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January 27, 2021 | Tom Ballard

INVESTOR OUTLOOK PART 4: Availability of angel and venture funding nationally and in the SE and Tennessee

(EDITOR’S NOTE: This is the fourth 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.)

One hopes that 2021 will be a better year with more vaccines available for COVID-19. From an investment perspective, what does your crystal ball portend for the year in terms of availability of angel or venture capital in general, whether first-time or follow-on, for early stage start-ups nationally, across the Southeast, and in Tennessee?

  • Kristina Montague, Managing Partner, The JumpFundFirst time funding will continue to be slow to come around, unless the company is in one of the “hot” sectors, such as delivery services, collaboration and communication tools, or disease-related life sciences. Many investors are choosing follow-on funding or even later stage deals as they look for companies that can weather the rough economic climate that remains ahead with cash reserves and/or strong revenues. While angel groups, according to the Angel Capital Association, say they have not wavered significantly in their appetite for new deals, Founders indicate that deals are slower to close, investors want to see at least six months of cash reserves, and those in COVID-impacted industries remain hardest hit (see ACA 2020 Pandemic Impact Investor Report – PandemicReport120320).
  • Grady Vanderhoofven, Founder, President and Chief Executive Officer, Three Roots Capital. In general, from a macro perspective, if the public markets continue to perform well, and if capital gains tax rates are not increased, relatively more capital will be available across a broad spectrum of stages and phases and geographies. If the public markets flatten out or reverse course, and if taxes on investors are increased, then relatively less capital will be available to invest in companies.
  • Ken Woody, President and Partner, Innova Memphis. Early stage access to capital will remain challenging, particularly in Tennessee. The stock market has been soaring, which leads many investors to just put their money there and expect strong returns rather than seek a more risky alternative investment vehicle. In the Southeast and Tennessee, we don’t have many new VCs launching or opening another fund, and those who are have not been focused on true early stage.
  • David Belitz, Charlie Brock and Courtney Watson, Partners, Chattanooga Renaissance Fund. 2021 in our opinion will be similar to other years. We don’t think there will be any shortage of potential opportunities. If anything, there may be more opportunities as people displaced from work start companies. We will all have to learn how to source ideas, perform due diligence and communicate with companies with less in person contact, at least for the first half of next year. However, at this point, we think most start-ups and most investors have figured out ways to address these issues. Across the country, there has been a decided move the last several years toward later stage, larger investment rounds, to the detriment of earlier stage opportunities. The plethora of accelerator programs and new early stage funds in the 2010-2015 time frame brought many new investors into the game. While this was a boon to burgeoning start up communities and entrepreneurs, over the past decade the harvest time for exits has been extended. Thus, the patience of many investors who were more traditional asset investors but were wooed into the excitement of the start-up world, has worn thin . . .  and the ink in their check-writing pens dried up. Thus, it will be difficult to re-energize the early stage funding base in many communities until there are more realized, positive cash-generating investments.
  • Eric Dobson, Chief Executive Officer, Sheltowee Angel Network. I participate in a group of angel network leaders across the Southeast. Anecdotally, investing was down across the entire angel industry significantly across the Southeast in 2021. My understanding is even angel fund and venture capital investing was down significantly. Access to capital was even more heavily restricted than usual. We will not know the full extent of the drop until March or April of 2021 when the numbers are tallied and reported on the industry. The good news is the big market is back up and breaking new records. With the anticipated recovery from the pandemic, I would expect start-up capital to be available at levels in excess of 2019, possibly significantly so. We have several strong investment opportunities that emerged at the end of 2020 that we expect to close in early 2021 to start the year off right.
  • Tony Lettich, Managing Director, The Angel Roundtable. Driven primarily by the COVID-19 pandemic, funding availability has tightened from 2019. While we are optimistic about the vaccines, significant uncertainty remains concerning them. How quickly can they be distributed? How effective will they be when widely distributed? How much of the population will be receptive to inoculation? Will the vaccines simply protect the recipient or will they limit transmission as well? Each of these questions remains unanswered and when uncertainty in the political environment is added, we expect the access to capital to remain comparatively tight in the short-term.

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