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Chattanooga may not be Silicon Valley or Boston yet, but for a midsized city, it sure has its fair share of investment groups – and that number is growing.
By Laura Childers
Google. Apple. Costco. Home Depot. Facebook.
What do all of these multibillion-dollar companies have in common? Besides being some of America’s favorite companies and businesses, they were all funded by people willing to dwell in possibilities – to invest in an idea that at its outset was just a fragment of a dream.
“The art of investing is not about figuring out what has already happened,” writes Forbes columnist Joshua Rogers in a recent piece on private investing. “It’s about anticipating the future and creating the future that others will read about in The Wall Street Journal.”
Whether you are talking about an angel fund or a middle market private equity group, the fundamental attractions of private investments remain unchanged: a vision for what could be and along with an expectation for greater returns on capital. Now a new generation of investors in Chattanooga is using the same vision to grow innovative businesses not only across the nation, but right here in our very own city.
Equity Financing 101
According to the Global Entrepreneurship Monitor, the vast majority of private investments in startups comes from close family (42%), relatives (10%) and friends (29%). However, more and more, entrepreneurs and business owners are starting to look to outside sources for private financing.
Three of the most common “outside” sources of capital for private companies are angel investors, venture capital firms, and private equity firms, all of which fall under the umbrella term of “equity financing.” The three are similar in their strategy – they each offer capital in return for equity, or ownership, in a company – but they differ significantly in their goals and preferences.
Focus: Usually Seed and Early Stage Companies
Angel investors are wealthy individuals who provide one-off early stage capital for startups in exchange for a stake in the company. In many cases they are seasoned entrepreneurs interested in “paying it forward’’ to the next generation of businesses. Often, angel investors work together to pool funds into a single investment fund.
Focus: Usually Early to Mid-Expansion Companies
VCs raise money from shareholders to open funds, and then divide these funds between a number of companies in their investment portfolio. Typically, VCs invest in startups and businesses that are somewhat risky, but potentially very profitable. Accountable to their investors, VC firms are usually expected to generate returns of 20% to 30%.
Private Equity Investments
Focus: Usually Mid/Expansion to Mature Companies
Unlike VC funds who buy equity in start-ups, PE firms target more mature companies, either to help company management accelerate growth, or to assist with restructuring in order to make them more profitable. PE firms won’t invest in as many companies as VCs, but their investments are of a much larger value.
Origins of Venture Capital and Angel Investing in the U.S.
The origins of the modern venture capital industry trace back to the year 1946, a year marked by the close of WWII and the influx of American soldiers returning from abroad. Determined to offset any impending economic downturn as the nation regained its footing, businessmen and government officials began to find ways to promote postwar prosperity – and subsequently turned to private funding. Five new venture capital organizations were birthed that year: J.H. Whitney and Company, Rockefeller Brothers and Company (later Venrock), the American Research and Development Corporation (ARD), Industrial Capital Corp. and Pacific Coast Enterprises.
However, many say the venture capital industry didn’t take off until a few decades later with the coming of the information age. As Silicon Valley grew to be the core of all things high-tech, it also became the new home for VC firms including the famed Kleiner, Perkins, Caufield & Byers and Sequoia Capital.
Following the successful $1.3 billion IPO of Apple in December 1980, the industry exploded. By the end of the 1980s, there were more than 650 venture capital firms managing over $31 billion in capital.
Moving into the ‘90s and early ’00s, capital investments increased steadily in the U.S., growing from $3.2 billion in 1990 to $103 billion in 2000. At their peak, during the height of the dotcom bubble, venture capital deals totaled upwards of $25 billion per quarter.
Financing Today: A Changing Landscape (2008-Today)
Thanks in part to the Great Recession – and tighter regulations that followed – the landscape of private financing has undergone significant changes. Discussing the emergence of a new “venture capital ecosystem” in a recent piece in the Washington Post, reporter Steven Overly describes how many existing venture funds have shifted to focus on more mature (and therefore, less risky) companies with the potential for greater returns. This shift, he says, has left open a void for early-stage capital that is now being filled by the growth of angel funds and seed funds. Seed funds now represent 67% of all funds being created, which is up 100% from 6 years ago.
This is positive news for cities like Chattanooga: as a general trend, these types of funds, while significantly smaller in dollar amount, tend to support entrepreneurs in their own backyards and are key to creating new jobs. Angel investors generally can have a longer term view on returns – and are often closely involved in their portfolio companies, playing a crucial mentoring role to help grassroots enterprises become eligible for larger investment from VC firms.
Once off the ground and eligible for VC funding, many would say ‘the sky is the limit’ for high-growth startups. A catalyst for innovation and technological advancement, VC has fueled the development of some of the U.S.’s most successful companies, like Twitter, Amazon and the aforementioned Google, Apple, and Facebook.
A survey of the U.S. shows a good deal, if not the majority, of these influential VC-backed companies are currently located on the West Coast or New England. But in metros across the country new VC hubs are beginning to emerge – and even outpace – these larger centers in terms of growth. Silicon Valley is certainly still the epicenter for venture capital and innovative companies in the U.S., but research shows it’s beginning to lose its dominance with startups migrating to what famed economist Richard Florida calls “knowledge metros” across the U.S.
Capital Surge in the Scenic City
Recent history shows Chattanooga is no exception to this trend of private equity aligning itself with emerging hubs for innovation and technology. The past four years have seen an upcropping of private investment funds across our city –
as many as six, to be exact. “The emergence of several new investment firms is particularly exciting because it appears to be reflective of all the entrepreneurial activity taking place,” says Charlie Brock, executive director of Launch Tennessee and a longtime investor in the Chattanooga area.
Local investors say that with Chattanooga’s estimated population of just over 170,000, it certainly has more than its fair share of readily available capital. Not only that, the city’s capital ecosystem is diverse. Rather than being clustered in one area (for example, in an abundance of seed funds), it includes angel funds, VCs, and PEs. While the past four years have seen the rise of seed funds and angel funds (funds like Blank Slate Ventures), the Scenic City has also given rise to “next-level” VC firms like Chattanooga Renaissance Fund, SwiftWing Ventures, and new specialty VC firm Solas BioVentures.
“I can’t think of how many times that I’ve been in conversation in the last couple months and came away saying, ‘What an exciting time for investors and entrepreneurs to be in Chattanooga,’” says Ben Brown, CEO of SwiftWing Ventures. “There has been a lot of momentum in the past few years and it’s starting to snowball.”
Chattanooga Invests [A Snapshot of Area Investment Firms]
FourBridges Capital Advisors est. 2007
What it is: Middle market investment banking firm, or “boutique” investment bank. “FourBridges is focused on advising business owners, who are planning or executing important transactions such as selling and buying businesses, or borrowing and raising capital,” says Managing Director Andy Stockett. In the past three months, FourBridges has also begun to source mezzanine debt. Typical Investment Size: $250,000 to $2 million. Leadership: Chris Rowe, managing director | Andy Stockett, managing director | Frank Williamson, managing partner | Charlie Brock, chairman | Ralph
Montgomery, managing director out of Atlanta
Blank Slate Ventures est. 2011
What it is: Seed fund. “We like to be either the very first investor in the company or a participant in the first round,” says Sheldon Grizzle. Funds: Blank Slate’s first fund was $500,000. A second round of $1 million followed this. Now they are considering a third fund this fall larger than the first two. Typical Investment Size: $10,000 to $200,000, but most are in the $150,000 to $200,000 range. Leadership: Lex Tarumianz, partner and co-founder | Sheldon Grizzle, managing partner and co-founder
Spartan Ventures est. 2013
What it is: Investment arm of Spartan Systems, a software and product development company. Funds: “We are exploring launching our own fund in early 2015,” says managing partner Sheldon Grizzle. Typical Investment Size: “It’s largely dependent on what the company needs,” Grizzle explains. “We’ve invested in everything from user interface redesigns all the way up to building entire applications from the ground up.” Leadership: Sheldon Grizzle, managing partner | Jonathan Bragdon, managing partner | Jesse Morris, managing partner | Benjamin Wald, managing partner | Tyler Jenks, managing partner
Chattanooga Renaissance Fund est. 2011
What it is: Angel fund. Funds: CRF’s first fund, now fully invested, was just over $3 million. A second fund of approximately $7.7 million was launched in 2013, expanding the company’s total funds to over $10 million. “We offer both true seed investments and early-stage capital,” says partner and co-founder David Belitz. “With our second fund, though, we can continue our mission while focusing on some later-stage opportunities.” Typical Investment Size: $50,000 to $700,000 Leadership: David Belitz, partner and co-founder | Miller Welborn, partner | Jack Studer, partner | Roddy Bailey, partner and co-founder | Stephen Culp, partner | Charlie Brock, partner and co-founder
Tenth Street Capital est. 2005
What it is: Lower middle market provider of mezzanine debt and minority equity. Funds: Tenth Street has six funds with more than $350 million in committed capital. It is currently investing out of two funds: a $170 million mezzanine capital SBIC fund and a $24 million purchased debt fund. Typical Investment Size: $2 million to $12 million with the ability to syndicate larger transactions Leadership: Al Duke, partner and co-founder | Joe Decosimo, co-founder and advisor | Casey Hammontree, partner | Bill Nutter, partner
The JumpFund est. 2014
What it is: Angel fund. “We are a group of women angels investing in female-led businesses,” says managing partner Kristina Montague. Funds: Now investing out of a $2.5 million fund. Typical Investment Size: $50,000 to $250,000 Leadership: Kristina Montague, managing partner and co-founder | Shelley Prevost, partner and co-founder | Tiffanie Robinson, partner and co-founder | Cory Allison, partner | Betsy Blunt Brown, partner | Leonora Williamson, partner | Stefanie Crowe, chief advisor and co-founder
River Associates Investments est. 1989
What it is: Lower middle market private equity fund. Funds: River Associates has raised six funds with more than $450 million in committed capital. It is currently investing out of River VI, LP, a $222 million fund. Previous funds include River I ($5 million), River II ($15 million), River III ($44 million), River IV ($58 million) and River V ($110 million). Typical Investment Size: $10 million to $30 million Leadership: George Pettway, founder | Jim Baker, partner | Mike Brookshire, partner | Mark Jones, partner | Patten Pettway, partner | Craig Baker, partner
Lamp Post Group est. 2010
What it is: Seed fund/venture capital group. Funds: Undisclosed. Typical Investment Size: $50,000 to $2 million Leadership: Ted Alling, partner | Barry Large, partner | Allan Davis, partner | Miller Welborn, partner, bank executive | Jack Studer, partner | Shelley Prevost, partner, official director of happiness
SwiftWing Ventures est. 2014
What it is: Venture fund. Funds: Currently working out of private capital with plans to raise a first fund in the coming months. Typical Investment Size: $250,000 to $1 million Leadership: Ben Brown, CEO | Paul Cummings, Founding Partner