OUTLOOK SERIES PART 3: Evolution of angel and venture capital as well as availability

(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. This is the third article in this year’s series.)

Today’s question that we posed was as follows: “Later stage capital has been a continuing challenge in our region. We’ve heard that venture capital is moving somewhat ‘up the continuum,’ causing angel monies to fill-in more of the earlier stage. Did this trend change at all in 2018, and how do you see it playing out in 2019? Is it any easier to find later stage capital for Tennessee-based start-ups?”

Kristina Montague, Managing Partner, The JumpFund: The efforts of LaunchTN as well as “Rise of the Rest” and other groups shining a spotlight on the “deals” in the Southeast has helped to elevate the profile for next stage venture capital in our region. Several local companies in Chattanooga have received both Silicon Valley and East Coast investment over the past few years, though it is still difficult to get on the larger venture capital radar. It will be up to the early stage investors and partners such as LaunchTN and others to continue to cultivate next stage capital if we want to see our portfolio companies grow.

John Morris, Fund Manager, The Lighthouse Fund: This trend didn’t change at all. It’s still an issue. Companies looking for Series A usually have to look outside the region. It’s not an impossible task, but you have to cast a wide net.

Grady Vanderhoofven, President and Chief Executive Officer, Three Roots Capital: I do believe angel capital is increasingly available, active, and sophisticated in Tennessee. I don’t believe it’s any easier today than it was five years ago for growing companies to find later stage capital in Tennessee.

Courtney Watson, Partner, Chattanooga Renaissance Fund: If we believe that venture capital is moving “up the continuum,” then we need more organized, committed seed capital as well as Series A VC-funds that are well connected to other regional markets. This will help ensure that we can adequately grow companies both at home and with the support of other ecosystems. We need more awareness of our companies in other markets (outside of Tennessee) as we ultimately want them to be capitalized by larger players with even more resources to support their changing dynamics. If we take the metaphor of families with kids going off to college, we ultimately want to prepare them at home and then encourage them to go out in the world, to make new relationships, to develop more skills, and then come home and continue to build upon what they have learned and experienced.

Ken Woody, President, Innova Memphis: Finding later stage capital has always been a problem in Tennessee and that has continued in the last 12 months. Later stage investors want to invest larger amounts of money but to do that, the deal size has to be larger, and the company’s progress has to be greater. So, many companies are stuck in the middle – making steady progress, but not great enough to justify a large up round.

Eric Dobson, Chief Executive Officer, Angel Capital Group: We have been very successful in getting our portfolio later stage capital. We are seeing a 22x leverage on our dollars invested. Two of our portfolio companies received $18 million each in fresh, strategic equity capital in the last six months, one of which is a Tennessee company. And, interestingly enough, we are now hearing that many VC firms on the West Coast are moving back into earlier stage deals. We have known for a long time that this market ebbs and flows between earlier and later stage deals. As too much money flows into a stage of deal flow, the valuations increase, and money goes elsewhere looking for better deals. The general “Heartland” market trails the coastal markets by several years in these trends. So, although it is not immediately imminent, we could see more money begin to flow into early stage deals within the next 24 to 36 months if the larger market does not enter a recession. We continue seeing West Coast money looking for “Heartland” deals and valuations. So, that should bode well for the Tennessee companies over the next two to three years as well

Tony Lettich, Managing Director, The Angel Roundtable: We continue to see increases in investment in the state by individual angels, angel groups and networks. Unfortunately, we are not seeing any significant closing of the gap from venture capital “moving up the continuum.” The issue of future investability of start-up opportunities in which we invest has become increasingly important. As a result, understanding the factors surrounding the potential future availability of capital related to such investments has become a greater consideration in our investment decisions.

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