By Evan Prislovsky, Capital Analyst

In Q1 of 2023, venture capital funding for Tennessee startups was a notable bright spot in the industry — with a dramatic 325% increase from the previous quarter and a 211% increase from the same quarter the previous year. 

This was especially unexpected considering the downward trend of venture funding and in the midst of the banking crisis. 

View Q1 2023 Deal Report.

Here are some of the recent VC trends across the board nationally: 

• Angel and seed investment made up its lowest share of venture investment in at least a decade, dropping to 34.0% in Q1, compared to its usual 47%, and even lower 38.4% in Q4 2022.
• VC fundraising amounted to $11.7 billion, a decrease from the $12.5 billion raised in the prior quarter. In 2022, 74% of the capital raised was secured in the first half of the year.
• IPO window remained closed
• Consolidation of capital into larger firms

Zooming in on Tennessee

This quarter saw major investments in three venture deals, including Monogram Health ($375 million), Wellvana ($84 million), and Rain ($116 million). 

It is notable that in 2022, nearly half (47%) of all venture capital funding in Tennessee went to healthtech startups, again capturing over half of the funding this quarter indicating the strength of the healthcare ecosystem in the state, particularly in the Nashville area. 

Beyond healthcare, fintech, climate tech, and data & A.I. are the other emerging industries seeing rapid growth.

On a more granular level, the average seed deal size grew by 91% year-over-year.

However, quarter-to-quarter, the average seed deal size dropped by 7%. 

In Q4’ 22, there were 23 seed deals, but that number decreased to 19 in Q1 of 2023. 

In Q1’23, the average pre-seed deal size decreased by 46% when compared to the previous quarter, with 8 pre-seed deals being made compared to 15 deals in Q4’22. 

In terms of where the capital went, 20% of venture funding dollars in the first quarter of 2023 went to fintech companies. 

Fintech deals came in third in terms of deal volume (5) and second overall for the most funded category ($155 million). 

HealthTech funding remained strong, accounting for 64% of all capital raised with $497 million invested across 7 deals done. 

Mobility was the only category that saw a decrease in year-over-year funding, with a 68% decrease in the capital invested.

Other Notable Tennessee Deals

• Empassion Health (Johnson City) raised $25 million in Series A funding to provide community-based advanced illness care services for patients facing serious illness. 
• Sovereign (Nashville), a blockchain platform aiming to improve user experience and scale up blockchain performance, secured a $7 million seed round. 
• Couture Technologies* (Nashville) also closed a $1.5 million seed round to develop software solutions that reduce returns for the apparel industry. 

*Couture Technologies is part of LaunchTN’s Impact Fund portfolio.

Notable Venture Funds Raised

• FCA Venture Partners (Nashville) closed a $71 million fund, investing in early-stage healthcare companies.

The influx of venture capital funds closed in Tennessee has decreased, a trend that is mirrored across the venture capital industry. 

In response to this decline, many venture capital funds are investing more resources into existing portfolio companies to extend their runways to 24 months and provide assistance with operational matters. 

This will present a challenge for newly formed companies seeking capital, narrowing the universe in terms of venture capital funds writing new checks until existing portfolios are accounted for.

Additionally, because of the uncertain economic environment, it has become increasingly difficult for new venture capital managers to enter the industry and raise funds, as limited partners are closely monitoring the Federal Reserve’s course of action to combat inflation and their intervention in the banking sector. 

Our team will soon announce a new fund-of-funds model investing in Tennessee-located and focused venture capital funds. More on this soon.

Key Trends from Tennessee Deal Activity in Q1:

• Deal volume is slowing down, declining ~15% QoQ 
• Tennessee saw a record-breaking quarter with nearly $774M in total VC funding, almost doubling its second-largest quarter ever
• Average check size for seed stage companies declined by more than 7% in the Southeast region, with a decrease of over 13% in Tennessee (QoQ) 
• Venture funds raised are declining in Tennessee, consistent with national trends

Q1 2023 Highlights

• LaunchTN’s Innovation Week showcased the state’s founders and innovation assets. Tennessee entrepreneurs advocated for Tennessee’s entrepreneurial ecosystem to lawmakers.
• ViVE – This nationally-recognized healthcare and healthtech conference attracted top healthcare investors and startups from across the U.S. to Nashville.
• Tennessee was officially approved for $117M via the U.S. Department of the Treasury’s SSBCI 2.0 initiative. Learn more about Tennessee’s equity and debt programs by visiting Fund Tennessee.
• LaunchTN’s Southeast Capital Call returns. This is a quarterly virtual event for VCs to network and discuss the state of the economy and industry trends in the Southeast. 

Stay up to date with Tennessee’s growing tech and entrepreneurial ecosystem by signing up for The Pitch, Launch Tennessee’s newsletter.

You can also check out our Q4 2022 Tennessee Deal Report to get a better understanding of quarterly funding trends. 

If you’d like to see any specific data in the next report, please reach out to Evan Prislovsky, LaunchTN’s Capital Analyst: evan@launchtn.org