The “Halo Effect:” An Interview with Bruce Doeg

Mr. Doeg chairs Baker Donelson’s Business Department in Nashville, Tenn., which consists of more than 200 attorneys in the Securities, Corporate, Mergers & Acquisitions, International, Real Estate, Intellectual Property and Tax Groups in 21 offices across the South.

Key Takeaways:

  • Capital is available for companies in the South with strong assets and steady cash flows – especially startups and early stage businesses.
  • Increased capital flowing into startups and early stage companies creates a halo effect that is leading to more capital for middle market companies, as well.
  • Most money is coming from money centers outside the South, as well as across the globe. Foreign investors, in particular, are looking beyond the coasts for better opportunities in other parts of the U.S., especially the South.
  • Southern cities doing especially well at attracting capital include Atlanta, Nashville, Memphis and New Orleans.
  • There are a lot of people with money on the sidelines who would like to get involved in equity investments, but they don’t have the experience, time or enough capital to be the lead investor. Need to provide a way for them to get in deals.

Q: In general, how available is capital to the middle market in the South?

A: While it is still uneven, access to capital is better than it’s been in a number of years. In fact, this is the best year we’ve seen since the downturn. Though it is still not entirely back to the way it was before the recession, capital is certainly available to middle market companies with existing cash flow. It is also widely available in the emerging company market, where there has been a lot of activity, with the intensity varying by region. Tennessee, Atlanta, New Orleans are particularly strong on the startup front.

In Tennessee, though there are some sources within the state, more significant middle market financing is coming from outside the state – primarily from New York, the West Coast and funds in the Carolinas.

We’re also seeing a lot of foreign money coming in to the South. As bad as things were during the recession in the United States, they were worse across the globe. International investors want to invest in a more stable, safe place, so they are looking to the United States, and the South in particular. They are discovering that there are a lot of really good things going on in energy cost, labor and logistics that make the South a great place to invest. International investors seem to have gained greater experience and sophistication in investing in the United States, and now increasingly realize that there are opportunities outside of the East and West coasts.

Q: Do you see some parts of the South having more capital than other parts?

A: Absolutely. Atlanta is a larger city, a financial center, and has a higher concentration of private capital. Tennessee has upped its profile in comparison to the rest of the South, particularly in Nashville and Memphis. The startup and emerging business programs have created some energy that has rippled up to the middle markets, thanks in large part to state investment programs like TNInvestco and INCITE. These programs primed the pump, as other private capital followed this money into Tennessee companies.

Memphis is doing well in certain segments like medical devices and logistics, which continue to attract investments and activity from across the country. New Orleans has been an incredibly bright spot. The state took some of the Katrina dollars, teamed up with Tulane and others, and have created a vibrant startup environment. That startup activity is attracting capital that is also being invested in middle market companies.

A variety of things are attracting capital to the South from around the country. Conferences like Southland and programs such as The TENN – both created and run by Launch Tennessee – are generating activity and fundamentally changing the landscape in Tennessee.

Out-of-state investors are also looking for in-state investors to partner with. There is a lot of money that funds on both coasts need to deploy. They are aggressively looking for opportunities, but want someone they trust on the ground. This is helpful for us, because there is often a limit to how much local capital sources can contribute to follow-on rounds. Out-of-state money is helping to fill that void.

Q: Where is capital most available?

A: It is available for seed and angel funding. As you go up the totem pole, there is a lot of capital interested in steady, cash flowing companies. It won’t necessarily come from the Southeast, but there is enough private equity available that is looking for cash flowing companies. The public market obviously opened up a couple of years ago. There has been some speculation that it may be plateauing, but there are a number of deals underway, which I couldn’t have said in 2008. Debt capital is easy to get right now as well, but the terms will depend on your industry. Some bankers still seem a little cautious after the recession. It may just be personal experience, but there have been some good companies that stumbled over a covenant ratio and faced harsh and quick action.

Q: Which industries are doing the best right now at attracting funding? Which are struggling?

A: Tech is doing well, especially if there is revenue associated with it. Health IT is robust and health services continues to do extremely well, particularly in Nashville. At the same time, we are seeing more investment outside of the health services industry in Nashville than we’ve seen before, like in tech. Outside these sectors, money is also there for other cash flowing manufacturing and service industries. If you are a smaller company that’s not yet cash flowing, you’re still facing some tough terms. If you’re a cash flowing company with some assets, then you have some good choices.

Life sciences is a tougher industry. There are a handful of venture funds within the state that will support early stage life sciences companies, but only up to a certain point. Medical device companies are getting funding to some degree, but biotech, pharma and others are having a harder time.

Compared to some other areas of the country, there is less experience with pharma or biotech investment in Tennessee, Georgia, Alabama, Mississippi or Louisiana. It has a longer revenue cycle and the risks are compounded due to the regulatory factor. There is more funding for those industries in the Carolinas because they have a greater history and a lot of success stories. When you get success stories and you have people who understand the industry and regulatory issues, investors can make a more educated decision as to where they should put their money and then they should reinvest. When that starts to happen in Tennessee the attitude towards these industries will change. There is an accelerator in Memphis called ZeroTo510K doing a great job. They really looked at the specific challenges of raising money for a life sciences company, are addressing those added risks and do a phenomenal job of helping companies in ways that resonate with the life sciences capital sources.

Q: What can Tennessee do to attract outside capital?

A: The TENN and Southland are both fantastic efforts and really focus on attracting capital from outside the state to companies within the state. I heard an entrepreneur at a recent roundtable say, “I’ve raised tens of millions for companies in Tennessee. The only dollars that came from Tennessee came from my pocket. We need to stop worrying about that and help companies get money from outside of the state. Money is money.” I think that he is spot on. We need to help build bridges to capital sources outside the state, while increasing the sources here as well. Things like The TENN – where you’re exposing investors from different areas to what’s happening in the South – are really important.

Southland also did a great job of opening up opportunities to companies throughout the South, not just in Tennessee. That’s just smart. As a region, if you want to attract international capital or money from the coasts, offer them the best of the best to get them excited. Companies from each state within the South can compete just fine.

Q: There is a lot of money on the sidelines. Does it make sense to get accredited investors in the game?

A: Absolutely. We need more people who are lead investors. There are many who will follow along, but precious few who will do the due diligence and lead the investment. We have to find a way to marry the two. There are a lot of people with money who would like to get involved, but don’t have the experience, time or enough capital to be the lead. They need a safer way to get in. The Nashville Capital Network does some interesting work in this area. They got a lot of people off the sidelines by creating a process and system that offered some comfort.

Q: Has the JOBS Act had any effect on access to capital?

A: Not a lot yet. The regulations for the crowdfunding piece, which is the big opportunity in the JOBS Act, haven’t been written yet. Accredited investors can get in at this time, and there is some activity, but we’re not seeing a lot. I have one or two clients who are playing in it on the accredited investor side, but that’s still limited. Once it gets beyond accredited investor, there is huge potential for abuse to happen, which is why it seems the regulations are taking so long to get written. Until the regulations are written, we won’t see a lot of activity.

Brought to you by the team at FourBridges

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