We in the Birmingham entrepreneurial ecosystem often joke about how they are throwing money at deals in the VC hotspots, specifically Silicon Valley. Like manna from heaven, capital simply falls out of the sky for anyone in the area, regardless of investment merits, and the Silicon Valley promise land flows freely with milk, honey, and investor-friendly term sheets. And while this is, of course, an overstatement, the truth lies at its heart — a gap exists in the investments between Silicon Valley and Birmingham (and most of middle America for that matter), and bridging that gap is fundamentally what we want to do at First Avenue.
Funds are a part of the solution.
Hopefully, you have seen our announcement about First Avenue Ventures Life Science Fund I. This fund is an initial foray into funds, which is an exciting possibility for us and hopefully Birmingham, for many reasons:
- The fund allows us to develop life science companies, which in Birmingham have not received the attention from investors that perhaps they should.
- The fund has allowed us to work with UAB, a great community asset.
What we aspire to do with the fund is to play a material part in the development of the life sciences in Birmingham. Our investors’ vision and hopes are that Birmingham’s nascent life science ecosystem becomes a robust ecosystem. Simply put, we want to see thriving and growing life science companies in Birmingham. Ideally, we want to play a part in their growth, but more importantly to almost all of our investors, is that Birmingham has a significantly more vibrant life science ecosystem in the next five to ten years. More work is needed to accomplish this — by First Avenue and others — but the fund is a part of the solution, and we believe more funds are needed.
Additionally, in the process of organizing the fund, we have come to believe that funds can play an important part in bridging the gap between founders/entrepreneurs and early-stage investors. While we know that entrepreneurs and investors ultimately have the same goal (success), the investment objectives of the investors and the company objectives of the early-stage founders are not always aligned. Both sides are often doing something new, so funds — and other ecosystem service providers — fill this role.
For entrepreneurs, a fund creates a professional process. If you fit the criteria, you can receive funds. If you do not, you cannot. While obvious, this process is more transparent and efficient than the angel network.
Angels are great and valued gatekeepers, but funds can work alongside these angels to help founders present and execute valuable startups.
For investors, a fund helps pool capital from investors with similar investment profiles; a fund creates a diversity of investment for the investors; it helps manage the diligence and risk allocation. This helps founders and startups access the capital more easily if they fit the criteria.
Simply put, a fund allows investors to put their money behind a breadth of companies rather than picking and choosing which companies might be winners so that all of the investors share equal risk and opportunity for reward in a variety of portfolio companies. With the high degree of risk inherent in the early stages, diversification helps investors retain and grow capital.
An early-stage fund is not right in every situation, but in some situations, it is. We believe an early-stage fund focused on UAB/ Life Sciences presents one of those opportunities. Helping with this organization of capital and participants in the Birmingham entrepreneurial ecosystem is fundamental to First Avenue’s mission.
In time, our hope is that the early-stage startup market becomes much more efficient. We are seeing this particularly in the tech ecosystem where the funding mechanism is becoming more clear.
This brings us back to Silicon Valley. Money is in fact not free there either. Rather, more founders are seeking from more funders, so the chances of alignment and the flywheel created by historical financial success increase the likelihood that a founder with a particular set of objectives will more easily match with an investor’s objectives. In short, the capital is more organized.
This is not a knock on Birmingham or our ecosystem. We have come far, and when you talk with people in the ecosystem, their enthusiasm is justifiably positive. This is not an aspiration argument that we should be like Silicon Valley.
This is a basic statement of fact: you need more companies if you want to participate in the entrepreneurial economy and have an innovative Birmingham.
To have more companies, you need more founders and funders. Where are we on the scale? This is tough to say, but I read this David Cummings blog about Atlanta establishing growth capital locally, and my takeaway is we have a ways to go.
So our belief is that you need more support, more funds, more accelerators, more incubators, more programs, more advocacy, and more activity. While comparatively, we may have more activity in this Birmingham entrepreneurial economy, we will need more in all aspects. When we say we need more funds, we mean it, even if that brings competition. First Avenue is not going to single-handedly transform the economy, but we want to play a part.
Establishing a fund gives us another arrow in our quiver. We need lots of arrows if we want to transform our community, but we are particularly proud and grateful for this one.
First Avenue Ventures, LLC is not a registered investment advisor. Investment advisory services are provided through affiliated partners registered with the SEC. Nothing in this article should be considered a recommendation for the buying or selling of any security, an investment report, or a recommendation to buy or sell securities.