Annual Assessment

Annual Assessment Of The Birmingham Entrepreneurial Community

2021 Annual Assessment

As always with the new year, we’re taking some time to pause and reflect. First Avenue does so by compiling our annual list of funded start-ups in Birmingham, which helps us analyze the health of the city’s entrepreneurial ecosystem. I also like to take stock and look back at some of my earlier articles and assessments and to ask people familiar with the ecosystem what they are thinking about its current status. When I do, three themes emerge:

  1. Our ecosystem is not as strong as we think it is. 
  2. We need more and better equity funders in the ecosystem.
  3. Valuations and funding activity makes no sense unless we are seeing a paradigm shift in the overall economy (and I think we are).

When compiling the 2021 list of Birmingham Funded Start-Ups, we saw a decrease in the number of funded start-ups.  In 2020 we had 86. In 2021, we had 81. We did see a healthy number of Seed, Series A, and Pre-Seed (Pre-Seed being defined largely as anything not classified in the foregoing) rounds. We also saw a healthy number of exits, which is pivotal for an emerging ecosystem. However, we also saw a lot of fade-outs – something that is inevitable but still disappointing. While the list does show that some aspects of the ecosystem are strengthening, this negative news is discouraging.

Additionally, we saw a significant number of companies move to different cities. This latter trend is something that I think will continue. Zoom and remote work have their benefits, but they also allow for less “stickiness” to any one city. In some cases, this is a positive thing for Birmingham. People love the city and move here from the costlier coasts, which helps build the community. But when the love fades, people can just as easily leave, and in several cases, companies have indeed left. Remote work is to the entrepreneurial community what the transfer portal is to college football: it giveth and it taketh away. We have defined “located in Birmingham” in a broad and generous light, but I see this question evolving. What exactly is a headquarters or a location? It’s a difficult question to answer, and it’s a question that may make any objective measurement of the entrepreneurial ecosystem’s health more challenging. 

Which leads me to the first of our aforementioned themes: our ecosystem is not as strong as we think it is. Yes, there is much that we can and should celebrate, but we also need to take off the rose-colored glasses and see things as they really are. The mindset of most Birmingham start-ups remains parochial and local. We try to boot-strap things when instead we need real funding. We fall for shiny objects. We do not dig and do the hard work when analyzing a start-up’s potential.  

Consider the following: Alabama had a record-breaking year in venture capital funding in 2020 – $179 million but California had an $81 billion year. Yes, Birmingham has a lot to celebrate; we have had successful fundings and successful exits, but let us not delude ourselves. Though the funding gap may not be as wide as it was in previous years, the ocean between VC hubs and middle-tier markets like Birmingham is huge. On a per capita basis, Alabama (population 5,030,000) received just over $35.58 in venture capital funding. Comparatively, California (population 39.23 million) received $2,066.00 per person. Say what you want about the hippie socialist West coast, but that is 59 times more of an economic driver. 

Comparatively, though, when we look outside of Alabama for funding, we find success. Shipt, Therapy Brands, Hospicelink, INFLCR, In8bio, and Prepaid Technologies all found financing outside of the ecosystem, and their success charts a course for others to follow. By looking outside of Birmingham, our perspective is broadened and success is more robust. 

The Alabama Innovation Commission is moving in the right direction and pulling influential lawmakers into the process. But their report – with which I totally agree in concept — was incomplete in key areas, overly broad in others, and potentially problematic in its execution ability. Additionally, the corporation board is primarily composed of politicians, and politics tend to be the anathema of innovation. How much better off would we have been if all the money spent with the Hoover Institution was instead actually invested in start-ups?   

I think some of this is because we are thinking too small. We are trying to satisfy everyone, which means no one will benefit. Politics – whether formal at the state level or informal within the ecosystem or individual companies — are the restrictor plates of the entrepreneurial ecosystem. When institutional venture capital is out in abundance, why are we not building businesses for that capital? While not every entrepreneur can or should be working towards the Series A,B,C rounds of funding or an IPO, a well-worn path exists for ready, willing, and able risk-takers.  

Which leads me to my next theme: we need more and better equity funders in the ecosystem. If you look behind the curtain at the funded start-up list, you will see that several share the same backers. This is all well and good, but if the goal is to get more funding into the ecosystem, these equity sources cannot do it on their own. If only 10 sources consistently fund businesses with equity and the goal is to get to 200, how is that going to work? It won’t. However deep their pockets, with such limited sources of equity, the human and financial capital will run dry.   

We need more Pre-Seed, Seed, and Series A funders in this community. We need people who are actually, actively investing. We need more funds. We need institutions who have large amounts of deployable capital to work with people and firms to invest in this economy. We do not need champions; we need investors who are doing their homework and rolling their sleeves up.  

This salvo is not a charitable ask: if done right, I think early stage investing leads to high financial rewards commensurate with the high risk. However, we rarely do it right. Too often, investors play a wait-and-see game: they wait to see which one of the many start-ups succeed and which ones fail. While I understand the financial principle — create optionality until that’s no longer possible — as institutional capital flows more towards the early stage companies (and I think this is a permanent trend), local capital will get shut out. This will limit our local impact and risk capital outflow away from the city. Local ecosystem investors and participants need to be more proactive — more definitive with yeses or nos and not maybes, more willing to lead, and more willing to pay people through fees, carries, or other incentives.

Why is this important? My final theme: a paradigm shift is underway. When I wrote the mid-year assessment in July 2021, I remarked at how we were in good times economically, but honestly did not have a good answer as to why. That continues, but as we have moved through the year, my thinking, like that of the Fed, has shifted from this being a transitory issue to a fundamental shift. Investing in the innovative economy is not just a good way; it is quite possibly the only way.  

Since the mid-year assessment, when I was not really sure why the start-up world was as hot as it was, I have come to believe that a more fundamental change to the economy and perhaps society is underway. A congregation of forces – supply change issues, blockchain, remote work, and responses to Covid like the vaccines and promising new treatments – are pushing our economy in a new, more innovative direction. I may be completely wrong, but I predict that we are just in the beginning of fundamental changes in the economy, and like the mice getting off the sinking ship, early-stage investors are deploying capital away from the sinking ship of the old economy and into new endeavors. 

The “overhot” VC market does not look overheated at all when you envision a world in 5 to 10 years in which these forces have more materially played out. In that world, companies, both old and new, that embraced innovation will have dramatically disrupted those that did not. If you knew that 50% of the companies that comprise the S&P 500 were going to go out of business while the other half would grow exponentially, would you think differently about your investments in younger companies today? For Birmingham, what new company is going to put its name on one of the large buildings, and what old company is going to have its name come off? When you look at things from that perspective, the “super hot” VC market may not be that off the mark. 

In order to remain relevant, vibrant, and economically healthy, Birmingham and Alabama need to embrace this change – which, of course, is not our forte. But I think that if we spread the risk, work in the incremental, and listen to and fight against our tendency to underinvest, we will have a better community. That, at least, is my professional mantra for 2022 and the years beyond, and I invite you to join me. 

    A Note on the Funded Start-Up List: No representation is made as to the accuracy and completeness of the information provided. We make every effort to be accurate, but this information is notoriously difficult to find and verify. If you find any errors, please let us know.

    2020 Annual Assessment

    Today, First Avenue Ventures releases the 2020 Funded Start-Up List. Thankfully, Birmingham added quite a few companies. This is wonderful. While striking an optimistic tone, our mid-year report, written in July of 2020, was unsure about the direction in which we were headed. Fortunately, at least from an entrepreneurial perspective, Birmingham ended up doing well.  

    Of course, the reason why we are doing well remains elusive. As 2021 so far looks to be an extension of rather than an end to last year’s events, truly assessing 2020 may require a little more distance.

    From an entrepreneurial perspective, the net effects of the pandemic as well as the political turbulence on start-ups in a general sense remain elusive: 

     

    • Will the increased reliance on teleconferencing allow for entrepreneurial companies in multiple locations (not just the current geographical hotspots) to flourish?
    • Will that same trend increase the ability of coastal institutions to invest in the tertiary markets, like Birmingham?
    • Will a Congress controlled by Democrats and a Democratic President find creative ways to engage and support entrepreneurial activity, such as the New Business Preservation Act or the Endless Frontier Act?
    • Will a Congress controlled by Democrats and a Democratic President work on regulations, such as re-classification of independent contractors, which could potentially decrease entrepreneurial growth?

       

      Again, it is too soon to say. But what I do believe is that 2020 set in motion significant trends, some obvious and some less so, that will impact us for decades to come. Things will be different. Once the COVID-19 pandemic is behind us, we will see how.

       One thing Birmingham did not do in 2020, at least from an entrepreneurial perspective, was stay still. Yes, some days may have been lost to scrolling through social media or hiding from a virus, but as our team prepared the Funded Start-Up List, we found the amount of activity in 2020 encouraging.

      As a reminder, the Funded Start-Up list was born out of the work done in 2018 by Innovate Birmingham, which was the first effort (to our knowledge) to canvass our entrepreneurial ecosystem. Realizing that some start-ups would fail while others succeed, a current list of companies in recent receipt of outside funding (which provides critical validation) would help give a good perspective of the overall health of the community. The sense at that time was that while much had been accomplished, much was still necessary. 

      Generally, we include companies that are not location-based that have received $100,000 from outside parties in the last five years. We exclude restaurants and similar retail businesses, as these are location-based businesses. While crucial to the overall Birmingham economy, these businesses do not fit within the growth of the entrepreneurial start-up system, which is what we are trying to measure and what we believe most crucial to the overall health of the economy. While the standards of $100,000 and five years are somewhat arbitrary, we believe they are good objective metrics in judging the vitality of the start-up ecosystem. The $100,000 standard represents a level of seriousness with validation from someone other than a founder. The five years standard represents a level of freshness important in evaluating the current status of the ecosystem: companies will automatically roll off, and if you follow this, coupled with companies that exit, annually, you will have a snapshot of whether the ecosystem is growing or not.

      Thus, we are happy to report that the ecosystem is indeed growing: we have 85 companies on the list this year as compared to 56 companies last year. This growth is significant, particularly given where we were in the spring of 2020.  At that point, I was exceedingly worried about the health of start-ups. I made the assumption — and I was not alone in this — that the capital markets would decrease due to the economic effects of the pandemic. While I am not a stock market prognosticator, the prediction a stock market decrease would lead to a decrease in overall capital for start-up funding did not occur (or, at least, it has not yet). That is probably the single most important factor in the robust nature of this entrepreneurial report.

      But is this a case of a rising stock market lifts all boats, or is this something unique to Birmingham?  Obviously, I am most interested in the Birmingham market. However, I do think certain trends are particularly in Birmingham’s favor, namely:

      1. UAB had some wins. In8Bio (formerly Incycus) filed to go public, and while they have not done so yet, that indicates financial success around the science. UAB also has a strong pipeline of companies – Yuva Biosciences; Sunfire Biotechnologies, LLC; TriAltus Bioscience; Reliant Glycosciences, LLC; Humbolt Innovations; HemEdits; and CNine BioSolutions, LLC. Generally, UAB is beginning to turn out more companies, and they’re doing so more efficiently and more effectively.
      1. Support services are in place. Five years ago, the only hub for start-ups in Birmingham was Innovation Depot and their accelerator, Velocity Accelerator. Today, multiple accelerators, incubators, funds, and other support services for entrepreneurs are active in Birmingham (see BhamBizHub for a complete list of services). In fact, a big contributor to the Funded Start-Up list was TechStars Alabama EnergyTech Accelerator, which provided not only expertise but capital to several companies new to this year’s list.
      2. Birmingham has had exits. While we had a big year for exits in 2017 (e.g. the year Shipt, Hospicelink, and Therapy Brands sold), the concern was that 2017 was an anomaly. 2020 saw several positive exits: Fetch Talent, MainStreet Family Care, Select Providers Network (SPNet), and StrategyWise. 

    Are there issues specific to Birmingham? Of course, and two issues in particular should be of community focus in 2021:

    1. Lack of minority founders. While we do not have good demographic information on all of the founders, empirically, one can see that not enough people of color are on this list. Yes, there are some, but if Birmingham is going to build an inclusive economy, we need to be mindful that this list is full of white people. Organizations such as Bronze Valley, as well as programs like the Community Foundation of Birmingham’s inclusive economy initiative, are critical, but more resources are needed.

    2. Lack of funds. Yes, the Alabama Futures Fund is active, but we need more funds. I believe that in 2021 we risk the number of investable deals in Birmingham exceeding the investment capital in the community to do those deals. If that happens, we will lose exciting new companies to other cities or other opportunities. Transitioning the economy is a game of attrition. Pooled capital helps diversify risk and professionalize the management of the portfolio. We need more.

    That said, just six to nine months ago, I was questioning the survival of the Birmingham entrepreneurial world. We should celebrate where we are. Turbulent times may continue, but the start-up community has endured. We are now more aware of the economic transformation; it is happening rapidly — perhaps, in some cases, dangerously so. As a community, our success depends on evolving with it.

    A Note on the Funded Start-Up List: No representation is made as to the accuracy and completeness of the information provided. We make every effort to be accurate, but this information is notoriously difficult to find and verify. If you find any errors, please let us know.

     

    2019 Annual Assessment

    2019 is in the books, and as is custom, we reassess where we’ve been, where we are, and where we are going. Birmingham is lucky for its entrepreneurs, and we cherish their hard work. They are the backbone of our city, without whom we wouldn’t have as strong and vibrant of a community or economy.

    Our bottom-line assessment: we need more. As has been our stance for the last few years, we remain cautiously optimistic about the Birmingham entrepreneurial scene. It is good, but it can be better. 

    In our July 2019 assessment, we said that we were concerned with the lack of exits, the state’s political climate, and gaps in connecting companies and available talent.

    Regarding the first concern, we did have a couple of exits in 2019. However, these exits, coupled with a lack of exits in 2019, are not of the monetary size of the 2017 (Shipt, Therapy Brands, Hospicelink) exits. Exits provide the human and financial capital necessary to fuel the continued growth of the ecosystem, and we continue to need more exits to provide the fuel for growth. All exits help create a second generation of successful entrepreneurs to mentor the first This concern was a push in 2019; let us hope 2020 brings us more.

    Some progress has been made on the second point, the “talent gap.” Birmingham has begun to better embrace the entrepreneur, showing a willingness to judge resumes on a win/loss basis and an acceptance of entrepreneurial risk takers. We’ve also seen more acceptance of entrepreneurs in the Birmingham social community (e.g. entrepreneurs belong to social clubs, perhaps even country clubs). I am not sure we always appreciated entrepreneurs, and our reluctance may have held the economy back. Although impossible to quantify, we believe that Birmingham has surpassed this biased perspective.

    On the third perspective, the Alabama legislature did not have another monstrosity of a PR situation, like we had with the abortion bill. Of course, the legislature has not been in session in the last six months, so I am not sure that can really be considered a win. 

    Additional positive notes were that several companies received follow-on funding from institutions. Incycus and Fleetio, in particular, had large funding rounds.

    Birmingham Bound attracted numerous companies, and the Alabama Futures Fund continued to be active in Birmingham. 

    So why the glass-half-empty perspective? It is not enough.

    For the first time this year, First Avenue Ventures released a list of funded startups that have received material outside funding since 2015. Our goal with this list is to have a comprehensive list of all of Birmingham’s current startups. Based on this list, we have approximately 55 funded startups. This number is an important indicator of where we are as an entrepreneurial community. 

    While the list is not yet tested in years, in pulling this information together, we were surprised at the lack of depth in Birmingham’s entrepreneurial scene.

    However, Birmingham does have something on which we can build. The eye-opener for us came when we were talking with a respected serial entrepreneur/funder from a major hub on the East Coast. We talked about ways we could get more institutional capital to invest in Alabama, under the premise that institutional investment is a key component of exponential growth.  We talked about flying people down to meet companies, but then we realized that we don’t have enough companies in the pipeline yet. We have some, to be sure, but to pull together a parade of companies ready for institutional investment – that is a challenge.  

    That lack of start-ups positioned for institutional funding is the cold bucket of water on all of the kudos about Birmingham’s entrepreneurial scene. In today’s world, in order to grow a city’s economy, a robust entrepreneurial ecosystem is imperative. Birmingham will always lose its big companies – to purchase, to market winds, to mismanagement, to excellent management. The ONLY way to replace them is to grow them internally. Companies just are not moving headquarters. As a side note, though I am not a member and therefore cannot be super critical, I was nevertheless disappointed with the BBA’s lack of emphasis in this area in their 2019 year-end report (or, at least, the PR Summary of its report). We need a BBA focused on the entrepreneurial section of the economy first and foremost.

    At First Avenue Ventures, we look forward to rolling our sleeves up in 2020 and getting dirty. We have been working with several entrepreneurs and look forward to working with more in 2020. Just as we see it as our mission to point out both the good and bad about Birmingham, we want to help entrepreneurs and companies with a realistic perspective. That requires digging in and seeing where we can help as well as being candid in our approach. This stuff is hard, but the challenge provides the reward and the meaning that makes it worthwhile.

    To going forward in 2020:

    Mike

    Laurel

    Emma