The best analogy that I have for start-ups and early stage companies in this time of tumultuous public markets is one of a submarine. A start-up shares the key benefit of being able to float beneath the surface — unaware and, to an extent, untroubled by the turbulent seas above. The financial markets may be blowing this way and that, but the nimble submarine start-up exists below the choppy surface, where it’s able to build, create and grow without exposure to the storm above the surface. That is, of course, until they run out of air (capital) and the inevitable need for funding compels them to surface. Alas, there is no telling what the financial markets will be like when they make their way above water.
This inevitable need for capital and the uncertainty in the financial markets does affect a start-up’s behavior, either directly or indirectly. Start-ups flush with capital are good to stay beneath the fray, perhaps with some slight modifications in course. But for start-ups that need funding, the raise may be more difficult. We are seeing deals get done; however, we are seeing less exuberance (for both rational and irrational reasons). When investors depend on public company gains to fund private company investments, a 20-30% drop in the markets disproportionately decreases the amount of investment capital available. When angels see a retrenchment of venture capital, they respond accordingly and focus on existing investments. When investors focus on existing investments, there is disproportionately less capital for new investments.
I am not a submarine expert, but I figure a good captain has a good plan for resurfacing when they take a submarine down. If conditions above the surface shift, they quickly change their navigation. This is the environment we are in, and founders should run their businesses accordingly.
For Birmingham, we should not discount the World Games effect. While the entrepreneurial ecosystem was not directly impacted, the intangible benefits will buoy Birmingham businesses in the years to come. Collectively, we cleaned up the city, built things that will last, and elevated our game. With Protective Stadium and Legacy Arena, we are now able to host a new level of events. Cultural amenities matter in the talent world. We are creating a more vibrant community where people want to live and work — perhaps remotely.
When I look back at prior assessments, I realize that my constant refrain is “do more investing in Birmingham start-ups.” I still repeat that refrain, but maybe after everyone either (1) gets done basking in the glow of the World Games or (2) comes back from the vacation they took to avoid the World Games, here are some specific areas that Birmingham’s entrepreneurial community can build on:
- Sports and Entertainment. As the World Games showed us, sports is a bigger boon for business than I think we realize. It ties in nicely with Birmingham’s bustling food scene. There’s a connection with our start-up scene as well: INFLCR, a leader in the NIL (name, image, and likeness) space, is located here, as are several other start-ups related to athletes and athletics.
- Equitable Access to Healthcare. Three out of the five start-ups in Prosper’s HealthTech Accelerator address the problem of access to quality healthcare for persons of color. Yes, we have deep political and racial divisions. However, we have a chance to bridge the gaps by creating a hub of companies that address access to healthcare for everyone.
- Neuromodulation. In the life sciences, few areas exist for a geography to claim as its own. A lot of work would need to be done and a lot more companies created, but Birmingham could become the capital for research and development in the field of neuromodulation.
And, of course, we need more equity investments. We need people who understand how to mitigate the (admittedly extremely high) risk of investing in early stage companies and find easier, less complicated ways to invest in these companies. We have seen much progress on that front already, as forms such as SAFEs and convertible notes have become more common. Specifically, in Alabama, we need to be able to more easily create and invest in pooled capital. Funds allow a way to have investments professionally managed and create diversity in portfolios. The rules in Alabama, unfortunately, are not favorable, and this has a negative effect.
Pullbacks have a way of sorting the winners and losers. Birmingham has a lot of things going for it, but so do several other communities. My prayer for the next six months is that we have enough to continue to build.
Additions to Our Funded Start-Ups List:
- Alpha Young, LLC
- Alveolus Bio
- Astound Research
- Compression Works
- Fighting Cancer Network Inc.
- The Office Exchange
- Reliant Glycosicences LLC
- Stroma Vision
- Sunfire Biotechnologies
- Xcellent Life
Additional Exits from Our Funded Start-Ups List:
- DiscoveryBioMed (Acquired by Eurofins Discovery)
- Pack Health (acquired by Quest Diagnostics)
- True Load Time (acquired by Tenstreet)
2022 Articles on Funding for Birmingham-Area Start-Ups:
- Edify Online secures bridge round of $600,000
- Birmingham-based medical device startup receives $1M seed round
- Startup funding in Alabama: Where funds are going and what’s next
- Quest Diagnostics to acquire Pack Health
- Velocity Accelerator names its 2022 cohort
- Prosper’s health tech accelerator has big aims as it starts this month
- Birmingham startup secures $4.2M in seed funding
- Prosper’s HealthTech Accelerator launches with five companies
- Alabama Inno Madness enters final round of competition
- BIO Alabama event connects Alabama research institutes with international industry partners
- GoodJob claims victory in Alabama Inno Madness competition
- Conserv raises $3 million in new funding round
- Birmingham-based Chonex raises $5.78M in seed round funding
- Local startup receives $1M to connect corporate sponsors to research institutions
- Entrepreneurs selected for third cohort in Voltage idea accelerator
- Velocity Accelerator graduate company plans next steps, future in Birmingham
- Birmingham-based startup app raises $500,000 in seed funding
- Software company to move HQ to Birmingham after Alabama Futures Fund deal
 For reference, see the Alabama Innovation Commission Report, which focuses on outdoor recreation as one of its key findings (pg 35): “The Outdoor Recreation Lab […] premised on the idea that persuading someone to move thousands of miles to a new home, a new community and a new state is not an event; it is a process. What’s more, when it comes to people who have invested in human capital that is specific to high technology industries, tourism and outdoor recreation can be a large draw.” [emphasis mine.]
See also pg. 82 of the same report: “Alabama is well-situated to recruit talent that is interested in having quick access to outdoor assets, as further described in the Hoover Institution Report. Alabama’s waterways, biking routes and trail systems provide many outlets for outdoor recreation near growing innovation ecosystems. Connecting innovation-oriented employment opportunities to outdoor recreational activities will provide a valuable metric to persuade potential talent being recruited to the state.”
 I did not use the term “cluster” here because I am not into that sort of thing. If, however, you are into clusters from an economic development perspective, you can do that for these three areas.
 To get deep in the legal weeds: a person who runs a fund usually does so for a fee/compensation. Thus, they probably fall within the investment manager rules (RIA). Your financial advisor is probably an RIA. It is not easy to become an RIA. A financial advisor has to be certified by FINRA via testing (such as the Series 65, which tests all sorts of things that are not really relevant to running a fund). The RIA then must be registered by the SEC or the state’s securities commission. Again, this is not a simple form. At the national level, VC funds are exempt if they have enough assets under management and qualify as a venture capital fund. Several states – specifically Tennessee (Tenn. Admin Reg. 0780-04-03-.05(1)(b)), Florida (Fla. Stat. § 517.021(14)(b)(7)), and Georgia (Ga. Comp. R & Regs. § 590-4-4-.13(1)(b)) – have exemptions for small funds. However, Alabama does not. Alabama-based funds have to register with the SEC or Alabama Securities Commission, both of which are costly endeavors. Bottom line, we need a similar exemption in Alabama in order to effectively deploy capital through funds.