Memphis Money: Investment pipeline for startups has room for improvement


In the entrepreneurial ecosystem, what makes or breaks a business is often capital. Facing a less-than-optimal mix of venture and angel capital in Memphis, entrepreneur supporters hope that homegrown startup success stories will attract more investors. 

Steve Bares, president and executive director of Memphis Bioworks Foundation, a nonprofit that focuses on creating companies, jobs and investments in bioscience, said the Mid-South has more companies than it does the capital needed to grow the startup ecosystem.

Related: "Memphis Money: Community-based startups struggle to find capital beyond debt-based platforms"

“The solution is generating the best companies we can and keep generating them and, over time, the capital will come,” said Bares. “We’ve just got to keep generating those best quality companies that are so compelling, the capital follows. That’s the way we’re going to change it.”

Historically, Memphis’ core entrepreneurial strengths lie in fields such as healthcare, medical device development, logistics, and agriculture – which presents significant opportunities for growth to feed a growing population. Bares said these sectors will continue to provide opportunities for startups, if Memphis is able to sustain a robust local investment pipeline, whether through institutional or angel investors. 

Related: "Innova Memphis raises new $31M investment to fund innovation in farming"

Bares also serves as board chairman at Innova, a pre-seed, seed and early-stage investor focused on starting and funding high-growth companies related to the bio-sciences, technology and ag-bio industries.

Staff at EPIcenter, located inside Cowork Memphis at 902 Cooper Street, help entrepreneurs conceive, launch and scale businesses. The organization is one of several working in Memphis to connect startups with investors and create a robust entrepreneurial ecosystem. (Aisling Maki)

Those are fields in which a business can be launched with an investment of several hundred thousand dollars, he said, but typically require several million in later-stage funding for research, development and certifications.

Innova, since it was founded in 2007, has invested more than $20 million in 75 startups, attracting more $90 million of outside capital for a total annual impact greater than $90 million and supporting more than 250 direct jobs.

“We haven’t yet brought all the capital to the table that we need to scale the companies that we’re producing,” said Bares.

But Bares said Memphis startups face additional capital hurdles once they get off the ground, begin production and start to build a customer base. They sometimes need to look beyond the region to secure later stage capital investment.

“We’ve got good companies that really struggle to find that follow-on capital … we have to bring a lot more sustainable capital – either angel or institutional – to really grow those,” he said. “I do have companies that need to go outside Memphis.”

Related: "Building an entrepreneurship movement"

According to Bares, angel investors – affluent individuals or networks who provide capital for startups, usually in exchange for ownership equity, are investing significant money in companies across the country. They’re just not doing it in Memphis at a sustainable level. 

But the angel investors who do invest in Memphis startups do so with a two-pronged approach.

“They not only want to seek returns, but they want to something good for the community at the same time,” Bares said. “So, they get the benefit of building out a local company, adding jobs, seeing something happen in the community, at the same time they get returns. And I do believe that investors in Memphis are looking at both of those.”

Organizations intent on ramping up capital for startups are hosting demo days, lunch and learns and networking events to connect entrepreneurs with angel investors.

The need for startup capital is evident in the city’s popular accelerator programs, which attract eager entrepreneurs from as far away as Argentina and Dubai, vying for spots that will give them access to support, mentorship and a chance to attract capital by pitching to potential investors.

Start Co., a nonprofit venture development that aims to advance Memphis’ economic growth through entrepreneurship, is one of the Memphis-based organizations offering accelerator programs.

Start Co. provides seed capital and programming to businesses looking to launchin Memphis.

Start Co. CEO and Founder Eric Mathews said that in the last year, the nonprofit had 24 available investment spots in its accelerator programs, which allowed startups to receive anywhere from $25,000 to $50,000 in capital, and he anticipates the same in 2018.

“There’s certainly more that can be done, but we’re able to attract teams from around the world to come here and participate,” he said.

Like Bares, Mathews said Memphis startups need access to more sustainable capital. There’s moderate support in the early stages for high-growth, high-tech startups, but the ecosystem needs additional angel networks and at least one new venture capital fund to fulfill the need.

And while funding is available for high-tech, high-growth businesses, which lend themselves to equity-based investments systems, small business that are not going to scale beyond their current geography lend themselves primarily to debt-based platforms.

Mathews said Memphis’ entrepreneurial community could be helped by capital that’s more grant-based in nature than equity-based.

Related: "The 2017 summer of acceleration kicks entrepreneurs into high gear"

“If you’re building a small business, there isn't much support beyond the [U.S. Small Business Administration] loan system,” he said.

This concern is addressed at Entrepreneurship-Powered Innovation Center – better known as EPICenter – which measures the impact of entrepreneurial support to create a just, inclusive and growing Memphis economy.

EPICenter is seeking solutions to support those non-tech community based or locally-grown business that are struggling more significantly for capital.

The organization wants to create more flexible investment opportunities, such as low-interest loans to launch new businesses in the community and plans to hire someone to focus on that system of capital flow.

Staff at EPIcenter, located inside Cowork Memphis at 902 Cooper Street, help entrepreneurs conceive, launch and scale businesses. The organization is one of several working in Memphis to connect startups with investors and create a robust entrepreneurial ecosystem. (Aisling Maki)

EPIcenter helps entrepreneurs conceive, launch and scale businesses, serves as a central point of contact for the region’s entrepreneurial ecosystem and connects entrepreneurs with resources such as accelerators, incubators, mentors, investors and networking opportunities.

The organization is part of a collaborative effort that includes Memphis Bioworks, Emerge Memphis, Start Co. and other partners working to create a robust entrepreneurial ecosystem in Memphis.

Leslie Smith, president and CEO at EPIcenter, said Memphis’ entrepreneurial ecosystem could be healthier.

“We do have some opportunities in Memphis to fill some gaps in the capital landscape … one area of opportunity is continuing to attract capital from outside of Memphis into our portfolio of companies because we do know we have quality deals,” Smith said.

“We just haven’t been as intentional about shopping those deals outside of the region as we need to be. So, we have a whole series of programs and plans around that.”

And like her peers, she said one of the most promising channels for shopping those deals is by hosting demo days and other events to showcase the city's portfolio to potential angel investors, who could build up sorely needed later-stage investment for businesses that have matriculated through local accelerators.

Smith said there are probably fewer than 25 active angel investors in and around Memphis, and EPICenter is launching programs to educate angels about quality deal opportunities. To date, the organization has raised more than $16 million in capital. 

“We’re doing a lot of networking to try to pull angels out and invite them into an understanding of what’s going on Memphis and what some of those opportunities look like,” she said.

Enjoy this story? Sign up for free solutions-based reporting in your inbox each week.

Read more articles by Aisling Maki.

Aisling Maki is a writer and editor with awards from The Associated Press, Society of Professional Journalists and Public Relations Society of America. Her work has appeared in publications in more than 20 countries and she has written locally for more than a dozen publications, including The Commercial Appeal, Memphis Flyer and Memphis Parent Magazine. She previously worked as a digital producer and weekend reporter for Action News 5, Memphis correspondent for the Agence France-Presse (AFP) and staff reporter for Memphis Daily News.