There's no arguing that the entrepreneurial boom contributing to the national buzz around Nashville stems in part from the growth in financing sources. Whether it's investors under the TNInvestco umbrella, new funds from established firms or the formation of more angel capital pools, the number of regionally based growth funding options has mushroomed in recent years.
But that doesn't mean taking outside capital is always the best way forward for local entrepreneurs.
At an event last week co-hosted by the Vanderbilt Healthcare Alumni Association and E|Spaces, Emma CEO Clint Smith and Solidus Partner Vic Gatto exchanged ideas and opinions — as well as the occasional mock barb — about if and when taking venture capital is the best option for very young companies.
Smith, whose company was financed early on by a SunTrust Bank loan, has eschewed VC and told the 100-plus attendees Emma wouldn't be where it is today had he chosen a different path. Smith said every investment firm he and co-founder Will Weaver talked to during Emma's early days gave them the feeling that they would be on the clock, "that there was a three- to five-year plan." For the founders, who were still figuring out exactly what type of product they were building and unsure of their timeline to do so, that felt too risky.
"It would have put us on a different trajectory," Smith said. "It would have changed us — possibly in some good ways and some bad. But as first-time entrepreneurs, we didn't understand ourselves enough to know how to move forward."
Gatto explained that most classic VC funds still work on a 10-year plan wherein most investments unfold in three- to five-year cycles. For a lot of business concepts, that lets the investors bring to bear their management experience and contact list and gives the company's leaders a window in which to develop their ideas as well as to figure out if they should be the people to continue to lead the business.
But, Gatto said, 75 percent of the VC industry is "riding the dinosaur to the tar pit" by sticking to old habits. The advent of technologies such as cloud computing has drastically lowered the cost of launching a business and many concepts these days require far less capital to come to market. To that end, he launched JumpStart Foundry (and its Memphis-area sister vehicle, Seed Hatchery) as a vehicle to put to work smaller amounts of money — sometimes as little as $15,000 — in promising ideas. The JumpStart model, he added, is a different way of thinking about how to grow young companies.
While he acknowledged that JumpStart "feels worlds away" from the VC environment he encountered a decade ago, Smith argued that the proliferation of Nashville-area funding sources comes with a possibly constrictive side effect.
"It feels like we're pushing entrepreneurs down one path — to get money early on," Smith said. "We're turning on that clock to some extent. My point is that entrepreneurs need to very intentional about what they want to build."
Among the other things discussed in the back and forth were the following:
• One of the companies Gatto believes is poised to be a big — and independent — success is Change Healthcare , the six-year-old venture that helps consumers become more efficient purchasers of health care. With reform injecting a lot of new factors into the industry, Gatto said the company has the potential to grow into a big area employer. "It doesn't make sense for them to sell now," he added.
• Smith's personal exit strategy — Saying that Emma is "on the precipice of a really interesting push" beyond email products, Smith said he's nowhere near ready to walk away from the company he founded more than a decade ago. But he has been thinking about what would enable him to move on to something new.
"I'm not gonna die at my desk. It's very compelling for me to lead us to a certain point but that's not about ego," he said. "I want to be the guy who gets us to a point where I can really call Emma a success."
• The shortcomings of advisory boards versus taking institutional money — Gatto said entrepreneurs can build advisory boards that can add value to their businesses. "But smart people are busy," he added. "And it can be hard to get them quickly when you really need them."
By contrast, VC investors are more committed and more available and can bring to the table knowledge "about who you want to work with and who you don't want to." More broadly, Gatto added, successful venture capital investments don't shoot to the sky in a straight line. They can have just as many bumps in the road as unsuccessful ventures. The difference often comes in the guidance and advice given by professional investors.