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August 06, 2023 | Tom Ballard

Q2 venture capital funding for Tennessee start-ups declines significantly

Launch Tennessee's latest "TN Deal Report" points out that the decline follows the largest funding quarter ever witnessed in Tennessee. 

One might say it was not unexpected, but it is also shocking when you see the data.

In the first half of CY 2023, venture capital funding for Tennessee start-ups went from the highest of highs to the lowest of lows — with a harsh roughly 79 percent drop from Q1 2023. That’s according to Launch Tennessee‘s “TN Deal Report” for the second quarter of 2023.

This is the lowest recorded funding over the past three years since the COVID-19 pandemic in 2020. While this downturn was somewhat expected, considering the overall slowdown in venture funding nationally, Launch Tennessee’s Evan Prislovsky, Capital Associate, and Kevin Yang, InvestTN Venture Fellow, write that it is noteworthy that the decline follows the largest funding quarter ever witnessed in Tennessee.

Here are some other highlights from the three-month snapshot:

  • There were 52 deals made and a total of $166 million invested in Tennessee, based on publicly available data. That’s roughly an 18 percent increase in the number of deals quarter-over-quarter (QoQ) and a whopping 55 percent decrease in the amount of money invested compared to the same time last year.
  • The average deal size for seed stage companies increased by roughly 68 percent QoQ in Tennessee, jumping from $1.3 million in Q1 2023 to $2.2 million in Q2 2023. The authors write that while this trend is promising, it is important to note that there were a handful of outliers that closed seed rounds in excess of $5 million that contributed to this increasing average.
  • As for valuations, the average pre-money valuation for seed deals clocked in at $8.7 million for Tennessee and $10.5 million for the Southeast Region in the first half of 2023.
  • The mobility sector is grabbing a bigger piece of the pie with each passing quarter. In Q2, there were six mobility deals, which is quite a jump from where it was only 2 percent of the deal count last year and 4.5 percent of the deal count the previous quarter. Currently, mobility comprises 12 percent of all deals in Q2 ‘23. The authors note that this trend is emerging as Tennessee grows its presence of major corporate leaders in mobility such as Nissan North America, Ford’s Blue Oval City, Bridgestone, and Volkswagen among others.
  • The medical device industry remains a fixture of Tennessee innovation, accounting for 12 percent of all deals done this quarter. Last year, in the same quarter, it comprised 7.6 percent of total deals. Interestingly, the majority of investment funding in this sector still goes to pre-seed and seed stage companies.
  • There was a significant drop in cleantech and biotech funding and the overall number of deals in 2023 compared to 2022. However, based on Launch Tennessee’s commercialization pipeline, there has been a surge in federal non-dilutive funding through the SBIR/STTR Matching Fund Program. In FY22, 54 percent of those companies were in the fields of biotech, cleantech, and advanced energy.

In terms of funding raised, two deals stand out above the others:

  • Candescent Biomedical, a medical device company focused on treating hyperhidrosis that recently relocated from the Bay Area to Nashville, raised a $35 million Series B; and
  • Whisper Aero, a Crossville-based start-up developing next-gen thrust for drones, and jets, raised a  $32 million Series A.

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