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January 22, 2017 | Tom Ballard

OUTLOOK SERIES PART 6: What is the outlook for investment capital in 2017?

2016-outlook(EDITOR’S NOTE: This is the sixth 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: “What is your overall outlook for investment capital nationally and, more important, for starting and not only growing but also retaining these new ventures in Tennessee?”

Jack Studer, Managing Director, and Courtney Watson, Partner, both with the Chattanooga Renaissance Fund – Studer: Attempting to over index on the location of companies will be a distraction, and a costly one to investors if they do indeed overindex. TN has an irrefutable cost basis advantage over other areas of the country. But we must also acknowledge and partner with other regions, and encourage our thriving startups to tap into and take advantage of expertise and advantages other regions offer (market presence, scalability, talent, etc.)

Grady Vanderhoofven, Fund Manager of Meritus Ventures and President and CEO of Three Roots Capital – I am very interested to see what impact the new Presidential administration, in combination with the Congress, has on the macro economy and how any legislative changes or programs affect capital flows at a high-level on a national scale. Changes in interest rates and banking regulations, for example, could affect not only how banks lend but also how they invest. We are bullish about opportunity in Tennessee because we continue to see significant need for capital in Tennessee. We are raising capital with an eye on Tennessee.

Ken Woody, Partner in Innova Memphis – Very encouraged about opportunities in Tennessee right now. Good teamwork at the state level and certainly in East Tennessee. Nationally, it is a bit too early to tell.

Eric Dobson, Chief Executive Officer (CEO) of Angel Capital Group – Capital is moving off the coasts into the interior. That is demonstrable and has been happening for several years. This will continue to accelerate. And, Tennessee will benefit.  Nashville is regarded as the “Silicon Valley of healthcare.” And, money is coming off the coasts to find deals. Initially, there will be an issue. Coastal money does not know how to address heartland deals from a valuation, management, etc. perspective. But, we fully expect they will adapt either directly or through partnerships in the region. The move of capital inward is a recognition that it is too expensive to create companies in the traditional innovation centers. It is a recognition that technology and talent are now ubiquitous across the country now. It is a recognition that uprooting companies from their spawning grounds is only logical if they move to be in proximity to their client base, not their capital base. We believe this bodes very well for the future of the Tennessee ecosystem.

Andrew Goldner, Founding Partner, GrowthX – Nationally, I think we will continue to see more seed stage dollars enter the market and continue to see the Series A pool of capital remain about the same (or, maybe, decrease). That means the “Series A Crunch” will get worse, especially as founders and accelerators remain focused on building products and raising money, rather than marketing products and making money. I’m hopeful that we’ll see an increase in early stage investment capital in Tennessee, especially as LaunchTN continues to increase the odds for start-ups around the state, new accelerators like Dynamo continue to attract start-ups from around the world that are venture-investable at graduation, and the word continues to spread about the angel investor tax credit that goes into effect for the 2017 tax year.

Tony Lettich, Managing Director, The Angel Roundtable – We are bullish about the state of entrepreneurialism overall and especially within Tennessee.  We are seeing larger numbers of stronger, higher quality start-ups from within the state and increasing numbers of start-ups attracted to the state. Strong ecosystems, such as those in Memphis and Nashville, are now in the process of development in Chattanooga and Knoxville. These ecosystems, when tied with investment capital at the late early and growth stages, will enable start-ups, removing key reasons for start-ups to exit Tennessee and the region for greener pastures.

Kristina Montague, Managing Partner, The JumpFund – Investment capital for women-led companies and diverse teams is on the rise with the emergence of a number of new women-led and women-focused funds – from Plum Alley and Rising Tide to 37 Angels and Bootstrap Capital. The Southeast is beginning to gain more attention from some of these groups as we build a pipeline of strong companies to showcase in our region. LaunchTN has also done a great job of pitching our state’s companies to national investors. Our challenge with retaining new ventures in Tennessee will continue to be later stages of capital for growth and technology talent, which is still a huge gap to fill. Frankly, I don’t think company growth should be retained within the borders of a single state, but allowed to move and grow where the opportunity takes them.

Geoff Robson, President, and John Morris, Executive Vice President, The Lighthouse Fund – Morris: Until more capital sources are in place, playing at the seed and early stage, there won’t be much change. Robson: Additionally, there is a lot of capital locally that is available waiting to engage in the right opportunities. We will continue to utilize this to fill the gap as necessary as well as continue to build relationships with bigger funds in the Southeast and Midwest. We have recently seen a large Midwest based early/growth stage VC make its first investment in Knoxville as a co-investor in one of our portfolio companies. We expect this activity to continue and grow in 2017.

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