It is that bi-annual time of year when I make my usual plea that we are not providing enough equity support. Once again, this is true, but perhaps this is also time for me to offer more productive thoughts. Thanks to Will Wright, the Head of Innovation at Protective Life, I recently had the opportunity to engage with a small group of seed investors and founders who had recently successfully raised funding. I greatly appreciate the time I spent with them because it helped me work through some of the changes that I see in an ever-changing and more evolved state of seed investing.
As opposed to offering my — perhaps, by now, routine — Birmingham pessimism, I think a reset of the discussion about the relationship between company, investment, and ecosystem is more productive and will perhaps frame the discussion more fully, offering not just a simple reiteration that not enough startups are getting funded, but also some perspective as to why.
We must recognize that there are new and evolving dynamics with seed funding, and while I do not fully understand them, I do think I can begin to see a “new normal” post-covid perspective on financing, which is changing things and creates new discussion points.
Specifically, we need to discuss:
- The re-evaluation of risk occurring in the seed investing markets and the material impacts on early rounds;
- What expectations are in a market that will look for more capital efficiency;
- Structural and practical implications;
- The effect of the wider economy on mid-tier cities such as Birmingham.
I will discuss each of the above points in forthcoming blog articles in the hopes of providing some tangible advice — or, at least, elucidating First Avenue’s market perspective. I continue to believe in startups and in Birmingham, but that belief is tempered by the reality that getting funded in Birmingham is a challenge. When the venture capital markets demand perfection and being located in Birmingham automatically makes you not the hometown investment, you start with a mark to the negative. How do you overcome that market (and stay in the city that you hopefully, like me, love and believe in)?
From my perspective, I try to provide transparent and clear-eyed guidance. Such guidance may often be wrong, and while I have tremendous respect for founders (there is nothing more challenging in business than creating a profitable revenue stream), I am always amazed at both my over- and under-estimation of a business plan’s prospects. A sober perspective, in my opinion, is always helpful, particularly when coupled with probing questions, which every founder should relish if they are at some point going to seek capital.
And, as we can see from the stats on Birmingham, getting funding is increasingly challenging:
- 38 startups secured funding in 2022 and 30 in 2023. So far in 2024, 16 startups have secured funding .
- Additionally, we are beginning to look at Series A[1] financings in Alabama. There continue to be some, but not a lot. In 2022 there were seven: Ayas Renewables, Case Status, Conserv, Fresh Technology, GoodJob Software, Immunowake, Shipshape Urban Farms, and Tquila Automation (HQ in Austin, delivery center in Birmingham). In 2023 there was one, REPOWR, and in 2024 there have been three so far: Acclinate, QuantHUB, and HData.
My belief is that while capital is available, investors want/need a higher return for a lower risk. For Birmingham companies, this requires a much higher level of expertise, acumen, and professionalism than in previous years. Personally, I find working through and with professionally managed seed funds increases the likelihood of success.
Finally, I should also add that Birmingham and Alabama are moving in the right direction, despite my sometimes glass-half-empty perspective. Readers will remember that one of the issues I have pointed out is the inability to form a fund except as a Registered Investment Advisor (RIA), which requires employees involved with due diligence and investment to take the Series 65. Earlier this month, the Alabama Securities Commission changed that rule and created an exemption for funds based on a model state rule. While we are still working on understanding the full legal implications, this was definitely a step in the right direction and a small step forward. Hopefully, we won’t have the usual step backwards.
[1] For purposes of this article, Series A is as reported by Crunchbase or recorded by First Avenue Ventures.