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January 23, 2017 | Tom Ballard

OUTLOOK SERIES PART 7: What are your thoughts about valuations?

2016-outlook(EDITOR’S NOTE: This is the seventh 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: “We saw some of the predicted correction in valuations in 2016. What are your thoughts about valuations going into 2017 and the likelihood of more adjustments?”

Grady Vanderhoofven, Fund Manager of Meritus Ventures and President and CEO of Three Roots Capital – I think valuations are very much a response to supply and demand effects. If relatively more investment capital becomes interested in early stage deals, valuations will increase for companies in that stage. If relatively less investment capital is interested in early stage deals, valuations will decrease for companies in that stage. Capital will flow to where the best opportunities reside, with respect to stage, geography, etc. I think there is relatively less capital available in Tennessee for seed and early stage deals now than was available five years ago, so I think valuations for companies at that stage are under downward pressure. With that said, some sectors are hotter than others, and some locales are hotter than others. Healthcare IT companies in Nashville probably aren’t experiencing the same downward pressure on valuations as some companies in other sectors in other parts of the country.

Ken Woody, Partner in Innova Memphis – I think we will see more corrections on valuations in 2017. Some of those high valuations in 2016 will come down to earth, and some of the folks who didn’t get funding will become more realistic.

Eric Dobson, Chief Executive Officer (CEO) of Angel Capital Group – The valuations on the coasts are over-inflated and in a bubble. Corrections there will continue. West Coast companies are no longer building value. They create ephemeral companies that generate cash, but not tangible products or services around productivity improvement. They are trading on pure speculation, often at 25x+ revenue. These companies can’t continue to maintain “unicorn” valuations, which have reached such proportions that IPO is the only option for liquidity. The question is the staying power of these companies as the emphasis on ad-based revenue models is waning because Millennials expect concierge service but don’t buy anything. In stark contrast, the valuations in the early stage marketplace remain quite rational in the heartland. We expect to see a continued migration of capital from the coasts to the heartland to find rational deal valuations. We don’t expect to see dramatic corrections in the heartland in the angel market. But, we do expect to see a continued growth of the Series A crunch, which will mean that angels will have to extend their runways with their portfolio to get them over the crunch.

Andrew Goldner, Founding Partner, GrowthX – I’m hopeful that the trend towards valuations reflecting the potential to profitably and predictably commercialize innovation at scale will continue.

Tony Lettich, Managing Director, The Angel Roundtable – We believe the overall entrepreneurial ecosystem will become stronger in 2017 and that valuations will stabilize and flatten out. However, 2017 may be a transition year and as such, with all the political change in the macro environment, it may be difficult to assess the future until we work through this transition period.

Kristina Montague, Managing Partner, The JumpFund – The Southeast is still a very low valuation market and entrepreneurs should understand that if they are to raise money in the region. We are fairly comparable to the Midwest, but obviously not the coasts. With more competition for dollars at the early stage, investors will continue to drive for deals with lower valuations, and it is up to the entrepreneur to prove why their company might have a valuation above the median. I don’t predict those conversations to change dramatically moving forward.

Geoff Robson, President, and John Morris, Executive Vice President, The Lighthouse Fund – Morris: I see valuations on the rise.  Housing starts are up, the market is up, so there will be a constant upward pressure on company valuations.

Jack Studer, Managing Director, and Courtney Watson, Partner, both with the Chattanooga Renaissance Fund – Studer: Valuations seem to be steady right now, being more reasonable in early stage and more financial metric based in mid and late stage.

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