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January 17, 2017 | Tom Ballard

OUTLOOK SERIES PART 3: What about Tennessee’s entrepreneurial ecosystem today?

2016-outlook(EDITOR’S NOTE: This is the third article in our annual multi-part series sharing the insights of angel and venture investors who are either located in East Tennessee or have a specific interest in investment opportunities here. We will be rotating the order of responses on a daily basis.)

Today’s question posed to our angel and venture capital panel was as follows: “Most people would say that Tennessee’s entrepreneurial ecosystem is more robust across the state than it was five years ago. Do you agree? If not, why? If so, how does the greater number of start-ups translate into the overall quality of the new ventures and their fundability?”

Tony Lettich, Managing Director, The Angel Roundtable – Absolutely, the level of community engagement and cooperation/coordination which existed in Nashville five years ago now exists and thrives in Knoxville, Chattanooga and Memphis, the latter of which has developed an ecosystem which one could argue is comparable to Nashville. Additionally, ecosystem entities and participants in areas such as Cookeville, Jackson and the Tri-cities, while lacking similar ecosystem structures of formal coordination, are clearly engaged and cooperating at much higher levels. The start-ups we see are more sophisticated and educated as to the processes required to become investable. As such, we are seeing greater numbers of quality, investable companies from within the state.

Kristina Montague, Managing Partner, The JumpFund – I whole heartedly agree. LaunchTN has done a terrific job of undergirding our entrepreneurial ecosystem and incentivizing investors to look at companies in our state. Our statewide accelerator programs are still producing strong, investable companies, and LaunchTN has been able to push the regional boundaries to showcase entrepreneurs across the Southeast to investors from across the country. More deal flow is always better for investors as companies must hone their business models, gain early customer traction and be just a bit further along which helps to de-risk the opportunities at such an early stage.

Geoff Robson, President, and John Morris, Executive Vice President, The Lighthouse Fund – Morris: Activity is up, but the challenge continues to be a limit on start-ups that gain market traction.  The gap between companies with an idea and companies that are serious (sell stuff, management team, etc.) is growing.

Jack Studer, Managing Director, and Courtney Watson, Partner, both with the Chattanooga Renaissance Fund – Studer: Ecosystem is vastly improved from 5 years ago, but still relatively nascent, especially on the structured capital side of things. There are funds, there is capital, but that capital is just beginning to see a full cycle and exits/returns that will inform and excite further investment in risky ventures.

Grady Vanderhoofven, Fund Manager of Meritus Ventures and President and CEO of Three Roots Capital – Tennessee’s entrepreneurial ecosystem absolutely is more robust statewide today than it was five years ago. In additional to producing more start-ups, the most noteworthy aspect of the improvement may be the quality of the companies and the quality of the entrepreneurs. I believe we have experienced a rising tide in terms of knowledge, experience, and sophistication of entrepreneurs, which has produced a rising tide in the quality of companies. I believe an increase in the amount of capital available to young companies has contributed to the rising tide, and I believe those who allocate capital have become smarter and wiser in many ways.

Ken Woody, Partner in Innova Memphis – I do agree. A lot of shakeout has occurred over who is leading entrepreneurial efforts in metro areas, and the state has supported many new ventures and associations focused on encouraging entrepreneurs. Universities, research institutions, accelerators, and major corporations are all focused in collaborating now on funding research and development in independent start-ups. They are seeing the value of both collaboration and small company-focused effort.

Eric Dobson, Chief Executive Officer (CEO) of Angel Capital Group – Without a doubt, that is correct. We have seen more investable deals in the last year in the East Tennessee region than the prior four years combined. Consequently, we have invested more in Tennessee deals (invested in six Tennessee companies in the last 12 months; three in the prior seven years). We credit the TNInvestco program for jumpstarting the industry and the legislators that had the vision to see it through. We credit LaunchTN for its dedicated and effective efforts to create an ecosystem for growth. We credit those organizations that support the accelerator network across the state, such as our own Chamber of Commerce.  And, we credit the angels and angel groups across the state that are willing to take a risk to create a new economy for the state. Most of the oars are rowing in the same direction, and it won’t take much more to bring the rest in line. Once we have a big exit, the “proof” that we can do it here will be evident. We feel that is a short-term prospect. We believe the state will one day, in the not-too-distant future, celebrate the moment that TNInvestco was set in motion.

Andrew Goldner, Founding Partner, GrowthX – I do think it’s an ongoing challenge, though I disagree with the view that it has to do with the absence of capital. The challenge for the state, and the angel and venture communities, to collaborate around and help solve together is how do we educate the sources of capital in Tennessee who are more comfortable with real estate and public company investing about early stage start-up investing as an important asset class to have in their portfolio. We need more capital to come off of the sidelines and invest to enable more entrepreneurs to start and grow their companies in Tennessee.

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