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January 24, 2019 | Tom Ballard

OUTLOOK SERIES PART 5: Quality of investment opportunities in Tennessee and Southeast

(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 fifth article in this year’s series.)

Today’s question that we posed was as follows: “Is the quality of the investment opportunities you are seeing from start-ups in Tennessee and the Southeast continuing to improve? If so, do you have any thoughts on why that is the case and, perhaps more important, what can be done to make further advancements?”

Grady Vanderhoofven, President and Chief Executive Officer, Three Roots Capital: I do believe the quality of the opportunities is continuing to improve. I think that is partly because the quality of the entrepreneurs has improved, and the support available to the entrepreneurs has improved. I also perceive increasingly effective and productive collaboration among investors. Overall, the entrepreneur and capital communities are more knowledgeable and practical and have a better understanding of what is required for success in growing a business and in raising capital to support that growth. I think these developments are an evolution that has produced a scenario where opportunities with lower likelihood of success are aborted or weeded-out or abandoned or die earlier, before they consume a lot of resources that ultimately would be wasted.

Courtney Watson, Partner, Chattanooga Renaissance Fund (CRF):

  • CRF has been investing in early-stage companies in various industries since 2010. Over that longer time horizon, we have seen the quality of investment opportunities increasing in broad strokes. In addition, due to programs such as LaunchTN’s “The TENN” and Oak Ridge National Laboratory’s (ORNL) “Innovation Crossroads,” we are seeing some interesting technology and businesses that have infrastructure wrapped around them for support. Nevertheless, in more recent times, there continues to be a need for a greater velocity of quality high growth start-ups as well as for more volume of investable opportunities. Atlanta continues to produce more quality and quantity of startups given the size of its ecosystem. It is unfair to compare ourselves to Atlanta, however, we have to be mindful of its magnetic pull.
  • Some thoughts on ways to make further advancements center around talent and how we de-risk either relocating here personally or growing a business in Chattanooga or other smaller markets. Could we create more intentional recruiting strategies to lure people home (referring to the family metaphor with kids in college) that are more likely to have stickiness to the area? Can we create a larger group benefits plan for start-up companies (to include health insurance, 401K, etc.) so they can, in turn, offer more competitive packages and recruit top talent? Can we broaden our start-up ecosystem conversations to include high-growth companies (that may have never taken outside capital) and not just include what is typically considered “start-ups” so that we can learn and leverage their business expertise? Can we build up our base of mid-tier technology companies so there is a broader safety net of jobs should a start-up fail?

Ken Woody, President, Innova Memphis: Quality continues to improve, but it is more and more challenging to attract that talent to Tennessee. Many top investors want their companies close at hand and push the Founders to stay where they’re planted. We have done better where the cities have strategic advantages, e.g., logistics, healthcare, and manufacturing.

Eric Dobson, Chief Executive Officer, Angel Capital Group: Yes. We have made several bets, some high conviction, on Tennessee companies over the last few years, and see more on the horizon. I believe ORNL has made huge strides with their commercialization efforts through the “Innovation Crossroads” program that is helping to bring more “hard” science IP deals to market. We see this as a trend across not just East Tennessee, but the “Heartland” in general. The talent is improving. The region is recycling successful entrepreneurs. We are seeing exits, such as Cirrus Insight. We are seeing substantial strategic investment in East Tennessee companies. That all bodes well for a growing and self-reinforcing ecosystem here in God’s country. Stay the course.

Tony Lettich, Managing Director, The Angel Roundtable: Absolutely. Improvements in the regional entrepreneurial ecosystem including the proliferation of co-working facilities such as the Sync Space in Kingsport or Spark Plaza in Johnson City, availability of mentoring and capital through organizations such as the JumpFund out of Chattanooga, and cooperative efforts among infrastructure components as seen in “Innov865” out of Knoxville have resulted in increases in information, networking options, capital and educational opportunities related to entrepreneurialism. This improving infrastructure has driven an overall improvement of the quality of start-ups in Tennessee and the Southeast.

Kristina Montague, Managing Partner, The JumpFund: We have seen many high quality, innovative companies in the Southeast, particularly out of Atlanta. We are excited about the companies ORNL is incubating with “Innovation Crossroads” and hope to see many more in their pipeline moving to commercialization. Steve Case has really shone a spotlight on the Southeast and the investment opportunities here, and we continue to see new start-ups taking advantage of the lower cost of living, manufacturing, and tax advantages in our region. New Opportunity Zone (OZ) Funds which are starting-up should also help to attract new companies to relocate into OZ designated areas, many of which are in our region.

John Morris, Fund Manager, The Lighthouse Fund: It is improving somewhat, but this is a classic “chicken and egg” problem. The quality will improve as more money is available. More money becomes available as the quality of deals improves. Further advancements will need “break the cycle” type action, such as TNInvestco did several years ago.

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