PART 4: Challenge of later stage funding for TNInvestco start-ups

Dollar Sign(EDITOR’S NOTE: For the third year in a row, we asked angel and venture investors who live in East Tennessee to share their thoughts on 2014 and their predictions for 2015. We were fortunate to have seven individuals provide their insights. Today is the fourth article in the six-part series.)

TODAY’S QUESTION: Many people say that one of Tennessee’s biggest challenges is later stage funding for start-ups that benefitted from TNInvestco monies. Is that a reality? If so, how can we address the need?  

David Belitz, Managing Partner, Chattanooga Renaissance Fund:

I do think the lack of later stage capital is real for Tennessee. However, I think the concerns are a bit overblown. If we build good companies, have good exits or just build big stable companies, the money will find us. I also think good entrepreneurs will find the money. It may not all be from Tennessee, but they will find it.

Eric Dobson, Chief Executive Officer, Angel Capital Group:

It is called the Series A Crunch. Between angel and early stage VC money and growth stage venture capital, there is a 95 percent down selection. Angels fund ~66,000 per year; venture 3,300.  So, this is not only a Tennessee issue; it is a national issue. I believe we are seeing a new class of angel investor, the professional angel, rising. I believe we will see more mezzanine funds developing out of angel funds to address this. I also believe this will be the biggest place the crowd impacts the market in the future when the Securities and Exchange Commission fixes its errors in the 506 (c) regulations. Many feel this is 18 to 24 months out.

We need more private equity money to be invested in the Southeast, period. Wealth is here, as you can deduce by researching the Federal Deposit Insurance Corporation deposit data and by looking at industry reports on investment assets under management with brokerages. Still, there has not been the demonstrated appetite for investing in the private equity asset class as we see in California, the Northeast, and around the Great Lakes. Fully a quarter of the venture capital investments made in the U.S. occurs in the small geographic area of San Francisco and Oakland, CA. By comparison, the entire Southeast U.S. accounts for less than four percent of venture investments, with the Atlanta metro area and Raleigh-Durham Research Triangle taking nearly half of that.  With percentages skewed as the data shows, it indicates that cultural issues as much as money concerns are working against developing a high-growth private equity-backed economy in our region.

Tony Lettich, Managing Director, The Angel Roundtable:

Yes. However, we believe that Charlie Brock and the Launch Tennessee Team are doing an outstanding job of raising awareness of the entrepreneurial ecosystem being developed in the state and of the growing strength of the start-up companies within the state and Southeast region. The Angel Roundtable is addressing this issue through our syndication relationship with Angel Syndicates Central. This relationship allows us to participate in seven figure deals. Additionally, the principals have numerous relationships with larger angel groups and VCs which increases the opportunities for follow-on funding. We believe the best way for the Tennessee angel and VC community to address the issue is to work together to tackle the syndication issues, thereby cooperating together on strong Tennessee opportunities.

Kristina Montague, Managing Partner, The JumpFund:

This does seem to be a need, and funds like SwiftWing in Chattanooga are being established to meet our need locally. I also think companies need to look outside of the Southeast sandbox if they want VC or later stage funding (and should be helped by their early angels to do so).

Geoff Robson, President, The Lighthouse Fund:

It is in general but the best companies can always address this issue any number of ways. There are plenty of later stage investment firms across the U.S., and companies always consider the benefits of bringing on a strategic partner who can provide funding but also infrastructure in the form of sales channels, implementation teams, and service teams. There will need to be more investment “imported” from outside of our region in general, though.

Grady Vanderhoofven, Co-Founder and Co-Manager, Meritus Ventures and Southern Appalachian Fund:

I definitely believe we have a supply-demand mismatch in Tennessee right now between the number of companies funded by TNInvestcos and the amount of capital available to continue funding those companies. I also believe the most attractive and promising of those companies will be able to attract additional capital, possibly from outside of the region.  The TNInvestco-funded companies that do not become self-sustaining and cannot attract additional capital, will die on the vine. In my view, it would be a mistake to assume 100 percent of the TNInvestco-funded companies should receive additional outside financing. Some of those companies were never destined to be long-term, sustainable businesses. I am a proponent of another iteration of the TNInvestco program, but I absolutely do not believe a goal of such an initiative would be to aggregate capital pre-programmed to support companies previously funded by TNInvestcos. Some of the TNInvestco groups are raising new funds, and that is a fantastic progression for companies seeking to raise capital in Tennessee. I think Tennessee would benefit from having more sources of pre-bankable debt to support companies that may have matured beyond the equity-financing stage but have not yet reached the point where they are attractive to traditional lenders such as banks. Some of my portfolio companies have successfully sought debt financing from non-bank lenders in Texas and California after failing to find sources in Tennessee, and I know my companies are not the only companies in Tennessee that need this type of capital.

Ken Woody, President, Innova Memphis:

Hopefully some of the former TNInvestco funds will provide funding for these later stage deals. There is also a great need for funding of inventory and equipment for expansion. These type of needs don’t really lend themselves well to venture investing but few banks have an interest in putting any types of funds at risk for a start-up company.

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