInvestco program or a similar option, will further the strengthening of this ecosystem, which is foundational to additional entrepreneurial growth in our state. Our state has facilitated the development of significant momentum in this area; taking advantage of and furthering the momentum is appropriate.
  • Ken Woody, President, Innova. Company expansion typically requires new capital. With the end of the TNInvestco program, even successful companies need to be developing strong VC or Angel contacts outside of TNInvestco in case they need follow-on funding. Smart companies will establish Lines of Credit early, and conserve funds.
  • Grady Vanderhoofven, Co-Manager, Meritus Ventures and Southern Appalachian Fund. I believe Tennessee does need follow-on to the TNInvestco program, with an expanded focus on a broader segment of the company maturation continuum.  I don’t know if the current political climate will support the creation of an identical, successor program for TNInvestco.  It is possible that a combination or “tool box” of several different initiatives might provide a more comprehensive and sustainable mechanism to encourage support of growing companies in this State.  SCRA in South Carolina has developed an impressive, albeit imperfect, model that includes SCLaunch and other programs focused on companies in South Carolina.

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