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EARLY-STAGE investment gets a close look in Nashville, as Medalogix CEO Dan Hogan pursues a Series A capital raise.

Return to the main story and Hogan's views, right here.

Hogan asserts that many Nashville entrepreneurs are disadvantaged by lower-than-desireable competition among investors who seek stakes in promising startup companies.

As you'll see in the 17 executives' comments below, some say Hogan's position is based on more than a kernel of truth. Others feel the startup investment process in Nashville is benign, and has done more good than harm. Thus who are not identified below obviously requested anonymity. None of the respondents criticized Hogan or his Medalogix venture, and a number of respondents separately volunteered their high regard for both.

VNC welcomes your comments via milt-at-venturenashville-dot-com or via Twitter @miltcapps - Thank you VNC

1. DAVID CONDRA, Co-Founder, Nashville Angel Network and Nashville Capital Network; Founder & CEO Amplion Clinical Communications; Founding CEO, Nashville Technology Council

[Medalogix Founder/CEO Dan Hogan] references "startups" which, in Nashville, means angel capital, or perhaps TNinvestco funds.

When we, at the Nashville Technology Council, founded the Nashville Angel Network, in 2001, we were in a situation where tech entrepreneurs were really on the outside looking in for early stage capital. Most of the experienced angels were from the healthcare community and much more comfortable looking at those type deals.

As the Angel Network morphed into the Nashville Capital Network, we had exposure for tech deals, and angel money interested in following on deals, but limited numbers of lead tech investors to do the due diligence, put the deals together, and help bring in other angels. We helped identify the right lead investor for good opportunities, and coached the entrepreneurs who really weren't quite at the angel investment stage yet.

In my experience, angel investors have plenty of deals to look at and most aren't very interested in putting together a second group to be high bidder on any one deal. They prefer to spread their bets at valuations that other experienced angels are comfortable with.

So, yes, in some cases I would expect that some tech entrepreneurs felt like they only had one deal available. However, that was as opposed to no deal offers which would have been the case before.

From the deals I've seen in Nashville, as an entrepreneur, and as an angel investor, I believe the valuations are generally appropriate for the stage and risk of the company. Angels don't want to own control of the companies they invest in, they want the founders to own them and be successful.

The bidding happens at the VC level. Once the company is out of the startup phase and ready for venture capital, and we do see competitive bidding in Nashville at that stage.

The great news today is that there is money to invest in early stage tech companies in Nashville, and that some great success stories have happened over the last decade that probably wouldn't have happened here without a supportive local capital community. ♦

2. ERIC DOBSON, CEO, Angel Capital Group

COMPANIES are not languishing because investors are too polite to bid against each other. It is a target rich environment. There are more good deals than money depending on how broadly you invest in the market(s). I do agree with Dan that the company wins when investors compete. However, it never pays to under- or overvalue a company. The next money at the table always corrects the mistakes of the last. If the valuation is too high, then the company gets a flat or down round. If the valuation is too low, the company is usually forced to add shares to the option pool to keep management incentivized. If the company is growing and meeting milestones, then the valuation continues to climb appropriately, regardless. The best thing we investors can do is to agree on a fair valuation at each step along the way, open opportunities to syndicate between collegial peers, and save the drama for attacking the market. If companies want to minimize dilution, they need to stay focused on the prize, selling products and services, not shares. ♦

3. CHRIS SLOAN, Co-Chair of Emerging Companies Group at Baker Donelson Bearman Caldwell & Berkowitz

I do think there's not enough competition here. yet. And, term sheets are sometimes not quite as favorable for entrepreneurs as they might be in a more competitive environment, but not to any unreasonable degree. Trends in Nashville -- in both seed and early-stage -- are moving in the right direction. I've done more deals this year, already, than all of last year. Because local investors and entrepreneurs need to work together, going forward, there's an incentive for the parties to be cooperative and that need is a strong check on the ability of local investors to overreach on deal terms. Local term sheets are seldom that harsh, and really aren't that much different from Chicago, Silicon Valley or Boston in most respects. If we had more investors bidding overall -- rather than seeing one-bid deals -- that would be better. It's true that sometimes our investors take more conservative or aggressive positions on a few issues, but generally not unreasonably so. We just don't have enough investors here for relatively early-stage deals yet. Less competition means terms for companies are not quite as favorable as you might see in Silicon Valley. Here, you're more likely, for example, to see local investors holding firm to get participating preferred stock, while a recent report shows a typical Series A round in Silicon Valley [now rests on] nonparticipating preferred. It's extremely rare, if it even happens at all, I believe, to see an established Nashville early-stage investor pressing for extremely unusual or unfair terms in transactions. ♦

4. GERMAIN BÖER Director, Owen Entrepreneurship Center; Professor of Accounting Emeritus

I think the collegiality of the Nashville community does impact their willingness to bid against one another. Part of that is because in the private world valuation is mostly art, so investors are always trying to calibrate what they think a company is worth with other investors. In effect they try to replicate what a public market would do. Also, the healthcare investors in Nashville really understand the healthcare business, so it is possible that what looks like a reluctance to bid against one another is simply that they all agree on the value of a particular company. In other words, collaboration can provide the same results that a market price provides: a single valuation on a new venture. In markets where there is collusion prices are uniform--In a perfect market prices are uniform. ♦

5. VIC GATTO - Co-founder, Jumpstart Foundry and Selous Ventures Society; Principal, Solidus; former Atlanta entrepreneur

I simultaneously agree and disagree with Dan's comments. I agree there is not enough capital in Nashville for early-stage companies. I (along with others) have been working to improve this situation, but the entrepreneurial community has grown at a much faster rate. Thus, local investors have no motivation to "chase deals" or pay high valuations. I do not agree that the local investors are any more collegial or reluctant to negotiate strongly against each other when the investment is deemed to be very compelling. ♦

6. MICHAEL READER, Founder/CEO StyleNet, co-founder Meetings.com

While Nashville has been referred as a "Nice City" with authentic "Southern Hospitality", competing is still a part of doing business here. "Nashville early stage investors are not competitive" -- I interpret that as an oxymoron.♦

7. NICHOLAS HOLLAND, Centresource, Populr.me entrepreneur; Mentor

I think [Dan Hogan] is right. However, I don't see any of it as nefarious -- it's a side effect of having a tiny investor community. More deals than money lets the investors be very picky. So, they they don't need to collude to still have incentive to pass on another VC's deal. There are plenty of single sourced deals that give the VC more control over terms & valuations. At the same time, it's seldom harder to collaborate with other investors. [The overall situation] doesn't work in the entrepreneur's favor. Birds of a feather flock together, so its not crazy that they talk to each other on a frequent basis. Moreover, they're in business to make money and I bet they'll compete if there is a hot deal. If they pass on a deal, it's because they see it as equal to others that aren't under terms, thus they don't have to pay a premium for an alternative deal. Bottom line, I agree with Dan that this sometimes occurs, but we need to keep the whole picture in mind, and not simply criticize investors.♦


There's probably some truth in what Dan Hogan's saying, but the situation's getting steadily better. When a deal lies outside the realm of healthcare services -- where many folks think they know enough -- it does often seem that local investors are more likely to reach out to others for advice and collaboration on a deal, and that does seem to lead, at times, to much lower valuations than one could reasonably expect on the West or East Coast. But, it's not just investors who are likely to reach out when considering a complex decision. The whole town is that way. It's everybody - entrepreneurs and investors, alike. We do have a more collegial community, and people talk about things. Anyone who's been involved very much in local investments knows that there are elements that can be good or bad. True, a West Coast investor may feel fully competent to consider a technology deal, and not reach out for other opinions. On the other hand, even very competitive private-equity investors on the East Coast will call people they know -- though, even then, they don't generally have the kind of colleagiality we have here. Here, people have often developed trusted sources, and know they can have an honest conversation.♦

9. GARY PEAT, Mentor Capitalist and former Tech-oriented VC

Valuation is almost NEVER the issue for entrepreneur or investor. It is almost ALWAYS about taking the right amount of capital and executing well. Markets set valuation. Don't like what an investor thinks on valuation? Find one who does or are you dreaming about Silicon Valley? That valuation is available if you move there and convince brand name capital to invest. Otherwise, stop whining. Take capital and execute or not. Naval gazing and thinking you are more valuable than investors offered terms? Make it work without the investors. Maybe get customers to pay, upfront even and bootstrap. Easier than it ever has been today. No excuses. Finally, I get a little weary when [an entrepreneur] is offended by investors offering to invest millions, but not on terms the entrepreneur hopes for. Just say thanks but no thanks. And make it work by bootstrapping.♦


I think there is not a funding mafia conspiracy, since we are not just competing locally but against capital anywhere in the country or outside looking for interesting investments which I think is borne out by his ability to raise capital elsewhere. There might be some argument that Nashville outsiders might be willing to pay some premium to break into this market, but I find collegiality goes out the door when investors want into a deal locally or otherwise.♦


My experience is the local investors are more eager to invest in a start up when one investor takes the lead investor role and sets the valuation. This may be a different spin since this is an advantage because they trust each other and prefer to be co-investors.♦

12. DAN HAMMOND, Founder, Chairman, President and CEO - American Hometown Media

Dan Hogan's observations about the local dynamics often working against entrepreneurs do not paint a complete picture of the Nashville market in my opinion. I don't think investors are generally 'in cahoots' together. However most investors, including institutions, are likely to do deals together. Part of the savvy required of a CEO is to understand these connections. If you know two investors have a close relationship, you should expect that they may wish to share risk and diligence and co-invest. There is some security in that. Additionally, keep in mind Angel investors know that their money is not going to be the last-in, and they want other investors to fill out later rounds. Nashville has a pretty damn good Angel community. Our venture-capital firms are really more boutique-size compared to larger investing markets. The real issue in the Nashville investor community is secondary capital. There's more concern here than in larger markets about where follow-on capital will come from. Generally speaking, if you're having difficulty getting Angel money in Nashville, there may be good reason for that. Also, when it comes to early-stage money, some VCs are now participating where a decade earlier they would not have been involved in early-stage deals. By their very nature, VCs are more sophisticated and will bargain harder at any stage including early/seed. Nashville is traditionally conservative, with much focus on the healthcare sector as it should. But the angel community here has branched out into all other sectors. When we have more high-profile exits -- such as VGT's plans to sell for $1.3BN -- we'll see coastal investors seeking-out our boutique VCs to network their way into promising deals and enhance the flow of secondary capital. I know many of our VCs are working to build relationships with coastal VCs.♦

13. DAVID JONES, General Partner, Bull City Venture Partners (Durham, N.C.)

Of course having outside capital and creating more competition is good and would breakdown any perceived disadvantage with local groups. Just as with any market, more players (investors) participating will create a more perfect market, thus enabling a market price. I see the West Coast capital coming into companies in our markets, but mainly at the later stages and not at the early stages.♦

14. BRUCE DOBIE, Founder, EvieSays; former Co-Owner NashvilleScene

I don't have the experience of people being reluctant to give me money because they would be somehow opposite their colleagues. That's not been my case. I've had plenty of people not want to give me money, but that's been because people thought my idea was bad, or they were more into some other project, or my deal terms weren't of their liking. Now, this is just my experience. Dan Hogan could very well be right as far as what he's been through. It's just that his experience has not been my experience.♦


My experience has generally been that great ideas tend to find capital one way or another. Take the raise out of Nashville if you don't like how Nashvillians invest their capital. If a half-orphaned sophomore at Vandy can crowdfund her tuition, how likely is it that a Nashville investor conspiracy could hold the startup community hostage? [VU Sophomore Cassie Wessely had a GoFundMe goal of $25K, raised $50K in 1,119 donations in 24 days, reported by Tennessean's Casey Harper, July 23.]♦

16. JOHN GERBER, Chief Manager, Private Capital Advisors

Raising money is hard. Sure, we could use new venture capital resources but what we have is pretty good. More and more angels are coming into the market. Pricing is all over the map with discounted convertible notes. Nashville is an improving capital market with a bright future. ♦


I have noticed that in tight networks like Jumpstart, [collaboration with other investors] seems to be exactly what some of those newer early-stage investors are hoping for. Call it a gut-check, or an education. Jumpstart isn't just about training new entrepreneurs, it is about educating potential investors, too. I'm sure even experienced investors like a little reassurance that they're making the right bet, or they're not walking away from one they should bet on.

Of course, there are leaders in town who have a really good batting average. People watch them to see how they lean. Regardless of anyone's experience investing, or how those leaders lean, there's one thing that is very clear to me... all of these investors really do seem to be doing their homework with each company.

I think Dan is right, in that it is good to have investors compete for a place with a hot prospect. It would be nice to see more of that. While investors being friends may make them slower to commit for fear of hurting future deals, we (as entrepreneurs) need to kick it up a few notches and give those investors something that makes them want to want to compete. ♦

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Tags: Amplion, Angel Capital Group, Angels, Baker Donelson Bearman Caldwell & Berkowitz, Bruce Dobie, Bull City Venture Partners, CentreSource, Chris Sloan, Dan Hammond, Dan Hogan, David Condra, David Jones, Eric Dobson, Germain Boer, investment, John Gerber, Medalogix, Michael Reader, Nashville Angel Network, Nashville Capital Network, Nashville Technology Council, Nicholas Holland, Populr.me, Series A, StyleNet, Vic Gatto

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