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January 27, 2022 | Tom Ballard

OUTLOOK SERIES QUESTION #4: Thoughts on national trends in angel and venture funding

(EDITOR’S NOTE: We continue our multi-part series sharing the thoughts on the past year and the outlook for 2022 from seven angel or venture investors based in the region.)

TODAY’S QUESTION: Several years ago, we asked about angels moving up the chain to fill funding gaps as venture firms looked more at somewhat later stage, less risky investments. Now, we are reading where firms like Andreessen Horowitz and Greylock Partners are launching seed stage funds. How do you see those trends playing out in the Volunteer State and the broader Southeast in 2022 and beyond?

  • Scott Ewing, Co-Founder and Principal Business Analyst, Appalachian Investors Alliance (AIA). The two funds you mentioned, combined, are reported to bring $900 million to bear on the seed and angel market. With so much eager money chasing higher risk, relatively unproven (seed and angel) ventures, the likely impact is going to be mal-investment. AIA’s fundamental assumption is that mal-investment is the enemy of economic development in our Appalachian or “American Heartland” region. Investment bids are likely to be pushed higher in our market, in many cases, irrespective of underlying value. We’re experienced to know that coastal funds have very limited insight into attributes and specifics of this market. If coastal or money center investors intend to find well-valued opportunities in the Heartland, they’d be smart to scout out deals through groups that have an established presence in our local communities and at the same time are well-connected in regional financial gateways, such as in Nashville or Pittsburgh.
  • Tony Lettich, Managing Director, The Angel Roundtable. It is important that capital availability at all start-up stages – from “Concept” to “Seed” to “Growth” – increases such that both Tennessee and the Southeastern region have robust investor environments and opportunities for entrepreneurial start-ups to obtain funding. The recent “Techstars” activity in Knoxville is one of the most obvious positive trends toward this growth in the investor ecosystem. As others fully recognize the talent/skills of and ideas being developed by entrepreneurs in Tennessee and the Southeast, we expect this trend to accelerate.
  • Grady Vanderhoofven, President and Chief Executive Officer, Three Roots Capital. I see the vast amount of liquidity (capital available for investing) in the venture industry driving well-established and well-capitalized investors to seek investment opportunities outside of what might be considered their historical or traditional “lane.” We observe this when an angel investor moves up the chain and when a venture capital (VC) firm moves down the chain. Frankly, from a geographic perspective, Tennessee is outside of the traditional/historical “lane” for most investors in the recognized VC hot spots. I see these trends as positive for Tennessee and the broader Southeast. I believe relatively more capital will be available to companies and deals in Tennessee. From an angel investor and VC investor perspective, a rising tide is raising all ships right now. Good things can happen when opportunities and preparedness intersect. There is a lot of effort in Tennessee, including specifically in East Tennessee, to position the region to capitalize on these trends.
  • Ken Woody, President of Innova Memphis. It’s still challenging to attract coast venture capitalists to come and invest in Tennessee. Unless you already have strong connections, there is just not a lot novel here to bring them in. We need to continue to develop great tech companies that attract early stage investors and show an attractive business model as they grow.
  • David Adair, Managing Partner and Co-Founder of Solas BioVentures. Angels have traditionally borne the risk, as such were rewarded with higher IRR (internal rate of return) demands > 40 percent. Most large funds are wanting to be a one-stop shop, in other words the big get bigger. It serves their investor base to have a minor league or farm system. It allows them to gain bigger ownership and control. It also helps to buffer against these higher pre-money ransom demands. Specifically, in device and pharma, we are not seeing a lot of bigger players go there just yet, perhaps the calm before the storm or alternatively, maybe naively, the high risk of failure early in this sector remains a warning sign that those who enter should not be faint of heart. Given my limited knowledge of what is going on in Chattanooga specifically regarding supply chain start-ups, there appears to be more outside start-ups coming and of course more consequential capital such as the national and/or international mega funds. I do not see these trends changing but only accelerating over the next two to five years. The Southeast is no longer a well-kept secret. The work anywhere mantra, secondary to COVID, has allowed our little paradise to be found, bringing more opportunities for growth.
  • Derren Burrell, President and Founder of Veteran Ventures Capital (VVC). Efforts by the Knoxville Innov865 community, in partnership with other groups, are continuing to bring education and awareness to increase the angel investor community within our region. Big firms like Andreessen getting into the space should aid in that awareness factor and help continue to fuel growth in our region over the next 12 months. Funds like VVC’s Veteran Fund I will also drive opportunities for individuals to invest with institutional money and see how the alternative capital sector will become more mainstream.
  • Eric Dobson, Chief Executive Officer, Sheltowee Angel Network. It is cyclical. Money moves into gaps where value can be extracted. We saw the “Series A Crunch” five years ago. Firms moved out of early stage investing to take up that slack. That left seed deals desperate for capital. That slack is now being taken-up, for which I believe the evidence is the increase in valuations we are seeing across the industry. Truth be told, I have been expecting that for a while. However, I will say that the definition of “seed” has changed in terms of the size of the round and valuations. They are both increasing. As a final note, I have been told, “Silicon Valley is coming to the Heartland,” and there are two choices: fight it or take advantage of it. I expect 2022 should be an exciting and interesting year.

Previous Articles in the Series:

  • Part 1A – A review of the past two years as well as a look into the future.
  • Part 1B – A review of the past two years as well as a look into the future.
  • Part 2 – Quality of deals and size of “asks.”
  • Part 3 – Impact of COVID in past two years and going forward.

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