Current Perspective on the Birmingham Entrepreneurial Scene

In 2018, Innovate Birmingham published their final report on the Birmingham entrepreneurial ecosystem. (See five articles at the end of this link – http://www.innovatebham.com/about/) In that report, the core conclusion is that Birmingham needs more “funded start-ups.” Toward the end of last year, I gave a glass half full/ glass half empty account of the Birmingham business landscape – https://firstavenueventures.com/will-fail-2019/, a perspective which I continue to hold. Generally, I think the ecosystem has done fairly well in funding start-ups, but I am worried about the lack of positive exits in 2018 and to date in 2019.

Obviously getting data about start-up funding is notoriously difficult given the lack of public information as well as the selective nature of the reports. Additionally, the terminology is difficult. In the 2018 Innovate Birmingham report, they determined that, “we have approximately 73 active start-ups in our city,” and “Birmingham had 23 deals with a mean deal size of $990,000 in 2017.” (Deals are defined as “accelerator, angel, seed, & VC investment.” Shipt is not included in the average deal size calculation as it was an anomaly for the ecosystem.)

Our research has indicated that since 1/1/2018, the community has added approximately 13 companies into the ecosystem. (See list of our stories compiled below.) This number is probably incomplete and low because of the difficulty of data for private companies. However, even if substantially under, the ecosystem is still behind the desired 27 new start-ups referenced in the Innovate Birmingham report. While the start-up activity is encouraging, we obviously need to keep going.

One good addition to the ecosystem since that report was published is the Alabama Futures Fund. They have, in the last 12 months, funded four early-stage ventures. In addition to Alabama early-stage ventures, they are working on recruiting companies to Alabama and have had some success. Although initially dubious of such a strategy, I have become a convert. Outsiders elevate the game, and we need to do that in Birmingham. We need to learn, appreciate and support these new companies, and not as we sometimes do, undercut the new and different outsiders’ perspective.

I heard an interview recently with Sam Altman of Tech stars. In the course of it, Altman discussed the problem with the lack of funding outside the coasts. His native city, St. Louis, was cited as an area that was problematic. He suggested that the ecosystem should go out and attract new companies here with better valuations than they can get on the West Coast. Birmingham is doing that, and we should be proud of the Alabama Futures Fund for taking a non-inconsequential risk in doing so. (The complete interview can be found here: https://medium.com/conversations-with-tyler/tyler-cowen-sam-altman-ai-tech-business-58f530417522.)

Additionally, on the plus side, our cost of living allows us to provide longer runways and go further faster with capital investments. Although I know that the VC model is built on the spend, spend, spend model to outpace perceived competition, every time a dollar is spent, more capital needs to be returned. Perhaps if you spent a little less and got a little further, you could make a better return. Realizing that this seemingly old-fashioned business sense is out of favor in VC land, I see a day where the tide will turn and more cost-conscious entrepreneurship will win the day. Birmingham is, and will be well positioned, when that day comes.

But while the growth of the ecosystem is going well, I do see some clouds on the horizon:

The first issue is the lack of exits. The question that I think everyone had is whether 2017, which saw meaningful exits from Shipt, Hospice Link and Therapy Brands, was an anomaly or a trend. Unfortunately, it seems to be more of anomaly. Our research found very few exits. (See article list below.) None of these have had the impact of the 2017 exiting start up class. While expected, I think we have to have a sober appreciation that this is going to be hard work. We need these to recycle the capital, celebrate communally and inspire the ecosystem participants. I think everyone realizes that huge wins do not always happen, but we still need to get more wins to be able to create the ecosystem we want.

The second issue is the state political climate. The Alabama legislation bill banning abortion and other extreme conservative actions out of Montgomery negatively affected the ecosystem. The loss of companies was real. While there are some companies and people willing to overlook this (or even accept the challenge), we need to recognize that the economic damage of extreme politics (left or right) is very real.

The third issue, from my perspective, is what I will term “The Talent Bridge.” Slightly different from the talent gap, where an ecosystem lacks for talent; I see Birmingham as having the available talent but not quite finding a way to fit said talent into the developing ecosystem as seamlessly as desired. Many years ago, I was talking to a Silicon Valley executive. He said his job was HR for companies between Series B and Series C rounds. That is incredibly specific. There is a not a similar person in Birmingham. However, we do have several people with HR experience. They are perfectly capable of fitting that job — probably for a lot less and maybe with more experience. But they are not quite perfect, in that their experience with a high growth company is relatively limited. That dynamic is “The Talent Bridge” issue we face. We need to be able to bridge people to that position. There are certain nuances to be learned between large HR firms and a growing VC-backed company.

The Talent Bridge is a nuanced and inchoate theory. But I am seeing this issue creep up in some of the growing and successful start-ups. (It may not even be so much of an “issue” as something to keep on the radar.) David Cummings gave a similar assessment out of Atlanta in a blog article that summarized his assessment of non-coastal tertiary and secondary markets.

As with any non-coastal VC market, realistic enthusiasm coupled with a dose of sobriety is necessary. The positive momentum is needed in order to incent the human and monetary capital to focus more on the risky (but rewarding) entrepreneurial world. However, realism is needed in order to smartly achieve the increment gains needed. Birmingham may be headed in the right direction, but we are not self-sustaining.

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