OUTLOOK SERIES PART 1: An assessment of 2018

(EDITOR’S NOTE: Thanks to the participation of Angel and Venture Capitalists located in East Tennessee, we are able to annually offer their insights on the past year’s activities and their outlook for 2019. We genuinely appreciate their willingness to share their thoughts with our readers. This is the first article in this year’s series.)

Today’s question that we posed was as follows: “Looking back over the past 12 months, what stands out in terms of both highs and lows for the investment arena in general, the Southeast in particular, and your portfolio companies overall?”

Eric Dobson, Chief Executive Officer, Angel Capital Group: We saw very few original, investable deals in the first half of 2018. We saw lots of “me-too” technology companies competing on price as a better mousetrap, rather than ground-breaking elements of industry change. That began to flip in the summer of 2018. The end of 2018 has been the opposite. We are seeing several strong opportunities, both in terms of leadership teams and product/service offerings, but they won’t be ready for diligence until early 2019. Over the last 16 months, ACG has invested approximately $2.8 million in 14 companies. Those companies have gone on to raise an additional $59.6 million in equity capital, one of which was a Knoxville company that received $18 million from a strategic investor. That is a 22x leverage.  This tells us a few things. First, we are investing in companies that other, strategic investors believe have real-world applicability and great potential. Second, the market is healthy for start-ups and capital is available for growth companies. Third, investment dollars are returning to IP-based opportunities.

Tony Lettich, Managing Director, The Angel Roundtable: We have observed a significant increase in companies emerging from accelerators as well as in tech-based opportunities focused on machine learning, artificial intelligence (AI) and “big data.” We believe this latter trend is presenting significant new and disruptive investment opportunities. On the downside, the viability of tech opportunities not utilizing AI, and leveraging “big data” and related analytics need to be scrutinized much closer.

Kristina Montague, Managing Partner, The JumpFund: JumpFund closed its second fund in June 2018 and has been making investments to build its second portfolio since January 2017. We have made 10 investments thus far, the majority of which were follow-ons in JumpFund I portfolio companies, and several of those have attracted strategic, next stage investment partners. We have continued to see steady deal flow of strong, women-led companies and an increased interest by other angel investors seeking diverse management teams and female leadership. We have also seen a significant uptick of interest in “impact investing” which has been gaining interest from both the philanthropic sector as well as angel investors. The Angel Capital Association’s (ACA) 2018 annual summit featured a “track” on impact investing, and many of its panelists spoke to double bottom line strategies for investors who can “do well by doing good.” The ACA Summit also focused on the importance of diversity and inclusion within start-up management teams as well as angel investor groups. The Southeast Angel Investor group of the ACA hosted its own gathering in New Orleans, LA this year, led by the NO/LA Angel Network, and we continue to syndicate deals on monthly SE Investor calls which has led to stronger deal flow and co-investment opportunities for many funds and networks.

John Morris, Fund Manager, The Lighthouse Fund: Angel investment continues to play a major role in the gap between seed and Series A. While capital investment for start-ups continues to be concentrated in California and Boston, the Southeast is growing in both organization and funding levels. Sharing deals between angel funds and groups is strong, allowing our portfolio companies to tap into capital from other regions of the country.

Grady Vanderhoofven, President and Chief Executive Officer, Three Roots Capital: The “Federal Tax Cuts and Jobs Act of 2017,” which passed last December, was a high because of the variety of ways it can positively impact the availability of and velocity of investment capital. The volatility of the public markets over the past 12 months is a low because uncertainty in the public markets can negatively affect how much capital is available for private investment. With respect to our portfolio companies, a number of them have performed exceptionally well and have grown substantially and/or have been acquired in the past year +/-. That process has created wealth for a number of the people who founded and have led those companies over time. It also has created or increased wealth for the investors in those companies, and it has allowed us to distribute capital to our investors as the companies have distributed profits in the form of dividends and as acquisitions of some companies in our portfolio has produced capital gains.

Courtney Watson, Partner, Chattanooga Renaissance Fund:

  • In reflecting on the last 12 months and looking forward to 2019, it is helpful to understand some larger investing trends and current indicators. PwC and CB Insights reported that in Q3 2018, VC-backed investments were up 17 percent over the previous quarter with $28 billion invested across 1,229 deals. While it seems the overall venture space will close out 2018 strong in terms of record level dollar investment, it is a subset of deals that are truly benefiting. Specifically, late stage, larger deals are swaying the numbers as seed stage deals declined to 18 percent of all deals, their lowest in several quarters. Early stage deals increased slightly to 27 percent, their first increase since Q4 2017. So, while the national numbers appear strong overall, if viewed from the lens of regional, early stage deals, the numbers tell a different story. Also, important to note are recent signs of volatility in the market. Just this November, leading tech stocks such as Facebook, Amazon, Apple, Netflix, and Google are each down at least 20 percent from 52-week highs in contrast to being the best performing sector of the S&P last year (source: Morning Brew). Rising interest rates and trade tariffs will also continue to put pressure on business performance in 2019.
  • Some high notes on a local level included Revolution Ventures “Rise of the Rest” fund coming to Chattanooga and FreightWaves winning a $100,000 investment; the acceptance of Rachel McCrickard, Founder of Motivo, in the TechStars program; the launch of Kiva Chattanooga; and the formation of the LaunchTN Impact Fund. At the Chattanooga Renaissance Fund, we are excited that four of our portfolio companies successfully closed their series A rounds in 2018: RootsRated, Ambition, Branch, and Skupos. Furthermore, two of our companies – GreenPrint and XOi – were selected to present at Venture Atlanta. These wins were not without some hardship such as RootsRated relocating to Atlanta and other portfolio companies having to downsize their teams for various reasons.

Ken Woody, President, Innova Memphis: Innova invests statewide in Tennessee for early stage tech and healthcare deals and nationally for agtech companies. Agtech is a hot trend and is booming nationally, which could be promising for Tennessee with our university research focus. Across the state and the Southeast, it is clear the last decade of entrepreneurial focus has continued to refine those companies emerging from accelerators and incubators. Quality is up across the board and companies are solving real problems.

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