By Tom Ballard, Chief Alliance Officer, PYA
Today is the deadline for individuals to submit suggestions to the State of Tennessee on how best to deploy the $65 million in funding that will be available under the federally-enacted “State Small Business Credit Initiative (SSBCI 2.0)” (see recent teknovation.biz article here).
The second iteration of the program – Tennessee received just shy of $30 million a decade ago – has caused a good deal of discussion among East Tennesseans involved in the entrepreneurial ecosystem including Grady Vanderhoofven, a long-time player in lending and venture capital who now serves as President and Chief Executive Officer of Three Roots Capital. He helped launch the Southern Appalachian Fund in 2003, and later co-founded Meritus Ventures in 2006, both of which were active investors in East Tennessee and the broader region for more than a decade.
In a recent presentation to the East Tennessee Economic Council and a follow-up interview, Vanderhoofven shared his thoughts on how the one-time federal dollars can best be deployed to serve small businesses, as its name implies, more uniformly across the Volunteer State. He offered his suggestions from his experience that also includes founding and leading Three Roots Capital, which is a certified Community Development Financial Institution (CDFI).
For the soon-to-be three-decade veteran of the access to capital space, those suggestions are further based on an analysis of how investment capital for small businesses, including start-ups, has evolved across Tennessee over the last 20 plus years. Vanderhoofven used a variety of sources including the PwC MoneyTreeTM Report, the CB Insights platform, and data from both the Tennessee Department of Economic and Community Development (ECD) and Launch Tennessee to complete his analysis.
His conclusion, which will not surprise anyone who is knowledgeable of the capital sector, shows that the vast majority of dollars from TNInvestco, the INCITE Co-Investment Fund, and angel and venture firms have been invested in Middle Tennessee, specifically the greater Nashville region, over the last decade. That’s 82 percent of the dollars and 61 percent of the deals, according to Vanderhoofven’s analysis.
He starts by painting a picture of the Volunteer State as a whole beginning with Q1 of 2000. That was at the height of the dotcom bubble before it burst in 2001-02, and Tennessee’s share of the national venture capital pie was .29 percent, a fact that clearly shows it was the proverbial “flyover state.”
When the state-sponsored TNInvestco program came along in 2010 and was followed shortly thereafter by the federally sponsored SSBCI 1.0, which was implemented in Tennessee as the INCITE Co-Investment Fund, Tennessee nearly doubled its share of venture capital on a national basis, achieving .57 percent of the U.S. total by 2013 and topping out at .72 percent three years later. By the end of 2020, the Volunteer State had dropped to .41 percent of the national total.
“I absolutely believe both programs increased venture capital deals and dollars,” Vanderhoofven said and that the Volunteer State was in a better position as 2020 ended than it was a decade earlier. On a national basis, however, the Volunteer State has remained slightly above the middle of the pact, so to speak.
“Our average ranking among all U.S. states between 2010 and the end of 2020 was 21.4,” he says after analyzing the data. Tennessee businesses secured nearly $3.2 billion dollars in venture capital over that period. While that is a good deal of money by any standard, it pales in comparison to the top states. California ranked first at nearly $322 billion followed by New York at almost $87.8 billion, Massachusetts at $72.8 billion, Texas at $19.9 billion, and Washington at nearly $18.4 billion.
“California attracted 100 times what we did, and New York was nearly 30x,” Vanderhoofven says.
On a statewide basis using PwC MoneyTreeTM Report data, he paints a very discouraging historical picture for start-ups and other small businesses in East and West Tennessee. For the period from Q1 of 2010 through Q1 of 2021, the Nashville metro area recorded an average of 8.8 deals valued at $64.6 million per quarter. For East Tennessee as a whole, the comparative numbers were 2.3 deals and $12 million per quarter, while the data for the Memphis metro area showed 2.7 deals and $5.2 million in average quarterly investment.
Vanderhoofven further examined the East Tennessee data more granularly by looking at the greater Knoxville region only. It showed less than one deal and $5 million in investment on average for each quarter.
To also underscore his point that the state needs to take these historical inequities into consideration with the strategy for deployment of SSBCI 2.0 funds, Vanderhoofven points to the selection of the 10 TNInvestco funds and the resulting impact on capital availability across the state.
Two of the 10 were West Tennessee-based, while the other eight were in Middle Tennessee. There was not a TNInvestco fund located in East Tennessee. Citing the 2019 TNInvestco Annual Report from the ECD, Vanderhoofven noted that 74 percent of the dollars invested – more than $97 million – went to start-ups in Middle Tennessee and another 17 percent — $22.5 million – went to those in West Tennessee.
What was East Tennessee’s share? It was nine percent or $11.7 million.
With new initiatives in East Tennessee like the “Techstars Industries of the Future Accelerator,” the “Spark Cleantech Accelerator” and the longer running “Innovation Crossroads” program operated by Oak Ridge National Laboratory, Vanderhoofven worries that capital required to help support the companies that will be attracted here because of the accelerator programs will not be available to retain them in the region.
His suggestion to state officials is to allocate funding on a geographic basis to ensure that opportunities are spread across the Volunteer State in a way that does not continue the historical trend of the “have’s” and “have nots.”
“The various sources of data seem to indicate that capital in the hands of investors and lenders in East Tennessee is far more likely to be deployed to companies and projects in East Tennessee than is capital in the hands of investors and lenders outside of East Tennessee,” says Vanderhoofven