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January 28, 2021 | Tom Ballard

INVESTOR OUTLOOK PART 5: Availability of follow-on capital for existing portfolio companies

(EDITOR’S NOTE: This is the fifth 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 follow-on investment capital for your existing portfolio companies?

  • 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. We prioritized capital investment first on existing portfolio companies that still had strong prospects for growth and success. Most of the Venture Capitalists and Angels we’ve talked to have done the same. There is capital out there for investment, but Founders will need to make a very strong case for a unique business proposition that has a high chance for success. More and more investors want to see others joining a round, rather than going it alone.
  • David Belitz, Charlie Brock and Courtney Watson, Partners, Chattanooga Renaissance Fund. Follow- on capital has been one of our big challenges. It is out there and available, but not always easy to find. Follow-on capital appears to be highly dependent on the success of the company proving the business model. For those companies that are able to prove the model and begin to show exponential sales growth, follow-on capital can be found; for those with slower growth models, it is a challenge. Entrepreneurs and investors are having to cast wide nets to find growth partners, especially if they want to stay in the East Tennessee area.
  • Eric Dobson, Chief Executive Officer, Sheltowee Angel Network. Currently, we are evaluating investments in two portfolio companies and expect that will be a common event in the first half of 2021. Companies that are not organically sustainable and did not raise capital in 2020 will be doing so in the first half of 2021 across the industry. I would expect angel and venture groups to first invest in their portfolio before seeking new investment opportunities. I believe that backlog will go quickly. But I think it is likely that some will use COVID to allow the walking dead in their portfolios to collapse. So, COVID will claim more companies before it is over, but not likely those that would not have died of other causes on their own.
  • Tony Lettich, Managing Director, The Angel Roundtable. We are cautiously optimistic that our portfolio companies will be able to obtain access to follow-on funding if needed in 2021. However, we do have some concerns, especially if the market tightens further. As a result, we are encouraging them to develop contingency plans and to consider various options and opportunities in their financial planning of the short to intermediate term.
  • Kristina Montague, Managing Partner, The JumpFundMost of our companies were able to close bridge rounds or even Series A/B rounds (in early March) from current investors. A few attracted new investors, but mainly with the aid of existing investor relationships. Some raised just enough capital to get by this year and are looking to launch significant raises in Q1/Q2 of 2021.

NOTE: The series will pause for about a week so that we can post single topic articles. The series will resume February 1.

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