Bridging the Gaps
A report highlights weaknesses in Knoxville’s entrepreneurial landscape, including access to capital. It also suggests solutions.
by jesse fox mayshark • January 11, 2021
TVA CEO Jeff Lyash on a virtual roundtable about entrepreneurship on Jan. 6.
In recent years, several Knoxville-area technology startups have been purchased by larger companies in lucrative deals. The region retains a relatively low cost of living and offers access to major research resources and the technical talent to go with them.
A three-year accelerator program plans to work with 30 local tech companies.
But there are still significant obstacles to growing tech businesses in East Tennessee, according to a report just released by Techstars, a global consulting and accelerator firm. Those include access to both early-stage and growth capital; racial and gender disparities in who is able to start a business; and a perception that Knoxville is just not the kind of place where you can launch a successful startup.
“Entrepreneurship is not a zero-sum game,” said University of Tennessee President Randy Boyd during a public presentation of the report last Wednesday. “There’s a catalytic effect or a compounding effect. The more we bring in, the more we connect and work together, the greater impact we can have.”
The report itself is the product of an unusual degree of collaboration between UT, Oak Ridge National Laboratory and the Tennessee Valley Authority. The three entities commissioned the study to identify ways they and other community partners can help technology startups.
To continue the effort, the three have committed to support a three-year accelerator program run by Techstars, which plans to work with 10 local companies a year for a total of 30.
“When it comes to technology entrepreneurship, we're actually better than we recognize today, but we’re just scratching the surface,” TVA CEO Jeff Lyash said during Wednesday’s virtual roundtable. “We know that it can support the industry, jobs and workforce that will allow the region to thrive, and to help the U.S. maintain its technological advantage for the long term.”
Also joining Wednesday’s session was ORNL Director Thomas Zacharia, Knoxville Entrepreneur Center Executive Director Jim Biggs, Techstars founder Brad Feld, and a virtual audience that included Knoxville Chamber CEO Mike Odom and representatives of Knoxville city government. (The roundtable was held in the morning, and its impact may have been diluted by the violence and chaos in Washington, D.C., later that day. You can watch a recording of the full session online at knoxmetroassessment.com.)
Zacharia noted that a recent report by the Brookings Institution called for federal investment in eight to 10 technology “growth centers” across the United States to diversify the industry geographically and spread its benefits more evenly.
“Of late there has been tremendous interest and conversations with the leadership at the Department of Energy about the national laboratory being more than just a part of the science enterprise but really to be part of the innovation enterprise of the nation,” Zacharia said.
But there are some hurdles for East Tennessee to overcome.
A Capital Challenge
Bill Malkes moved to Knoxville with his family in 2000 from Ann Arbor, Mich. A former CPA with the powerhouse firm KPMG, he had had success helping to build a respiratory therapy business. He picked Knoxville because it seemed like a good place to raise his children.
“One of the arrogant mistakes I made was I looked at Ann Arbor and Knoxville and said, hey, both college towns of similar size,” Malkes said in an interview last week before the release of the Techstars report. “I can raise $100 million in Ann Arbor, why can’t I do it in Knoxville? And the answer is really a regional access to capital.”
The Techstars report highlights capital as an ongoing challenge. “More than half of the community leaders interviewed for this project cited the lack of early-stage capital as a major challenge to the growth of local entrepreneurial tech companies,” the report says, “while over 80 percent of the founders of early-stage startups agreed with the statement that ‘access to equity funding is a major challenge for tech entrepreneurs in Knoxville.”
Malkes, with his experience, was able to persevere and in 2007 co-founded the “smart traffic” company GridSmart with local entrepreneur Vig Sherrill. That company sold to Cubic Corp. in 2019 for $87 million, one of several notable recent exits for Knoxville technology companies. Malkes is now CEO of another startup, the biopharmaceutical firm NellOne.
He said Knoxville investors have developed a more entrepreneurial mindset in the 20 years since he arrived here. The Techstars effort itself, he said, showed that the region’s major public institutions also understand the need.
For years, local economic development officials have dreamed of a pipeline of innovation and investment that could be built on research from UT and ORNL. Now, that is happening in concrete ways, as in ORNL’s Innovation Crossroads program, which provides a fellowship for entrepreneurs and the use of ORNL facilities for research and development.
“Really, ORNL is the seed investor in all the people who are going through that cohort program,” Malkes said. “That is a big, big deal.”
Maybe nobody knows more about the local capital situation than Grady Vanderhoofven, CEO of Three Roots Capital. A veteran investor, he founded Three Roots in 2016 to help fund companies focused in low-income areas of Central and Southern Appalachia and across the Southeast.
“Things I would say have continued to improve over the years,” Vanderhoofven said. “Fundamentally, there’s a recognition of the need for capital that supports young companies. And then along with that, there are more sources of capital for young companies and startup companies.”
He said different companies need different kinds of investors at different times. Although tech industry rhetoric tends to revolve around venture capital, Vanderhoofven said that level of investment is most appropriate for companies with some track record looking to scale up.
Many entrepreneurs need support at earlier stages, which is where angel investors — who typically make smaller investments and have less immediate expectations of returns — can make a big difference.
“Most of the companies that are started in a community are not candidates for venture capital,” Vanderhoofven said. “So if you really want to have a healthy startup community or a healthy community for young companies, you have to have capital that will support companies that aren't necessarily candidates to be venture-backed.”
Three Roots has raised $100 million and so far invested about $57.8 million of that. It is also a partner in the TennesSeed Fund, formed to support innovative companies across the state. Of TennesSeed’s first three investments, two were in East Tennessee technology companies: SmartRIA and Active Energy Systems.
“There are probably nine sources of capital that I’m aware of today that a decade ago or 15 years ago weren’t looking for deals in this space,” Vanderhoofven said. “I would say that’s a lot of progress.”
But, he added, “We still don’t have enough.”
Diversity and Perception
The Techstars report also notes a “participation gap” by women- and minority-owned companies in the tech sector. One local entrepreneur told the study’s authors, “When I show up at events, I’m often the only person of color in the room.”
This is part of a broader problem in the community that goes beyond just the tech sector, the report says: “Increasing representation among technology founders will likely need to be part of larger efforts within the entire entrepreneurship community.”
Malkes said he thinks encouraging and supporting diversity in the startup scene is crucial to the long-term success of the region.
“If we want to be entrepreneurial, we have to expand our inclusiveness, and I can see that happening,” he said.
He noted with approval Knoxville City Council’s recent resolution apologizing for the legacy of Urban Renewal programs and promising community investment.
“Things like that open it up,” Malkes said.
And then there’s what the report calls the “perception gap” — a sense, both cultural and financial, that Knoxville isn’t really a startup kind of town, despite many local success stories. “The misperception of local success seems to be due to a lack of storytelling,” the report says.
“We must be known as a place that promotes innovation, encourages entrepreneurship, and welcomes smart risk takers,” Zacharia said in Wednesday’s meeting. “These are the individuals who create a local economy, long term.”