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OUTLOOK SERIES QUESTIONS #8 AND #9: A look through the crystal ball and any final thoughts

(EDITOR’S NOTE: We conclude 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. As we do so, we again express our sincere thanks to those seven individuals who responded to the request to share their thoughts with our readers.)

TODAY’S FIRST QUESTION: What does your crystal ball predict in terms of valuations going forward?

  • David Adair, Managing Partner and Co-Founder of Solas BioVentures. Not sure crystal ball says anything, but we see the valuations increasing. No doubts about that one.
  • Derren Burrell, President and Founder of Veteran Ventures Capital. Valuations continue to increase with larger funding rounds, but prudent analysis and funding practices will find the right balance to ensure that over valuations can be minimized. It’s all in the right partner you choose in vetting deals.
  • Eric Dobson, Chief Executive Officer, Sheltowee Angel Network. They will continue to rise, especially as costal monetary centers continue to reach out to the Heartland . . . ironically seeking better valuations.
  • Scott Ewing, Co-Founder and Principal Business Analyst, Appalachian Investors Alliance (AIA). AIA funds are primarily angel stage investors. The essence of angel investing is to front-run the next stage venture capital investors. Because we expect to suffer dilution through two, three . . . four rounds of later stage capital, angels must be cautious not to overpay relative to the amount of risk we’re taking on when funding a start-up’s unproven business model. The “sweet spot” for our investing is the point in a company’s early life when technical risk has been reduced, and the planning risk inherent in a business model has been worked through, leaving execution risk as the main question. “Can this particular entrepreneur or team deliver on an otherwise sound technology and go-to-market plan?” At that point, there is still enough business risk ahead to keep venture capitalists on the sidelines – and keep enterprise valuation reasonable. Yet, there’s enough of an information advantage available to well-informed angel investors so that we can enter into a financing just prior to a higher value for the business being generally recognized. Once entrepreneurs no longer need to compete based on quality for angel-stage dollars – if too much investor money is chasing too few good (and even marginal) opportunities – it becomes very difficult to remain as disciplined, rational angel investors. We worry with record seed and angel stage valuations about our investors being drawn to participate in deals that offer a low probability of reaching AIA’s objective 25 percent minimum internal rate of return target.
  • Tony Lettich, Managing Director, The Angel Roundtable. We expect valuations to continue to increase in the short to intermediate terms, especially for strong concepts with diverse management teams with the capability to execute.
  • Grady Vanderhoofven, President and Chief Executive Officer, Three Roots Capital. Valuations will continue to increase while the supply of investment capital is high. If federal policies create liquidity, and the stock market continues to boom, the supply of capital will continue to drive increasing valuations. If macro and micro economic factors reduce the supply of capital and/or increase the cost of capital for investors, then we will see some downward pressure on valuations. Also, a black swan event (unforeseen event with severe bad consequences) would be a major disrupter that could change the trajectory of everything.
  • Ken Woody, President of Innova Memphis. Valuations are closely related to capital available to deploy. As long as the companies can clearly state a unique high value product or service, and investors have funds ready, the valuations should stay strong.

TODAY’S SECOND QUESTION: Is there anything you want to address that we have not asked?

  • Derren Burrell, President and Founder of Veteran Ventures Capital. The best long-term play are veterans – year in and year out. We believe veterans make better entrepreneurs and business leaders (“vetrepreneurs”). While in uniform, their battle-tested leadership drives performance for our nation. After transitioning from military service, those same virtues and traits of successful veteran leaders drive performance and financial return in their business careers and civilian life.
  • Eric Dobson, Chief Executive Officer, Sheltowee Angel Network. 2022 promises to be an exciting year. I want this to be the year that Knoxville fully embraces angel investing. The “Techstars (Industries of the Future) Accelerator” is an exciting opportunity. If we want to take full advantage as a key part of our ecosystem development, then we must create more and better angel investors. And our Chamber is leading the way with a series of panel discussions on angel investing in January (see teknovation.biz recap here), February, and March. If great start-ups can’t find capital locally, they will move to be closer to one of their two most precious resources for growth – capital. If we want great companies to form here and stay here, we must create the capital stack that will support them. It is just entrepreneurial/economic math. And, by keeping them here, we address the second most precious resource for growth, great entrepreneurs/teams.
  • Tony Lettich, Managing Director, The Angel Roundtable. 2020 and 2021 have been challenging years for the entrepreneurial and investor communities in Tennessee and the Southeast. In true entrepreneurial spirt, these groups stepped-up with creative ideas and means to maintain the state and regional momentum despite COVID and the related challenges. We are excited about the momentum which is in place and upon which these ecosystems can build.
  • Grady Vanderhoofven, President and Chief Executive Officer, Three Roots Capital. I have been encouraged by my observation that our region seems to be experiencing an increasing spirit of collaboration. I do believe organizations – large and small, public and private, for profit and non-profit – in our region are exhibiting more desire to collaborate and are investing more time in trying to understand how to build momentum and unlock synergies fueled by collaboration. I applaud the people and organizations that are participating and collaborating. Collaboration isn’t always easy, but it will be one of the keys to continuing to build momentum around company creation, job creation, and wealth creation in this region. I also want to say, “Thank you, Tom Ballard.” I appreciate your positive spirit and attitude and your tireless desire to add value and contribute to the entrepreneurial and investment ecosystem in Tennessee. I am proud and fortunate to have you as my friend.
  • Ken Woody, President of Innova Memphis. Investors need to continue to work hard to stay educated and up-to-date in this rapidly changing tech world. What is Web3, NFTs (non-fungible tokens), Blockchain? Does it matter or is it a fad? Are there real applications? Founders need to be able to show their companies solve a real problem and they have a way to take market share and scale. Tennessee and Knoxville need to continue to be focused on working with founders and investors to grow together and build an ecosystem where entrepreneurship can continue to thrive.

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.
  • Part 4 – Thoughts on national trends in angel and venture funding.
  • Part 5 – Is there a “bubble” on the horizon?
  • Part 6 – Suggestions on best utilization of federal SSBCI funding.
  • Part 7 – Assessment of progress for women and entrepreneurs of color.

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