By John Lanahan, LaunchTN Director of Capital Formation
“Buy low, sell high.”
It’s a tried-and-true axiom for all good investors to follow. When you believe the intrinsic value of a company or asset is priced below the market, it’s a good time to buy and when the opposite is true, it’s time to sell.
So how does an early-stage investor evaluate a company with little or no traction, a minimum viable product and only a two-person team? It’s a given that investors look for quality teams solving a significant pain point in a large market. Yet investing is more of an art than a science, which is why most investors rely on intuition, groupthink and pattern recognition to evaluate teams and market opportunities. They often invest in industries they know, are more likely to invest if they’ve personally experienced the pain point, take meetings based on personal referrals and develop FOMO if lots of investors are interested in a company.
This creates what Ross Baird, early-stage investor and founder of Village Capital in D.C., calls the Innovation Blind Spot. Ross recently spoke at 36|86 Entrepreneurship Festival, is a huge supporter of Launch Tennessee, and understands the undervalued opportunities that exist in emerging startup hubs like ours.
Ross’s mission is to find these opportunities in founder demographics, industry sector and geography. When 75% of venture funding goes to California, Massachusetts and New York, startups in the rest of the country are generally overlooked. He recognizes where there’s concentration, there’s competition, which can artificially drive up valuations. “In recent years, if you invested in a company outside New York, Boston or San Francisco at similar stages, the value — what you paid for shares in the company — would have been at a 35% discount compared to peer companies in the big three [markets],” Ross says. He’s not the only smart investor who understands the geographic disparity, Steve Case, founder of AOL and Revolution Ventures recently closed a $150M fund to focus on investing in companies outside the major markets and will be making stops in both Memphis and Chattanooga during his Rise of the Rest Bus Tour in a few weeks.
The Innovation Blind Spot also recognizes that investor networks play a role in the demographics of founders in whom they invest. According to CB Insights, VC dollars go to only 8% of female founders, and, even worse, in 2017 only 2.2% of venture capital dollars went to all-female founding teams. Minority founders are further underrepresented, raising only 1% of VC dollars.
This is both a networks and bias/perception problem. The majority of investors source deals through personal networks, and when most investors are white males, these networks tend to be homogenous. So when the best and brightest women and minority founders are developing amazing companies, which often happen to be in social-impact areas, they struggle to get the warm introductions and referrals that increase the likelihood of an investor meeting with them.
Luckily, the number of female- and minority-led funds is growing; they see the untapped potential in overlooked founders. Leading the charge is the first female-led fund investing exclusively in women: The JumpFund in Chattanooga! We will continue to leverage our partner relationships across the state with true innovators like The JumpFund and provide an open application on our website to make sure that we’re meeting the most impactful Tennessee companies regardless of demographics.
In addition, personal perspective frames opportunity. Investors tend to fund the problems they experience or understand, meaning they tend to overlook solutions to larger societal issues that wealthy investors in San Francisco rarely experience.
“Investors continue to dump billions of dollars into photo-sharing apps and food-delivery services, solving problems for only a wealthy sliver of the world’s population, while challenges in health, food security and education grow more serious,” Ross writes in The Innovation Blind Spot.
We have massive problems to solve and an incredible opportunity to effect true societal change. Joel Solomon, founding partner of the Renewable Funds in Vancouver, recently visited the Nashville Entrepreneur Center, and I had the pleasure of moderating a talk on his new book, The Clean Money Revolution. The book frames the opportunity as “$40 trillion will change hands by 2050, as the largest intergenerational wealth transfer in history will take place and the ramifications will remake the world. The dirty money of “business as usual” is on the brink, wedged between catastrophic climate change and the demographic tidal wave of Millennials pounding the consumer table for real change. These forces are transforming the very nature of capitalism into something different and powerful— towards a clean money revolution.”
Social challenges, according to Ross, are solved by nonprofits and financial patronage — and they’re investment opportunities with potential upsides. Social impact funds have sprung up to fuel capital into this arena, yet they’re relatively unknown to most investors. Unsurprisingly, Millennials, who more likely to care about social responsibility, are driving awareness of social impact funds. The best part is that these types of funds deliver results. According to Cambridge Associates, social responsible funds at various stages perform on par or better than traditional funds.
Meet LaunchTN’s new Impact Fund, which will invest $50k to $150k into for-profit, Tennessee based companies making a social or economic impact with their product or service. Over the last few months we’ve had an opportunity to refine both the industry focus of the fund and stage/profile of the companies we’re looking for. Through this fund, we have an opportunity to help grow companies that have a net positive in society, while generating solid returns.
Our goal is to help lead the way on Impact Investing in Tennessee and we believe there’s an incredible opportunity to catalyze the state. It’s time to reframe the conversation on access for founders in underrepresented areas like social impact. We’re excited to support change for the good of Tennessee with our investment dollars.