PART 4: Panelists discuss drivers for new angel and venture funds
(EDITOR’S NOTE: We continue our annual “Investor Outlook” series with another important question for our panelists.)
New angel and venture funds have clearly emerged during the last decade that were not operational in 2010. What were the drivers for the creation of the new fund(s) that you lead or the launch of additional funds? Was it investors who saw a great need or void and decided to make a difference? Was it the fact that the quality of start-ups was improving and the necessary ROI for investors could now be realized? Or, was it something else?
- Brandon Bruce, Entrepreneur-in-Residence with Greater Sum Ventures. Greater Sum Ventures launched in 2015 to provide transformational capital to mid-market growth technology companies. The thesis is that when great entrepreneurs and great companies have the opportunity to join forces and work together, everybody wins big. As Aristotle said, “The whole is greater than the sum of its parts.”
- Ken Woody, President and Partner, Innova Memphis. Our Fund III investors like our track record for returns and the companies we’ve invested in over the last 12 years. Fund IV was totally different. It is an AgTech Fund, focused on rural innovation in agriculture. Those investors see a huge market opportunity and a need for real innovation.
- Kristina Montague, Managing Partner, The JumpFund. We have witnessed a sharp increase nationally in female-led, managed, and owned funds addressing the untapped market of female and diverse entrepreneurs. According to the Angel Capital Association (ACA), women now make-up almost 25 percent of all angel investors, the majority of whom are in funds or networks. This is a striking increase from less than five percent just 10 years ago. The ACA is also experiencing a significant rise in “Impact Investors” who are interested in investing in “double bottom line” companies that have high potential for both returns as well as positive social or environmental impact. The thesis varies group to group, but they have been joined by a growth in later stage venture capital firms also focused on critical issues.
- John Morris and Geoff Robson, Fund Managers, The Lighthouse Fund. First, angel investors don’t naturally form networks or funds. There has to be a concerted effort to realize those goals. That has happened locally with both a network (Angel Capital Group) and a fund (Lighthouse). These funds/networks are critical because venture capital (VC) invests, primarily, at later stages of growth. That means that entrepreneurs must go to individual angel investors to procure seed and early stage funding (pre-series A). That is a time-consuming task and can kill most early ideas.
- John Bruck, Knoxville-based Member, and Scott Jacobs, Executive Director, Queen City Angels (QCA). In 2018, two significant events occurred that drove QCA to its sixth fund in early 2019. First, our fifth fund was projected to have a three-year life, planned to extend through 2018. Due to an increasing quality deal flow, we invested the full fund in less than two years, over a year faster than planned. Second, we led a multi-million dollar, syndicated investment in a med-tech company that was oversubscribed with VC funding by a factor of three, so the investment that we initially circled increased by more than $10 million. This case also indicates that there continues to be a blurring of lines between angels/funds and VC’s on the funding spectrum available to start-ups. Angels are reaching for larger, higher-potential deals, while VCs are becoming more involved in earlier stage companies. We think the involvement of numerous angels and angel groups and VCs in a promising investment is a strong indicator of a healthier overall start-up community.
- Grady Vanderhoofven, Founder, President and Chief Executive Officer, Three Roots Capital. Historically, we have not been approached by proactive investors who have clamored for us to manage their capital because they perceived overwhelming opportunity in this region. I believe those fund managers who have been able to raise new or follow-on funds have demonstrated (1) staying power evidenced by (2) the ability to return capital and deliver ROI (rate of return) to investors. I also believe there is a general perception that opportunity can be identified, cultivated, and realized by experienced, knowledgeable, and capable investment teams.
- Eric Dobson, Chief Executive Officer, Angel Capital Group. Deal flow does not breed investors. Investors breed deal flow in my experience. It may sound heretical to say that, but it is true in my 18 years of experience. If you want to change your community, you need to identify a set of impact-minded investors willing to put capital at risk. That capital is a bond with the community that says to entrepreneurs that if they will assume the risk of creating worthy companies, the community will invest TIME and money in them. The reality is if a great company forms and does not have local capital, it will die-on-the-vine, move to be near the required resources, or find a way of boot-strapping. The latter is by far the most difficult and rare success story in the high-growth start-up world, despite being the one celebrated the most. Investors are the catalyst for change if you want a stable, repeatable, scalable entrepreneurial ecosystem. I have worked in many communities around our region and beyond. I see this play-out over and over again. Given this statement above, it is the investors of the community that have agreed to “worship at the altar of capitalism” (a quote from one of my investor/members), taking risks for the good of the community that are responsible for the upswing in deal flow and deal quality in my opinion. We have seen six high-tech exits in the last 24 months that all returned meaningful to impressive capital to investors. Those seeds were sown in the middle of the last decade. This has created a clear path to liquidity through early stage investing. I credit the brave entrepreneurs and investors for the marked changes in the ecosystem. To answer the question more directly, we are creating more funds. The fund formation is either focused on creating resilient communities or an investment thesis for improving financial outcomes through disciplined, comprehensive, tactical diligence and mentoring.
- Tony Lettich, Managing Director, The Angel Roundtable (ART). ART was established by a group of investors who desire to facilitate the development of the state’s and the region’s entrepreneurial ecosystems, support economic development, “give back” by supporting others as they have been supported, and to diversify their portfolios in the process. Technology development has democratized entrepreneurial investing such that start-ups can be established and raise funds from anywhere in the country, not just in the major markets like Silicon Valley, Austin, New York City and Boston. The strengthening in entrepreneurialism and the related ecosystems in Tennessee from Knoxville to Chattanooga to Nashville to Memphis and parts in between demonstrates this democratization and increasing funding opportunities for state and regional entrepreneurs and start-ups. We expect this trend to continue.
NEXT: Thoughts on state and perhaps local policies that could be more supportive of start-ups and entrepreneurs.