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VOL. 9 | NO. 3 | Saturday, January 16, 2016

Tennessee Startups Chasing Greater Opportunities

With less than $200M already invested, the goal is $1B by 2017

By Jeannie Naujeck | The Tennessee Ledger

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When it comes to launching startup companies, Tennessee is best described as “early stage.”

The less than $200 million in venture capital invested in Tennessee businesses in 2014 is a rounding error compared to the $30 billion invested in California. And when the final tally for 2015 comes out later this month, the disparity won’t be much smaller.

But it’s still serious momentum compared to just a few years ago when only about $100 million was invested in the Volunteer State.

And those who run Tennessee’s business incubators say it’s just a matter of time before one of the thousands of business ideas they develop each year turns into the state’s next big hit, fueling interest from investors and exponential growth in capital investment.

“The activity is encouraging. You can see the whole next level of growth for our collective communities and overall state in terms of a startup network and ecosystem,” says Jason Denenberg, director of entrepreneurship and capital formation for LaunchTennessee, the coordinating network for the state’s nine regional startup accelerators. Those entrepreneur centers screen about 2,000 pitches each year and help develop those ideas into businesses.

“There’s a lot of work to be done yet but there’s a tremendous amount of activity.”

LaunchTN has set a goal of attracting $1 billion to support the state’s early-stage companies by 2017.

Attracting more diverse capital is a priority. In Middle Tennessee, most investment continues to go into health care-related startups, a legacy of Nashville’s HCA, which created wealth that has gone to finance future generations of startups, explains Alexander Davie of Riggs Davie PLC, a boutique firm that provides legal counsel to tech startups.

“The main thing is the lack of growth capital,” he adds. “The exception is health care tech startups. Health care is where Nashville shines.”

That’s evident in a brief review of recent funding successes by startups in Middle Tennessee. IQuity Labs announced $2 million in seed funding last week, which will help it bring a minimally invasive early diagnostic test for multiple sclerosis to the market next quarter, and tests for other autoimmune diseases soon after. The tests commercialize research developed at Vanderbilt University Medical Center.

Clariture, which provides social media marketing to health care companies, raised $3.5 million in December to expand through a new round of financing. MindCareSolutions, which provides tele-health behavioral health services, announced $13 million in new investment in November.

Evermind, a technology that helps seniors age in place by tracking their activity, raised $5 million in October. Narus Health, which provides care coordination to those diagnosed with a life-limiting illness, launched last summer with $30 million in funding.

With enough investment, each one could develop into the next Change Healthcare, which sold its health care technology business to Emdeon for $135 million just over a year ago.

But entrepreneurs can no longer expect investors to be interested in funding just an idea, says Jonathan Sexton, who founded two music-related startups based in Nashville and is currently the entrepreneur-in-residence at the Knoxville Entrepreneur Center. They’re interested in ideas or products that are developed and are already seeing success.

“So many people now are in the startup game, you can’t just have an idea on paper anymore. You’ve got to figure out how to bring that idea to life and get people to start using it before anybody’s going to take any interest,” Sexton says.

“It’s all about being able to hustle and execute and make something out of nothing. If you’ve got something people want, the money is going to find you.”

One of the state’s largest recent investments is the $8.7 million in funding announced in November by General Graphene, an East Tennessee company that will use manufacturing technology developed at Oak Ridge National Laboratory to commercialize a carbon-based material called graphene that is stronger than diamonds and has many potential business and commercial applications.

Founder Vig Sherrill has started seven companies, most of which were acquired or went public.

“$8.7 million is good for Tennessee,” Davie explains. “But it has to succeed and return money to the founders and the investors so they are free to go and fund future companies.

“There needs to be another home run.”

Finding the next home run is LaunchTN’s goal. Each year, it takes the top startup companies to graduate from the business accelerators and gives them advanced training, funding support and greater visibility to potential investors in a master-level program called the TENN Master Accelerator. This year’s class includes eight ideas that could develop into Tennessee’s next big hits.

They include music technology companies, an educational tool for children, software to help divorce attorneys manage their caseloads, health care related companies and a tool that predicts vehicle breakdown by reading sensor data.

“It’s an extremely diverse set of people, companies, industry focus, and I think it’s a really accurate depiction of the great activity we have going on around the state,” Denenberg says.

Interestingly, the two health care-related companies didn’t originate in Nashville. Innovasan, which offers a technology solution for on-site treatment of fluid medical waste, was developed in Knoxville, and LendMed, a platform for hospitals to swap and keep inventory of medical supplies, came from the Memphis accelerator.

In general, each of Tennessee’s four major urban areas has a flagship company or industry that largely determines where new investment is concentrated.

Memphis is the hub of innovation in medical devices and transportation and logistics due to the large concentration of medical device manufacturers and FedEx. Its ZeroTo510 business accelerator invests in startups with promising ideas and helps them develop their products and business models to fast-track them through the FDA approval process.

Chattanooga’s investment in ultra-high-speed fiber Internet service has turned it into a hotbed of innovation in business applications requiring high bandwidth, including big data, cloud computing and smart grid software. The entrepreneur center there, CO.LAB, has a boutique program called GIGTANK for startups in that area.

Chattanooga also has a venture incubator called the Lamp Post Group, which invests in and gives business development support to startups. Its recent successes include a transportation startup called Access America Transport that was sold for $125 million to a larger company that ended up being purchased by UPS, and Bellhops, an app that connects people who need things moved with students who contract to do it. Bellhops recently raised $13.7 million in investments to expand its business.

In Knoxville, the presence of Scripps Networks Interactive, creator of the Food Network, Travel Channel and HGTV, has made it the third-largest market in the U.S. for video production and spawned scores of companies creating programming for networks like Discovery, ESPN and A&E.

Because of that focus, the Knoxville Entrepreneur Center has a concentration for digital media startups called MediaWorks. Research at nearby Oak Ridge National Laboratory also diversifies the economy. Last year, Phoenix-based automotive startup Local Motors collaborated with ORNL manufacturing researchers to produce the world’s first 3-D printed car.

Other Knoxville successes include ARiES Energy, which was acquired by PHG Energy in September; NewsBreak Media Networks, which provides merchandising software to convenience stores and is rapidly expanding its network of locations; and Little Fishkopp, a children’s clothing retailer whose signature product is a sleep-bag alternative to blankets.

“The Silicon Valley ecosystem is much further than us in that they have a high number of venture capitalists and angel investors – the money available there is huge,” notes Emily Skaar, director of entrepreneurship for the Knoxville Entrepreneur Center.

“We’ve been teaching our companies not to expect that money, but to figure out how to do it by bootstrapping,” she says. “Though they may not be getting the funding right now, they definitely will be in a few years because VCs [venture capitalists] won’t be able to ignore them any longer.”

While most of the money may be elsewhere right now, remaining in Tennessee has its benefits. Startups here don’t need to raise as much money because their labor and other costs are much lower, Skaar adds.

“The area we excel in that Silicon Valley does not is cost of living,” she points out.

“Here you can make much less, have a great standard of living, and get the same product done. So while the gap may seem large it’s getting smaller every day with technology and marketing.”

Knoxville digital media entrepreneur Joe Vangieri, whose companies include DigiTrax Entertainment and Children’s Media Studio, says he is in talks with funders in New York. But he has no intention of moving his business there.

“Tennessee has been so good to us. It has given us advantages we wouldn’t have had anywhere else,” he adds.

“Silicon Valley became what it is because they teamed up and created incubators, and the education and community surrounding it was phenomenal. We want to see that happen in Tennessee as well.”

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