“In all chaos there is a cosmos, in all disorder a secret order.”
― Carl Gustav Jung
As we size up where we are mid-year with the Birmingham and Alabama entrepreneurial ecosystem, the theme that I see is: out of chaos comes order. One of the trends we’ve noticed through investing at First Avenue is that the venture and equity growth capital markets are becoming increasingly more efficient. Capital markets and capitalism crave efficiency. They want scale, repetition, assembly line mechanisms, and wash and repeat sales process.
Venture capital nudges startups towards efficient, scalable processes. But while capital markets want efficiency, entrepreneurs and company builders want inefficiencies that they can leverage for profit, market gaps that they can fill, and technologies and advances that create entirely new markets. This tension is, in many ways, the core back-and-forth between funders and founders. However, over time and with experience, investors refine and develop what they are seeking from early-stage startups. The traits, characteristics, industries, and stages blend into the investment theses of various funds. Founders seeking capital point their companies in their direction.
The funder/founder tension may remain, but the level of sophistication increases, and the rules and infrastructure become more established. At the pre-seed level, accelerators and venture studios supplement friends and family investments. As the companies mature, larger venture capital firms begin to move companies in a direction to receive such funding with more established benchmarks: $2 million in ARR for a SAAS company, for example, puts you as a candidate for financing from an array of institutional funders. Even companies that are seemingly off the roadmap may find funding by venture capitalists who are seeking just such an off-beat opportunity. Although I would urge caution in these maverick strategies, if real value is being created, funds are usually there to support it.
With experience, the rules and customs as well as the milestones and metrics become established. Helping companies look at the financing world in this way is a lot of what we do. As a geographically-based funder, I see our role in part as nudging our portfolio companies into the larger and broader world. We want our companies to think beyond Birmingham and Alabama not because we are negative about our city and state, but because we always want them to think bigger, to be bigger, and to expand their impact. If you are only impacting your small community, are you really a growth company? To receive funds, you have to think big.
From a funding perspective, this evolution is helpful for Alabama. I believe that venture funding is going through significant changes, but whether this is a material shift or an evolution in the venture capital business, the inevitable change allows Alabama to jump in at any point. Just as a developing country does not have to put up phone lines everywhere but can simply install cell towers, Alabama is able to leapfrog the current—and potentially broken—venture capital financing model. If we invest wisely and create the appropriate environment, then we can provide a level of equity financing that will move the state forward. We have had some wins in the last six months (the exits of Vendrix and Illumicare, for example) and Innovate Alabama’s SSBCI program is now underway. The building blocks are there.
Alabama also now realizes—correctly—that economic development includes an entrepreneurial and startup strategy. After years of looking in awe and wonder at the crazy California hippies, the nerdy Boston scientists, and the fast-paced Yankees, we have now realized the necessity of their method of taking a risk with capital. Startups, it turns out, grow local economies. We are late to the game, but we are now in it.
Naming things is the key: name the vertical with precision, name the institutional funders who will fund it, name with precision the KPIs and milestones necessary for institutional funding. If we do this individually for each company, then our collective ecosystem will more easily and effectively allocate the resources.
I have more confidence than normal that we can do this, and as a long time glass-half-empty person with respect to the Alabama entrepreneurial ecosystem, I hope that gives each of you comfort.
Mike