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VOL. 39 | NO. 20 | Friday, May 15, 2015

Investors pumping hundreds of millions into Tennessee startups

By Kathy Carlson

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Chris Sloan, an attorney with Baker Donelson’s emerging business group, says he fields calls weekly from investors in Silicon Valley and New York.

-- Michelle Morrow | The Ledger

The assignment sounded simple enough: Find out whether more money is coming into Nashville for startups.

If so, where is it coming from and what does it means to entrepreneurs, investors and the rest of us?

The answers:

Yes, the money is rolling in

It’s coming from all over

And it’s good for just about everyone.

And, yet, there’s more to the story than numbers, bullet points and happy feelings.

The answers come from entrepreneurs, professors, data gatherers, professional organizations and consultants to investors and startups. A picture emerges of a city on the cusp of greater attention from growing numbers of investors at all levels of the deal-making food chain, of young professionals moving here and remaking Nashville’s business landscape, of a Nashville entrepreneurship community that extends outward from health care.

“The growth of an entrepreneurial economy is not a flip-of-the-switch kind of thing. Entrepreneurship in cities takes time,” says M. Eric Johnson, dean of Vanderbilt’s Owen Graduate School of Management.

What makes a successful entrepreneurial culture is a combination of three things, he says. “You need the money, absolutely. You can’t start a business without capital. Things like the Nashville Capital Network have matured in that space.

“You also need the community that was created by the Nashville Entrepreneur Center and affiliated programs like Jumpstart Foundry.”

That created the chance for entrepreneurs to bump into each other, for investors to bump into other investors, he says.

Finally, there’s the innovation part of the engine, from Nashville’s universities ito its innovative businesses.

“We have those three pieces now and they feed on each other.”

So for attorneys like Chris Sloan, phones are ringing.

“I get calls on almost a weekly basis from Silicon Valley, New York. Investors are starting to come to Nashville on a regular basis and look for deals,” he says.

At the law firm Baker Donelson, Sloan chairs its emerging businesses group, which employs 50 attorneys, including 10 in Nashville. Eighty percent of his practice involves representing entrepreneurs and early-stage businesses.

While he hasn’t seen a venture capital firm pull up stakes and relocate here in the recent past, he has seen capital firms assign staffers to cover the Nashville area.

“There is venture capital money spread around the South in pockets, like in Atlanta,” he explains. “Nashville probably has more than other cities.”

From 2001-2011, more than $1.4 billion venture capital dollars were invested in 215 different Nashville-based companies, according to the Nashville Venture Capital Report of the Nashville Capital Network and the Nashville Health Care Council. Health care companies received about 65 percent of investment dollars. The report was released in August 2012 and an update is in the works.

The report notes Nashville fared better overall than the nation in venture capital investment trends since the 2008 economic downturn. Moreover, venture capital was “fueling the growth of new industries … such as health care information technology, media and Internet,” it states.

Launch Tennessee, a public-private partnership organized through the Tennessee Department of Economic and Community Development, reports online that $670 million in investor capital has funded Tennessee early-stage businesses since its beginnings in 2012. That includes $276 million in investment in 2014 alone, representing a 45 percent increase over 2013. Launch Tennessee’s goal is $1 billion in early-stage investment by 2017.

That includes $276 million in early-stage investment in 2014 alone, representing a 31 percent increase over 2013. Launch Tennessee’s goal is $1 billion in early-stage investment by 2017.

The Nashville Capital Network, for years the sole local organization supporting angel investors (those who invest in the earliest startup concepts and ventures), reported $50 million in angel investments between 2003 and 2014.

And while it isn’t exactly dollars, the signup list for an upcoming entrepreneurism event is instructive.

Launch Tennessee has signed 60 investors representing 50 regional and national firms to participate in its tech-friendly Southern culture and entrepreneurship conference, 36|86, set for June 8-10 in Nashville.

Brock

The goal is to promote Tennessee to entrepreneurs and investors and become the go-to conference of its kind for those who want to invest in the Southeast. The conference name, 36|86, represents Nashville’s latitude and longitude.

Coming up

A sampler of upcoming events for entrepreneurs and investors

36|86

June 8-10

Organized by Launch Tennessee

Marathon Music Works, Nashville

www.thirtysixeightysix.com

The mission of 36|86 is to bring Southern thinkers, founders and investors together by hosting an annual event in Nashville and inviting a national audience to participate in the experience, according to the event web site, www.thirtysixeightysix.com. The event gathers startups, business leaders and investors to celebrate Southern culture, technology and entrepreneurship. Organizers have selected 36 startups from seven Southern states to share their stories. Nashville companies are GameWisp, Scorebird and Utilize Health. Speakers will include Warby Parker CTO Lon Binder and Uber East Coast Regional GM Meghan Joyce.


Pandoland2015

June 15-17

Marathon Music Works, Nashville

www.pandoland2015.com

Pandoland is the tech news web site Pando’s annual festival of entrepreneurship, technology, and Southern culture, according to the Pandoland web site. The event will be held June 15-17 at Marathon Music Works. On the confirmed lineup are filmmaker Jose Antonio Vargas, Fab co-founder Bradford Shellhammer, Birchbox co-founder Katia Beauchamp, SoulCycle co-founders Julie Rice and Elizabeth Cutler, BuzzFeed Chairman Ken Lerer, Stack Overflow CEO Joel Spolsky.

Health:Further

Aug. 19-20

Sponsored by Jumpstart Foundry

Omni Nashville Hotel

HealthFurther.com

This two-day health care innovation conference sponsored by the Nashville business accelerator Jumpstart Foundry will be held on Aug. 19-20 at the Omni Nashville Hotel. The conference will include sessions with industry experts and investors and will focus on innovation within tech, business models and startups, Jumpstart Foundry said in a statement. It will also highlight companies that have graduated from Jumpstart’s 14-week program and will include an exhibition on new health care technologies. Confirmed speakers include Dawn Rudolph, chief customer experience officer, St. Thomas Health; U.S. Rep. Jim Cooper; Michael Burcham, CEO of Narus Health; and Ed Cantwell, executive director of the Center for Medical Interoperability.

Launch Tennessee is trying to attract both in- and out-of-state capital to Tennessee, says Charlie Brock, its chief executive officer and president.

“There’s more capital in play in Tennessee (now) than we’ve ever had, but we also have more early-stage (companies) coming through the pipeline,” he adds. “There’s more supply (of good companies). It’s highly, highly competitive.”

“The early stage angel-funding landscape in Tennessee is significantly improved from what it was four years ago,” Brock notes.

“There was really one established angel fund in Nashville four years ago, the Nashville Capital Network. We now have 11 angel groups across the state: four in Nashville, four in Chattanooga (Brock’s hometown) and one each in Memphis, Knoxville and Upper East Tennessee.”

Angel groups from other states are regularly doing business here, Sloan says.

“Where we have more early-stage investment, we still have a bit of a gap in the later stage funds, the B-stage or C-stage investors who can fund $5 million to $10 million,” Brock adds.

Launch Tennessee is working to close the gap with the later-stage funds and also to make corporations with venture capital arms aware that there are investment opportunities here.

Higher visibility for angel investors and successful deals give comfort to potential investors. Capital formation is happening here because investors see that startups are succeeding, and success encourages them to invest, Johnson says.

In addition, several angel-investor groups allow investors to pool resources and spread investment risk more widely.

“Each time a company takes off, investors become more willing to invest,” he says, adding much investment is still being funded by local investors. The newest investors would probably have put their money in more conventional investments – stocks, bonds, etc. – if they hadn’t decided to back the startups.

“We’ve definitely seen venture investment from all over the country,” says Cliff Duffey, president and founder of the Franklin-based tech company Cybera. “We talk to private equity firms from all over the country. … The investors are very encouraging (and see) Nashville as an up-and-coming high-growth city. Nashville has a perception across the venture capital world as a progressive, high-growth market.”

Cybera began in 2001 with three employees and now employs 120 with revenues of $30 million.

Cybera began providing Internet network services, including connectivity. It has exited that business and morphed into an Internet security business that provides cloud-based security software for retailers.

“I’d like to see Nashville branch out, see more broadening from health care into non-health care technology. I think that’s the missing piece,” Duffey says.

Tech and non-health ventures are gaining traction, Sloan and Johnson say.

“A lot of the VCs in town that historically have always focused on health care are now starting to look at early stage investment outside of health,” Sloan adds.

“There is more interest in tech businesses these days,” Johnson says, “but some of the tech has been driven by health care. That draws more tech resources into the region. Some entrepreneurs jump out of health care with another tech idea.”

Interest in music also is picking up, especially with the Entrepreneur Center’s recently initiated Project Music, developed in partnership with the Country Music Association. The Center describes it as America’s first tech accelerator dedicated to the future of the music business.

“Nashville has been a pretty entrepreneurial place for a long time,” says Vanderbilt professor emeritus Germain Boer, who directs the Owen Entrepreneurship Center. “The business climate is very conducive to (entrepreneurs). The business community is like a small town. ... It’s collegial.”

Out-of-towners notice that people want to help one another and aren’t afraid someone’s going to steal their ideas, he adds. “If you’re a crook, you’ll probably only do one deal” because the word will get out.”

The creativity piece is in place, business-watchers say, and Launch Tennessee’s network of nine startup accelerators has helped establish more investment-worthy companies, Brock adds. “There’s more quality and quantity. We’re cranking out some really good companies.”

Another piece of the investment and entrepreneurship mosaic is the personality of Nashville itself.

“Since the founding of HCA in 1968, the city has had a strong history of nurturing entrepreneurism, supported by deep industry expertise and strong access to capital,” says Hayley Hovious, new Nashville Health Care Council President, via email. A history of collaboration among entrepreneurs, academic institutions, business leaders and community partners also has contributed to entrepreneurism.

“Nashville has just become a really trendy place for young professionals,” Sloan says. “Young professionals are choosing to live here. They’re strengthening and deepening the talent pool. These young professionals are most likely to start entrepreneurial ventures,” either right away or after working for a larger company for a few years.

Moreover, Boer points out, Nashville business people who left to work in Silicon Valley or Wall Street often return to raise their families here, bringing fresh ideas back to Music City.

“I’ve lived all over the country; I grew up Colorado,” Duffey says. “I think this is the best quality of life for raising a family. … We may need to import talent (in IT), but … people want to move here.

“It’s a great city to recruit into. People that we’re looking at are making a big quality-of-life adjustment to leave Silicon Valley and come here. That’s a big statement for Nashville.”

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