Meet us at the Tennessee House!

Q4 2023 Tennessee Deal Report

By Evan Prislovsky, Capital Associate

View the entire deal report. 

Venture market outlook for 2024: key points

  • Challenging Environment: Expect continued difficulties in 2024 as excesses from past years are corrected. The market’s recovery depends on economic resilience and exit market improvements.
  • Funding: Most startups will need to raise capital in 2024. Many may face down rounds, M&A discussions, or closure if IPO markets and sentiment don’t significantly improve.
  • Valuations: Down rounds are increasing for late-stage companies, while seed to Series A valuations remain stable. Expect IPO candidates to exhibit significant scale, growth, and profitability.
  • IPO Market: A phased reopening could occur in 2024, favoring durable, scalable companies with profitability at IPO. Windows of opportunity may be limited due to elections and market conditions.
  • M&A: Mixed outlook due to valuation gaps, geopolitical uncertainties, and lack of conviction. Deals are taking longer, involving more structure, and are relationship-driven.

Sources: JP Morgan, Carta Q4 and 2023

 

 

What’s happened in the Southeast in 2023

The Southeast has emerged as the fastest-growing hub for venture capital and startups in recent years. The region raised 20% of all U.S. VC dollars in 2023, up significantly from 11% in 2020. This growth is fueled in part by the Southeast’s large and expanding population, now representing the census’s biggest region with over 128 million residents. Major metro areas, like Atlanta, Austin, Miami, Nashville and Raleigh are experiencing a surge in startup activity across industries, like logistics, healthcare and manufacturing that have traditionally had a strong regional footprint.

The maturation of the ecosystem itself is also driving more VC activity. As Southern startups achieve successful exits, they produce more angel investors and startup talent that then is reinvested locally. This cycle of startup wins followed by capital recycling is lifting up hubs across the Southeast.

Recent data shows this cycle continuing despite some short-term economic uncertainties. While early-stage funding rounds have declined slightly in 2023, average check sizes are up 22% since 2018. Investors are focused on placing larger bets in proven sectors and supporting the growth of thriving startups. This demonstrates a cautious optimism in the Southeast’s ability to cultivate an environment favorable for innovation and long-term startup success.

Sources: State of the Startups in the Southeast in 2023, South’s Rising Share of VC

Tennessee’s trends

Tennessee’s investment landscape showed resilience this quarter, with total funding reaching $276 million (excluding Main Street Health’s $315-million raise as an outlier). This represents a hearty 23.9% QoQ and 51.7% YoY growth rate, respectively.

Late stage and Series A & B companies secured the lion’s share of deals, particularly within the thriving Health Tech sector. Health Tech firms accounted for over 21% of Tennessee’s deals and brought in 73% of funding, highlighting vigorous investor appetite for early to growth stage businesses in this space. 

Echoing broader U.S. venture trends, Tennessee saw slowing deal count against the backdrop of macroeconomic uncertainty, while average round sizes swelled. This signals that local startups are taking a more conservative fundraising approach designed for endurance rather than rapid expansion. It paints the picture of a prolonged startup slump nationwide rather than a quick rebound.

Tennessee’s Health Tech momentum continued as investment levels more than doubled year-over-year. Several mature industries, like fintech, mobility, and medtech, also saw healthy expansion upwards of 46-76%. However, some emerging spheres felt strong headwinds, with funding plunging over 100% in biotech and 300% in web3. Moving forward, the separation between the state’s established and fledgling tech ecosystems will be an important barometer to monitor. For now, Tennessee remains a hub of activity for later stage companies in proven sectors, while earlier stage and pioneering startups face more muted prospects.

 

Notable Tennessee deals in Q4 2023

  • *Personality Pool (Kingsport) – $300K Pre-seed funding for video interviewing and AI-powered personality screening SaaS to improve hiring for customer-facing roles
  • Allera (Chattanooga) – $750K Pre-seed funding for food tech SaaS platform providing QA and operations documentation plus AI data analytics
  • KIT Plugins (Nashville) – $1M Seed funding for developing high quality audio augmentation software
  • Aro (Knoxville) – $1.1M Seed funding to help reduce phone screen time through gamification
  • Prosal (Chattanooga) – $1.1M Seed funding for RFP marketplace connecting companies with agencies/vendors for projects
  • *PaintJet (Hendersonville) – $10M Series A funding for industrial painting robotics company addressing labor shortages
  • Local Infusion (Nashville) – $10M Series A funding for infusion therapy services with improved patient experience
  • Kythera (Franklin) – $20M Series A funding for healthcare data analytics platform applying machine learning for insights
  • Phosphorus (Nashville) – $27M Series A funding for proactive security platform protecting IoT and IIoT devices
  • Diana Health (Smyrna/NYC) – $34M Series B funding for tech-enabled maternity and women’s health clinic network
  • INGENIOUS.BUILD (Nashville) – $37M Series B funding for integrated cloud platform streamlining construction project management
  • SurgNet Health Partners (Nashville) – $50M Late stage funding for surgery center development, syndication, management and strategy
  • Main Street Health  (Nashville) – $315M Late stage funding bringing value-based care models to improve rural healthcare access

*Impact or InvestTN portfolio company

Key trends from Tennessee deal activity in Q4 2023

  • Deal volume dropped further by ~19% quarter-over-quarter
  • Total funding rose to $276M excluding Main Street Health’s $315M outlier deal, up 23.9% over the previous quarter and 51.7% year-over-year
  • Larger Series A & B and growth deals drove funding increases, especially in health tech and fintech, mirroring broader Southeast trends
  • Tennessee ranked 24th among U.S. states in total 2022 venture funding after holding the 25th spot in 2021; now 16th in funding year-to-date for 2023, behind GA, NC, VA and FL
  • Chattanooga seeing more pre-seed and seed deals as Brickyard Fund I brings teams to the area

Our take on the market moving forward…

  • Bridge funding rounds are expected to remain popular in 2024 as overall VC activity declines. This allows existing investors to support their top startups at more favorable valuations during a period of market uncertainty.
  • Startup failures have hit record highs while funding availability has tightened significantly. This will likely intensify competition among startups for limited venture dollars in 2024. It also creates potential opportunities for investors to find deals at lower valuations.
  • Expected increase in pre-seed and seed deals across Tennessee with the launch of InvestTN fund in Q4 2023

Get connected

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. 

Check out our Q3 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:

You are now being taken to Startup Tennessee to view current events.

Launch Tennessee provides an ecosystem map with links and resources to other organizations, but this does not constitute an endorsement of content, viewpoints, policies, products or services of that site. Once you link to another web site not maintained by LaunchTN, you are subject to the terms and conditions of that website, including but not limited to its privacy policy.