(EDITOR’S NOTE: We’ve just entered a new decade with arguably some of the most sustained economic growth and lowest unemployment rates in our nation’s history. An important part of that growth has come from new start-ups, and the State of Tennessee has clearly been part of that entrepreneurial wave over the last 10 years. Today, we begin our annual “Investor Outlook” series by asking our panelists to assess the “then” and “now.”)
How would you grade the overall quality of start-ups (i.e., how investible) in 2010 and now at the end of 2019 (lowest score is 1, highest is 10)?
- Eric Dobson, Chief Executive Officer, Angel Capital Group. We are commonly seeing investable deals in town in 2019. 2010 – 5; 2019 – 8.
- Tony Lettich, Managing Director, The Angel Roundtable. 2010 = 3.0; 2019 = 5.0. Improvements in the Tennessee entrepreneurial ecosystem are clearly driving improvements in the quality of the start-ups we see from the state.
- Partner Charlie Brock, Chattanooga Renaissance Fund. For 2010, I rate the overall quality of start-ups as a 3 and then for 2019 as a 5. I would say we peaked in 2015-16 in early stage as I would have ranked us a 6 then; still a long way to go.
- Brandon Bruce, Entrepreneur-in-Residence with Greater Sum Ventures. 7 – I think quality has been consistently high and that we benefit from having more start-ups today than in 2010.
- Ken Woody, President and Partner, Innova Memphis. Quality is much better in the last nine years, I’d say 3 in 2010, and 7 now. Between the work KEC (Knoxville Entrepreneur Center), UT (University of Tennessee) and ORNL (Oak Ridge National Laboratory) are all doing, the quality has improved dramatically, both in the start-up ideas and the development of those ideas. We always say we invest in people, not companies, and those people who are not prepared to run a company and have not developed the plans and infrastructure better do so.
- Kristina Montague, Managing Partner, The JumpFund. Since 2013, 8.
- John Morris and Geoff Robson, Fund Managers, The Lighthouse Fund. 2010 – 6; the quality was good, just not enough of them. 2019 – 7. There are more quality start-ups, and the region is better organized. Still much more can be done to improve the quality.
- John Bruck, Knoxville-based Member, and Scott Jacobs, Executive Director, Queen City Angels (QCA). Nationally, regionally and locally (both Cincinnati and Knoxville) the investor-readiness of start-ups has clearly improved over the past decade. On a 10-scale, we would grade the investibility of start-ups as 4 in 2010 and 7 in 2019. There are several factors at play here including: (1) wide recognition of the importance of start-ups to economic growth and job creation, so that policy makers at all levels have begun to understand how to better support this vital part of the economy; (2) formation of state-level entrepreneurial/start-up support organizations and funding sources; (3) university curricula, degree programs and centers focused on innovation and entrepreneurship, including those (e.g., accelerators) that make connections into the investor community; (4) early stage involvement of a selected few private companies (“BigCos”) that are willing to work with start-ups on pilot-scale projects; (5) private incubators and accelerators, supported by institutional, community and investor organizations specifically for the low-cost, qualified training and funding-supported launch of start-ups; (6) strong improvements in the organization of funding sources, particularly at the angel and venture capital levels of the funding spectrum; (7) recognition by investors of the return potential of the asset class represented in small private equity; (8) greater degree of investor outreach in the start-up community to coach, encourage and connect start-ups; and (9) growth and liquidity in other sectors, particularly in the last three years that fuels a higher level of cash infusion. The Dow Jones Industrial Average has grown 42 percent in the last three years and regionally there have been many growth-oriented exits providing an increasing amount of capital available for investment into earlier-stage companies. In its most recent fiscal year, QCA’s deal flow was: (1) 159 outreach/pre-screened companies; (2) 32 formal applications for funding; (3) 22 applicants that entered the formal screening process; (4) 11 new and several existing portfolio companies presented to the full membership; (5) nine total investments made; and (6) 30 new and follow-on investments currently in QCA’s pipeline.
- Grady Vanderhoofven, Founder, President and Chief Executive Officer, Three Roots Capital. 2010 – 3 and 2019 – 6. I think this is tricky because the scale is absolute, but grading will vary depending on context, perspective, benchmarks, etc. As a “relative” comparison, I think it’s safe to say I perceive the quality of the average start-up in this region as being significantly higher (in general) at the end of the decade than it was at the beginning of the decade.
How would you grade the overall quality of the founders/entrepreneurs (i.e., how coachable, do they have the “all-in” commitment, etc.) in 2010 and now at the end of 2019 (lowest score is 1, highest is 10)?
- Dobson for the Angel Capital Group. Quality and coachability are two different things. I feel the knowledge base and experience have increased. The dedication has always been there, but with fewer tools to be successful. In some ways, I believe the coachability is decreasing as we are seeing some arrogance showing through with founders. 2010 – 6; 2010 – 8.
- Lettich for The Angel Roundtable. 2010 = 4.0; 2019 = 6.0. The most significant drivers of the improvement in the quality of the start-ups we see come as a result of improvements in the coachability and quality of the entrepreneurs, where we have seen continuing growth.
- Brock for the Chattanooga Renaissance Fund. Our entrepreneurs are more humble now than they were when money was flowing in 2010 due to TNInvestco, and many of them thought they were worthy of big investments . . . they were not ready, which many admit to now. 3 in 2010, 7 in 2019.
- Bruce for Greater Sum Ventures. 7 – I think we’ve always had high quality entrepreneurs in East Tennessee. I think we benefit from having more entrepreneurs today than at the start of the decade.
- Woody for Innova Memphis. Since they have all been coached more to this point, they are used to receiving coaching and criticism. They are seeking feedback from experienced investors and business leaders and are implementing that feedback. Score of 7 now.
- Montague for The JumpFund. 8, in part due to more robust accelerator programs and expansion of TechStars, etc.
- Morris and Robson for The Lighthouse Fund. 2010 – 8. We have had several companies with exits since that time. 2019 – 8. Not much has changed. The ones that are engaged are doing more.
- Bruck and Jacobs for Queen City Angels. Coachability of start-ups/founders has definitely improved in the last decade (2010 = 4, 2019 = 8) for several reasons: (1) the investor/founder relationship factor in investment evaluation is recognized as a leading (perhaps the leading) indicator of a successful outcome; (2) investors are becoming more involved in outreach and mentoring founders earlier in the process, even months before the start-up is ready for investment; and (3) founders are more amenable to mentoring and direct involvement in their companies by well-aligned investors.
- Vanderhoofven for Three Roots Capital. My answer to this question would echo my answer to the first question.
NEXT: Two more sets of grades on “then” and “now.”