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Q3 2023 Tennessee Deal Report

By Evan Prislovsky, Capital Associate

View the full report: TN Deal Q3 ’23

National Trends Quick Hits

  • Venture environment remains down after the 2021 boom. B2B tech weakness indicates a prolonged tech recession.
  • LPs highly selective in VC commitments given weak returns and low liquidity. IPOs/M&A minimal.
  • Valuations stay compressed, especially later stage. Lackluster venture returns persist.
  • Consolidation accelerating as startups unable to raise capital look for exits.
  • Series A median size down 26% and pre-money valuations down 17% vs 2021 per Carta data.
  • Recent IPOs like Instacart, Klaviyo, ARM struggled post-IPO due to small float, lack of lockups, and funds seeking for liquidation.
  • B2B software recession ongoing for over a year, consumers starting the feel economy tightening with high debt and prolonged higher interest rates.
  • Prolonged downturn through 2023/2024 likely. Rebound will be gradual as risk appetites recover slowly.

*Source: Bloomberg, Carta, Bill Gurley’s Tweet Storm

Zooming in on Southeast Landscape:

  • Deal activity and valuations dropped substantially vs. Q2 and year ago levels.
  • 15% of deals now down rounds as investors gain leverage amid weakness.
  • Investors dictating more founder-unfriendly terms given market power shift.
  • Diligence timelines still stretched out given caution in deploying capital.
  • Expect continued pressure on deal environment for remainder of 2023 until liquidity improves.

*Source: Hutchinson

Tennessee’s Trends

Tennessee saw funding volume decline but deal sizes increased this past quarter. Thirty-six deals totaling $220M closed, down 31% in deal count and 23% in dollars versus last year. However, average seed deal size jumped 68% quarter-over-quarter to $2.2M, excluding outlier Croissant. Excluding outliers, seed deal size further increased 77% to $3.1M. Early stage Series A and B deal sizes also grew 57% versus last quarter as companies raised more conservatively to extend runways.

While overall deal count dropped substantially, the rise in total funding suggests some larger seed and early stage rounds occurred this quarter.

The mobility sector continues gaining momentum, grabbing an even larger funding share versus previous quarters. Despite the downturn, healthtech, fintech, and mobility sectors have already surpassed their total 2022 funding this year.

In Q3, there were 12 combined deals related to SaaS, data, and AI startups here in Tennessee. This level of activity reflects the AI hype still occurring in the Bay Area and NY amid recent tech IPOs hence the pumping up valuations.

Overall, the Tennessee market does mirror broader U.S. trends. Deal activity has slowed, but average round sizes are up, indicating startups are raising more conservatively amidst macro uncertainty. This paints a picture of a prolonged venture slowdown rather than a rapid rebound.

Key Takeaways from InvestTN in Q3, that we’ve noticed:

  • As a new fund, InvestTN can take a fresh valuation approach amidst the shifting market, emphasizing reasonable terms and founder education.
  • A robust CPG startup ecosystem is emerging in Nashville, with new brands in food, beverage, and consumer products.
  • Battery technology startups are developing in Knoxville, leveraging Oak Ridge and UT research strengths.
  • More VCs have appetite for their first Nashville/Tennessee investment deal.
  • Due to more challenging conditions in the venture capital landscape, seed stage companies will face a tougher environment raising Series A rounds and will need to focus more on capital efficiency and achieving product-market fit with less funding. This means seed investors will need to be more selective in backing founders and companies that can succeed with less capital.

Notable Tennessee Deals

  • Calm Waters AI (Nashville) – $1.5M seed for automated medical coding platform
  • Genus AI (Brentwood) – $6M seed for generative AI platform for brands
  • Tankfarm (Nashville) – $23M Series B for propane distribution platform
  • Pluto Health (Knoxville/Durham) – $8.9M seed for health data platform
  • Lirio (Knoxville) – $14M Series B extension for digital health personalization
  • Writerly AI (Nashville) – $2M seed for custom enterprise AI
  • Southbound Tequila (Nashville) – $3.3M seed for premium tequila brand
  • Thyme Care (Nashville) – $60M Series B for oncology management platform
  • Croissant (Nashville) – $24M seed for retail commerce fintech platform
  • Textla (Chattanooga) – $3M seed for no-code, intelligent messaging platform for SMBs & low-tech teams that unlocks enterprise, wholesale pricing
  • Yoshi (Nashville) – $35M Series C, automotive mobility services

New Players Rolling into Town

While venture capital activity has slowed recently, Nashville continues to see exciting grassroots investor activity emerge in Q3 in tandem with our flagship startup festival 3686.

Former Chicago Bears linebacker Hunter Hillenmeyer joined New York-based seed-stage venture firm Company Ventures as a general partner. Hillenmeyer, who has lived in Nashville full-time since 2017, will be Company Ventures’ first partner based outside of New York. The firm invests in digital health, fintech, and enterprise software startups — all sectors with potential in Nashville. With Company Ventures focused on pre-seed and seed rounds, Hillenmeyer’s presence could help address Nashville’s historical lack of early stage funding, especially outside of healthcare.

Additionally, Thomas Lehrman, managing partner at Teamworthy Ventures, recently relocated to Nashville. Teamworthy partners with outstanding entrepreneurs building software and software-enabled services companies, often leading pre-seed, seed, and early stage rounds.

Chrissy Whitty, an investor at Jurassic Capital, a North Carolina-based B2B SaaS fund, also moved to Nashville this past quarter.

Finally, Mark Chou, founder of Bradhurst Ventures, an operator and investor in early-stage consumer brands, arrived in Nashville. Chou previously spent 4 years at Away, joining as the third employee and first executive, overseeing growth marketing, e-commerce, and international expansion.

Ultimately, Nashville’s ecosystem is benefiting from an influx of top executive talent relocating to the city. This migration of C-suite leaders could create a domino effect, attracting more junior tech talent and capital to the Volunteer State. 

Notable Venture Funds Raised:

Key Trends from Tennessee Deal Activity in Q3

  • Deal volume decreased 31% quarter-over-quarter, signaling investors are reevaluating deals as companies seek extended bridge financing.
  • Tennessee funding increased 38%, returning to more normal levels after the Q2 drop.
  • Healthtech, fintech, and mobility have already exceeded their total 2022 funding this year.
  • Later-stage deals remain frozen, with most funding going to seed, Series A and B.
  • Tennessee ranked 24th among U.S. states in total venture funding at the end of 2022. The state held the 25th spot in 2021. After the first three quarters of 2023, Tennessee is on track to rank 16th.

Lastly, you can stay up to date with Tennessee’s growing tech and entrepreneurial ecosystem by signing up for The Pitch, Launch Tennessee’s weekly newsletter. 

You can also check out our Q2 2023 Tennessee Deal Report to get a better understanding of quarterly funding trends. 

If you are a startup in Tennessee that is looking for venture funding, we’d love to connect with you. Just head over to the InvestTN website and complete our startup intake form – it’s the easiest way to get started!

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

Special Thanks to LaunchTN’s

2023 Visionary Supporter:

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