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January 23, 2013 | Tom Ballard

VENTURE CAPITAL OUTLOOK #2: Belitz, Robson offer their thoughts

(EDITOR’S NOTE: This is the second in a three-part series.)

Yesterday, we presented the thoughts of two venture investors – Ken Woody of Innova and Eric Dobson of the Angel Capital Group. The series continues today with the perspectives of David Belitz of the Chattanooga Renaissance Fund and Geoff Robson of 3 Degrees.

David Belitz, Partner, Chattanooga Renaissance Fund

Belitz describes 2013 as “a mixed environment” and says, “We don’t know for now” how the year will unfold. “There’s hope that it can be an exciting year, but there’s also caution.”

In his roles as Chief Financial Officer and now as Chief Executive Officer for The Lupton Company, Belitz has participated in the oversight and management of that company’s investments for about 12 years. He has also been involved with the Chattanooga Renaissance Fund for three years, so he has a fairly lengthy view of the start-up investment landscape in this region.

On the positive side, he says, “There’s a lot more deal flow now because the economy has forced more people to be entrepreneurs. The opportunity set is quite high, but the real question is what will it take to turn opportunity into something really successful.”

Belitz believes that initiatives like “500 Start-ups” are creating a surplus of companies chasing investment capital. “There’s going to be a shake-out,” he predicts.

On a regional approach, Belitz is cautious, because the South does not have the same amount of venture capital that other regions do. As a result, he says that our start-ups have to get to revenue more quickly than those in other locations.

Belitz also expressed concern that “the new tax on medical devices will be a negative on that industry,” and he believes we will “probably see something soon in social media” similar to the aftermath when the Internet bubble burst.

Finally, as many start-ups shift to mobile applications, he ponders the question of whether they are a viable business or just a great idea.

Geoff Robson, Founder, 3 Degrees

“Knoxville has an average of four to five start-up or early stage companies funded per year,” Robson said, noting that 90 percent of the money comes from local investors. “There may be as many as 40 companies seeking funding at any one time.”

Robson compared the annual funding to the yearly exits, with the latter being about one-half of the new investments and noted the challenge that this presents.

“When they do (exit), it is typically via merger and acquisition, so we have an ‘overhang’ of companies that have been funded through early stages,” he said. “This is not abnormal, but the more exits we can drive from the pool of funded companies, the more investments will happen (churn).”

Robson believes that “there is plenty of funding out there, but it remains hard to fund a seed/early stage company.” He adds that it will be much easier in 2013 for companies that have already been funded, have hit strategic milestones and created inflection points to secure follow-on funding.

Like others, Robson cited the impact of the TNInvestcos nearing completion of their first rounds of funding.

“The TNInvestcos are nearly complete in building their portfolios and will not fund many, if any, new companies,” he said, citing statistics that published in the fall of 2012 that showed about 75 companies funded by the program. “I expect between 80 and 100 total to be funded.”

Robson also cited the uncertainty in Washington in dealing with the budget deficit as a critical issue that will “continue to make it harder in 2013, especially if it is not addressed early in the year.”

Finally, he believes the mergers and acquisitions (M&A) market will be even stronger in 2013 than it was in 2012, and this will be positive for the region’s start-ups.

“Very few, if any, of our local companies will IPO at any time in the near future,” Robson said. “The M&A market has been strong and will continue to grow stronger providing a path to exit/liquidity for those investors.”

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