Investing in the Future

by Lucy Morris

It goes without saying that with successful startups comes the creation of new jobs and an improved economy. Take, for instance, the classics. Silicon Valley and New York. Known as tech hotspots, these cities have accounted for some of the biggest business launches in recent years, from social-networking giants Facebook and Twitter, to newer favorites like streaming service Netflix, online doctor appointment platform ZocDoc, and meal kit company Blue Apron, which was valued at $2 billion at the time of its initial public offering (IPO) in June.

The economic impact of these titan startups is staggering. Silicon Valley reports a 4.3% increase in the number of jobs created in just a year’s time, and a total of 19.6% since 2010, and New York has reportedly added 985,100 private sector jobs since 2011. Blue Apron alone employs 4,500 individuals, Netflix 4,700, and Facebook? More than 17,000.

However, with this kind of monstrous growth comes setbacks. Today, costs, competition, and barriers to entry in these larger cities are at an all-time high. More companies are fighting for the same resources, the same locations, not to mention – the same investment dollars.

As a result, new markets have been picking up steam as epicenters for startups. Call it the “goldilocks effect,” entrepreneurs have begun flocking to midsized cities for their low cost of living, their access to resources like incubators and advisors, and their affordable office space. But the biggest draw of these new markets? The availability of equity financing.

Named one of the best cities for startups by Forbes, over the last 30 years, Chattanooga has developed a strong, locally-focused financing ecosystem comprised of funding options for every stage of a company: seed and angel investing for the initial stages of a startup, venture capital (VC) for companies with scalable potential, and private equity and mezzanine capital for mature companies looking for further growth or acquisitions. Here’s what many of these local groups do, what they look for, and how our city benefits.

Top Metropolitan Statistical Areas (MSA’s) for Venture Capital growth 2010 – 2015

1. Charlottesville, VA

2. Oklahoma City, OK

3. Rochester, NY

4. Chattanooga, TN

5. Memphis, TN

Sources: U.S. National Venture Capital Association

Stages of Private Equity Funding

After an initial investment by the founder or co-founders, many successful businesses tend to follow a similar financing route
that includes:

Friends & Family Financing

These  pre-seed investments can be considered gifts, loans, or equity investments; Typically, this round is used to self-validate the business idea.

Angel Investors

Angel investors usually focus on seed and early-stage companies. These investors are often 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. Angels generally have a long-term view on returns and are heavily involved with their portfolio companies.

Venture Capital Funds (VC)

VC funds typically focus on early to mid-expansion companies. VCs raise money from shareholders to open funds, and then invest in different companies. Typically, VCs invest in businesses that have proprietary ideas and are led by proven entrepreneurs. Investors usually expect to generate 20-30% returns.

Private Equity Investment Firms (PE)

Private equity investment firms focus on mid-expansion to mature companies. Unlike VC funds that buy equity in startups, PE firms target more mature companies, helping to accelerate growth or assist in restructuring. PE firms won’t invest in as many companies as VCs, but their investments are much larger in value.

Chattanooga Renaissance Fund

Established 2009

Leadership: David Belitz, partner and co-founder | Miller Welborn, partner | Jack Studer, partner | Roddy Bailey, partner and co-founder | Stephen Culp, partner | Courtney Watson, partner

Billed as a formalized angel fund but structured more as a VC fund, the Chattanooga Renaissance Fund is focused on early stage tech businesses in the southeast. “We operate with committed capital and an investment committee that allows us to make faster investment decisions,” says Courtney Watson, a partner in the group. Typical investments in these technology-oriented businesses range anywhere from $150,000 to $175,000.

When considering investments in startups, the Chattanooga Renaissance Fund looks for innovative businesses competing in large and growing markets. Leadership also plays a major role, as does scalability.

Though not all of their investments are local, the Chattanooga Renaissance Fund sees the importance of investing in Chattanooga. “We are trying to do our part to help expand Chattanooga. We believe in the city, and we believe in the people. At the end of the day, we are truly focused on three primary pillars –promoting entrepreneurship, fostering innovation and regenerating wealth,” says Watson.

The Jump Fund

Established 2014

Leadership: Kristina Montague, managing partner and co-founder | Shelley Prevost, partner and co-founder | Tiffanie Robinson, partner and co-founder | Cory Allison, partner | Betsy Brown, partner | Leonora Williamson, partner | Stefanie Crowe, partner and co-founder | Kim Seals, partner

Founded by a strong group of local women, the Jump Fund is an angel investment fund dedicated to growing female-led ventures in the southeastern arena. “We kept it to this area because we wanted to be able to add value and have a high touch. With the companies we’re investing in, we can drive there, join boards, and be a bigger part of helping them succeed,” says managing partner Kristina Montague.

From the first fund, valued at $2.5 million, the Jump Fund invested in 18 different women-led companies, where women held significant equity in the company. “We launched the Jump Fund because we felt like we weren’t seeing enough women on the demo stages,” says Montague.

Because the Jump Fund is one of the few funds in the nation focused on funding women-led businesses, it helps to shine a spotlight on the city. In fact, two of the companies the Jump Fund has invested in have taken home top honors at 36|86, the Southeast’s premier technology and entrepreneurship conference, in recent years. According to Montague, “The regional tech stage didn’t have a single woman on it five years ago. The landscape has really changed in just a few short years, and the future is exciting.”

Lamp Post Group

Established 2010

Leadership: Ted Alling, partner | Barry Large, partner | Allan Davis, partner |
Weston Wamp, principal | Miller Welborn, former founder

When Lamp Post Group launched in 2010, founders Ted Alling, Barry Large, Allan Davis, and Miller Welborn were looking to run things a bit differently from a typical venture capital fund. With original funding from the partners themselves, startups seeking investments were required to move into Lamp Post’s headquarters for nine to 12 months. The reasoning behind this? According to one of the original founders, Miller Welborn, it was to increase the chance of success. “Most VC funds would say around 1 in 10 investments is a homerun. We weren’t willing to invest in just a 10% success rate – we wanted to raise it to 70%. By moving into our space, we could help them with everything from marketing to technology, and they could spend more time focusing on the business itself.”

Today, Lamp Post Group is still investing in and mentoring promising startups. Funds now include community investments, and Welborn has since transitioned into more of a mentor role, but the idea remains the same. Companies with strong leaders who are willing to work hard can succeed.

Ted Alling, one of the founders and partners at Lamp Post Group, is enthusiastic about the future of Chattanooga. “This city is the single greatest place for a founder to build a business. Among other things, it has a supportive community, incumbent expertise that’s willing to mentor, and energy that is unrivaled in our region.”

Dynamo

Established 2015

Leadership: Ted Alling, partner | Barry Large, partner | Allan Davis, partner | Weston Wamp, principal | Santosh Sankar, director | Jon Bradford, executive advisor

Recently launched Dynamo is an $18 million early stage fund that focuses on pre-seed through pre-Series A investment opportunities. Spinning off from the success of the Lamp Post Group, Dynamo is concentrated on technology startups that have the potential to transform the logistics technology industry, which includes supply chain management and transportation.

“With our background in both supply chain and early stage investing, we feel there are few better equipped for this niche than us,” says partner Ted Alling. Investments for startups in the industry range from $250,000 to $500,000, and are considered when a business has established a strong, founding team and has some semblance of a product or service. “We can then help a startup achieve product and market fit by leveraging our network and getting feedback, trials, and early customers,” says Alling. “If we have one core skill, it’s sales and building a robust organization that moves quickly to serve the customer.”

According to Alling, the future of Chattanooga as a hub for startups lies in supply chain, particularly for warehousing and trucking. “Startups seeking mentorship and clients related to this industry have no better place to go – the likes of Kenco, Tranco, Covenant, and U.S. Xpress have been extremely supportive and are joined by newer names like Steam, Reliance, TransRisk, Workhound, and Bellhops to drive this forward.”

River Associates Investments

Established 1989

Leadership: Mark Jones, partner | Jim Baker, partner | Mike Brookshire, partner | Patten Pettway, partner | Craig Baker, partner | Blake Lewis, vice president | Stuart Vyule, vice president

A private equity fund for lower middle market companies, River Associates Investments is geared toward mature, profitable businesses with annual revenues of $20 to $100 million looking to pursue different divestment and growth options. “We have helped companies pursue a variety of different strategies. For example, we helped a founder who owned a business diversify his net worth by selling part of his company and retaining some ownership, and we have facilitated a number of add-on acquisitions,” says partner Mark Jones.

The firm just completed a final closing on River VII, a $285 million fund that will be invested into 10-12 different companies. The number of annual investments is limited in order to ensure success. While the firm remains “industry agnostic,” it requires companies to prove they are solid and have an indefensible niche to obtain investment.

Launched in 1989, River Associates Investments has seen steady growth over the years, due to the partners’ focus. “You don’t usually see too many fund VIIs, and you  definitely don’t usually see fund VIIs with so much continuity among its partners,” says Jones.

Jones credits, in part, the vibrant and evolving culture in Chattanooga, not to mention the low cost of living, with the success that local startups and investment groups are seeing today. “Some of the markets you think of as the traditional growing areas, the cost of living is off the charts. You’re seeing more cities like Chattanooga becoming attractive areas for building businesses.”

FourBridges Capital Advisors

Established 2007

Leadership: Andy Stockett, managing director | Chris Rowe, managing director | Ralph Montgomery, managing director

FourBridges Capital Advisors is a middle market investment banking firm that advises business owners in need of expansion capital or debt financing, in addition to those looking to make an acquisition, take on a strategic partner, or sell the whole company. Often, companies have opportunities to accelerate growth, but have reached the financing capacity of existing owners. FourBridges connects businesses with Private Equity Groups (PEGs), family offices, or corporate investors that can provide capital and lower an owner’s personal risk, while also providing additional strategic, financial, and industry expertise.

“In a lot of cases, the business owner takes chips off the table but retains enough ownership so that a sale down the road can provide a larger financial payday than was realized with the initial transaction,” says Andy Stockett, a managing partner for the group.

Though FourBridges Capital works primarily with companies with anywhere from $5 million up to $1 billion in revenues, the partners see the importance in assisting startups as well. “With startups, we help them complete forecasts and projections, and challenge their business models. We like to help them out early, so that when they grow, we can offer our services to assist with their next level of strategic growth,” says Stockett.

Stockett sees continued growth in the city’s future. “I grew up here, but like many young people at the time initially moved away to bigger cities. Thankfully, many of our multi-generation owned businesses as well as the benefactors of recent financial successes had enough foresight to re-invest in the city. It has been a burst of energy that has continued to invigorate the community and make it a great place for businesses to come and grow.”

Tenth Street Capital

Established 2005

Leadership: Al Duke, partner and co-founder | Meredith Duke, partner | Joe Decosimo, Advisor Emeritus

In order to assist with growth, acquisitions, and recapitalization, Tenth Street Capital provides mature companies with mezzanine debt and equity co-investments. Mezzanine debt, a cash flow loan, is frequently used with mature companies looking to acquire another company, add a new product line or distribution channel, or to enable management to buyout company owners for succession purposes.

Tenth Street has raised more than $400 million in committed capital, across eight separate funds. Investments are often much larger in size – generally in the millions – and don’t require collateral to underwrite loans. But because they carry more risk, investors are looking for much larger returns, often in the high teens.

Over the course of 12 years, Tenth Street has invested in more than 100 middle market companies.Since mezzanine debt carries more risk, traditional bank lending can be difficult to acquire since commercial banks are often unwilling to loan such large amounts given the associated risks, and the companies themselves generally can’t afford such significant investments on their own.

When identifying companies to partner with, Tenth Street looks for annual revenues between $10 and $100 million, a history of tenable growth, a diversified customer base, and a proven management team.

When investors are passionate about investing in area businesses they believe in, the results are twofold: the obvious is a return on their investments, but the intrinsic value lies in seeing the financial ecosystem they worked so hard to create, in a city they love and want to see succeed, flourish. As Chattanooga continues to gain traction as a hub for startups with serious growth potential, these investors are making it apparent that our city is good for business.