(EDITOR’S NOTE: We continue our annual “Investor Outlook” series with another important question for our panelists.)
Look into your crystal ball and give us your projections as they relate to the national economy in general over the next few years and how that will impact the availability of investment capital for early stage companies, those seeking Series A venture capital, and those in a growth stage.
- John Bruck, Knoxville-based Member, and Scott Jacobs, Executive Director, Queen City Angels (QCA). The biggest single impact in the next few years will likely come from the 2020 presidential election. As uncertainty of a possible new administration rises, with the possibility of increased taxation, regulation and spending, availability of investment capital will likely decrease. Angel investments are slightly more resilient to macro-economic downturns, but nonetheless uncertainty at the highest level will cause a drag in investment decision-making. Should there be continuity in economic, financial and regulatory policy, in late 2020, we would expect continued growth and available capital for early stage investment.
- Grady Vanderhoofven, Founder, President and Chief Executive Officer, Three Roots Capital. Venture capital and early stage and growth stage capital in general are sourced from investors (those who invest in the funds and the deals) who are interested in “alternative investments,” usually as a percentage of their total assets. If the stock market continues to boom, and if overall wealth continues to increase, then the piece of the investment pie that gets allocated to alternative assets gets bigger (in terms of value, but not necessarily in terms of percentage). If the wealth of the investors who are willing to invest in alternative investments (ranging from pension funds to high net worth individuals) decreases, then the amount of capital available for “risk” investments decreases. I’m not an economist. I see some signs today that remind me of 2007 and 2008. I wonder if the market can continue doing what it’s been doing. Trade policy will affect the equation, as will monetary policy, as will the outcome of the next election. Lots of variables at play for sure. If the trend of the past seven or eight years continues, I see lots of capital available for young companies for years to come. If the combination of factors produces a general contraction in the economy, then the amount of capital available for young companies (and projects) will decrease, without question.
- Eric Dobson, Chief Executive Officer, Angel Capital Group. I believe we will be heading back into a recessionary period. Essentially, my believe is we bought five to 10 years of growth into three years. Markets can’t continue going up and up. That would be wholly unprecedented. Historically, they always suffer corrections and with predictable frequency. Having said that, if we want to avoid recessionary pressure, it is the flyover states that must rise. I believe this is the reason for the genesis of the OZone (Opportunity Zone) program as well as others. The OZone program will begin impacting the country in 2020. This, I believe, is an even greater argument for fixing the OZone regulations to entice angel investors to use the program to invest in start-ups and growth companies. If not, we are only pushing out the inevitable crash that will come from overdeveloping real estate without clear buyers and tenants . . . housing market crash of last decade anyone? It does not appear that we have learned anything from our past mistakes.
- Tony Lettich, Managing Director, The Angel Roundtable. In general, we are optimistic about the national economy in the short- to intermediate-term. Continued growth in the U.S. economy at reasonable levels supports continuing overall investment and development of the entrepreneurial ecosystems around the country. The ratification of USMCA (United States Mexico Canada Agreement), improving trade relations with China following the completion of a Phase I agreement and continued efforts to drive efficiency into regulatory processes will support the continued growth of the national economy. As the ecosystems are developed and enhanced, the potential for financing at all stages of funding will improve.
- Partner David Belitz responded for the Chattanooga Renaissance Fund. I don’t think there is any question at this point that the economy is overheated and a recession of some sort is not far off. Couple that with the intense political uncertainty around 2020, and this makes for a turbulent few years coming-up. This uncertainty leads me to think that current start-ups need to raise capital now that will last them at least 18 months, and they should focus on achieving sustainable operations. I would also think that valuations and capital availability will be negatively impacted. The extent of the impact will be difficult to predict, since it will be tied to the depth of any recession and to the amount of economic dislocation caused by the election. On a brighter note, uncertainty, recession and disruption all create opportunities and thus, a new crop of interesting start-ups will emerge from the turmoil.
- Brandon Bruce, Entrepreneur-in-Residence with Greater Sum Ventures. The increase in private equity over the past decade is likely to mean ample available capital for growth stage companies over the next few years. Private equity also creates liquidity opportunities for early stage and Series A investors which is important for replenishing and incentivizing the entire capital stack from seed to exit.
- Ken Woody, President and Partner, Innova Memphis. Cannabis may have peaked for a bit as states deal with all the growth and evaluate the risks associated with that growth. Nationalism/Globalism will drive a lot of the economic focus for the next several years as the U.S. and others try to digest the threat/opportunity China provides. All of our current portfolio companies are evaluating the new markets effect and impact. Tariffs still loom large for ag companies and threaten other industries. Investors will seek alternative places to invest if the stock market declines in any significant fashion, which should be good for early stage companies.
- Kristina Montague, Managing Partner, The JumpFund. In every conversation with companies that pitch to us, we ask them how their particular business will fair in a recession, which has been on the horizon for some time. This is a tricky time for new businesses, with changing regulations, tariffs, and now the threat of war as well as a precarious political landscape. Some see great opportunities and others have been significantly challenged by these turns. Any threat of a recessionary cycle will lessen the availability of capital and regionally, we as investors have not experienced many significant wins that would propel us to re-invest in our state otherwise. There is some hope on the growth side, as more venture capital interest has been drawn to the Southeast region and helped by active recruitment by LaunchTN and others. VCs are looking more actively for deals “beyond the coasts” and several of our portfolio companies have recently seen significant next stage investment from both west and east coast venture capital funds.
- John Morris and Geoff Robson, Fund Managers, The Lighthouse Fund. Private Equity funds have become a dominant force in the later stage investment arena over the last few years. This has been good for investment and for M&A activity. We see this trend diminishing over the next few years. There is still a lot of angel money on the sidelines, and we see that vehicle organizing and gaining strength. That would be good news for earlier stage ventures and make the road harder for later stage investments.
FINALLY: Any last thoughts.