INVESTOR OUTLOOK PART 3: Health of start-ups in portfolios at the beginning and end of 2020

(EDITOR’S NOTE: This is the third article in a 10-part series capturing the thoughts of Angel and Venture Capitalists who invest in East Tennessee as they look back on 2020 and ahead as we begin 2021.)

How would you characterize the overall health of the start-ups that are served by your fund as a group at the end of 2020 compared to the beginning of the year? What have been their biggest challenges and how have they been able to address them?

  • Tony Lettich, Managing Director, The Angel Roundtable. The Angel Roundtable has been very fortunate in that our portfolio companies had either just completed financing rounds when COVID-19 hit or were able to secure Paycheck Protection Program (PPP) loans. A couple were able to do both! As a result, in general the financial health of our portfolio, like last year, is good. It should be noted, however, that the pandemic created business opportunities for some of our portfolio companies and reduced them for others. Existing business trajectories were disrupted. The impact of these trajectory disruptions, on both sides of the equation, remains uncertain. Their biggest challenges are the uncertainties related to both the pandemic and the political environments. All are fully aware liquidity for operations is critical and strategy and tactical contingency planning has become increasingly important.
  • Kristina Montague, Managing Partner, The JumpFundA majority of our companies received PPP funding, most in the second round of this funding, and some have been beneficiaries of additional grants and resources, both public and private. We saw many of our companies tighten their belts, reducing headcount or moving to completely remote offices, in order to preserve cash, but to their credit they all have weathered the storm and many are flourishing. Several made early, significant pivots to their business models and some have been able to capitalize on aspects of the pandemic to grow their business, from assisting in data collection for COVID tracking to offering accessible, passive income strategies for those looking to bolster their savings. Some of our companies did suffer from supply chains which came to a standstill for a time or production which had to be curtailed due to safety protocols and stay at home orders. But most bounced back in the summer and have been able to fulfill back orders successfully. The biggest challenge we have seen with not only our portfolio companies, but with most early stage ventures, is that much of the next round financing, especially building new relationships with potential funders, was put on hold or slowed significantly this year. We had one of our busiest second quarters this Spring working with our companies to fund or close bridge rounds when their Series A or B rounds were not consummated due to investors pulling back. Many have pushed their next stage funding rounds to the new year, hoping that investor appetites will have come around by then.
  • Grady Vanderhoofven, Founder, President and Chief Executive Officer, Three Roots Capital. 2020 has been the best year ever for a number of our portfolio companies, at least in terms of revenue, and in some cases in terms of cash flow and net income. I think, for a number of them, the PPP loan program has been an important lifeline. They all had to become adept at maintaining or even increasing productivity with a remote, distributed workforce, and they had to figure out how to serve customers that were dealing with the same issues. Necessity is the mother of invention, and sometimes you don’t know what you are capable of doing until you are forced or required to do it.
  • Ken Woody, President and Partner, Innova Memphis. Overall, our companies are healthier now than before. They had to simplify their operations, focus on what was most critical to their success, and run lean teams. Biggest challenges have been balancing personal family needs with constantly changing customer demands and pushout of decisions as many customers have been overwhelmed and juggling issues of their own. Several companies had to raise bridge rounds to tie them over till expected growth returns.
  • David Belitz, Charlie Brock and Courtney Watson, Partners, Chattanooga Renaissance Fund. The Chattanooga Renaissance Fund has an established portfolio and thus 2020 has provided both opportunity and challenges. Overall, the health of our portfolio remains good. Most of the companies have adapted business models and work arrangements to reflect the new normal of 2020 and pandemics. We would suggest that the biggest challenges our companies faced in 2020 were the same as every other year – how to grow effectively, how to recruit top talent and where to raise capital. The pandemic has not changed those traditional business problems. What it did add was a few new problems and opportunities. (1) Remote work which has the potential to open the pool of talent available to the company and potentially save costs. At the same time, companies had to work hard to learn to on-board employees remotely and teach and maintain culture. (2) Revise sales processes – With the inability to meet in person, companies that rely on direct sales had to reevaluate their sales process. Lack of travel saved budget, but at the same time training and technology had to be implemented to address these new opportunities. (3) Racial justice and diversity were also issues that companies faced this year. The opportunity for those companies that tackled this issue or already had addressed it are broader, more balanced workforces, engaged employees and stronger community involvement.
  • Eric Dobson, Chief Executive Officer, Sheltowee Angel Network. We were incredibly lucky. The majority of our most promising portfolio companies raised capital in the fall of 2019 and Q1 of 2020. So, our portfolio has fared well. I am not aware of any of our portfolio companies going under due to COVID, but survival into the Spring will be the true test.

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