First, this is not a politically motivated post. We are NOT endorsing either party. We are simply trying to document the trends that we have seen and what we believe to be the outlook for the coming years, given the change. We have witnessed the following trends over the last several years, most pronounced in the last two:
- We see a fourth industrial revolution coming around advanced materials and advanced manufacturing
- We see “coasties” looking to the heartland for deals at valuations that are rational following a pronounced trend of urban to rural migration of talent and capital.
- We see ubiquitous talent and technology in the heartland: people work where they want to live now.
- The heartland is a desired destination now for reasons of lifestyle in the Richard Florida concept of paradise.
- We see the rise of cities like Nashville, but also of Chattanooga, TN and Greenville, SC out of industrial towns moving to entrepreneurial wonderlands.
We were surprised, but not shocked by the recent election. Americans are fed up with what they perceive as an economic “elite” that has ignored the middle class for over twenty years. This is the first generation in American history that believes their children and grandchildren will experience a lower standard of living than they’ve enjoyed. Americans will abide a great deal, but not a loss of hope. We’re an optimistic people. We can’t abide that our productivity growth is the lowest it’s been since the 1970s. According to the BLS, it’s been just about zero for the past five years. No economy can grow with zero productivity growth. Jobs growth has been reportedly strong since 2013, but with zero productivity growth, output has been gained only by growing labor, which is not how a productive economy is supposed to work. And if labor was really in greater demand, inflation-adjusted median household income wouldn’t be back to where it was during the Reagan administration.
The shrinking middle class sees corporations making money through regulatory capture and by gaming the system, rather than by deploying new technologies. Since the recession beginning in 2007, the number of small businesses, small business starts, and employment by small businesses have all been in decline. This may sound dire, but in chaos we find opportunity. We’ve been telling our investors and entrepreneurs to view the inevitable shift-of-the-tide as an impending opportunity.
What we think is important to understand is we are seeing a convergence of important trends. First, a strong urban/coast to heartland migration of talent. Second, a ubiquity of talent and of technology. Third, a revolution on the horizon around advanced materials and advanced manufacturing. And, fourth, we expect to see an easing of restrictions on startup investing. The last 8 years have been marked by a very protectionist Securities and Exchange Commission. But, we expect to see a much more investor friendly SEC with the new administration.
Paradoxically, the SEC has been rattling swords about changing traditional accredited investor qualifications at the same time they have been opening up crowdfunding to all. Crowdfunding has its own challenges and some of the SEC “protections” have resulted in a vehicle that professional investors are not willing to embrace. That should tell you a great deal! But, we expect to see a loosening of some of these restrictions, which should have a direct impact on investment in startups. The other major trend we expect is a repatriation of a great deal of corporate capital into the US from foreign accounts and subsidiaries with some sort of “tax holiday.” If that transpires, we could see $2 – $3 trillion in cash coming back into the US economy. That money has to go somewhere and we expect it to go into STEM jobs, corporate growth strategies, and a lot of M&A activity. It should be a great time to be in the market for both investors and high tech companies.
One of our fundamental investing propositions is the best opportunities are to be found when nearly everyone else is on the wrong side of a trade. Looking at the “big picture,” we think there’s been far too much emphasis for too long in the entrepreneurial world over chasing after Millennials, pretending that the world can always use more mobile applications, and believing that “tech” equals software. Basically, what’s become the popular image of Silicon Valley investing. It’s not that we don’t appreciate the impact Silicon Valley entrepreneurs and VCs have made; it’s that too many people in places that aren’t Silicon Valley have gone down a rabbit hole hoping to replicate what can’t be replicated simply by creating collisions between nerds and rich people. If you aren’t set up to be a “Silicon Valley,” it’s better to try to be something else, something you can be good at being in the place where you are.
We see evidence that investors in Silicon Valley, and in other venture capital hot spots, are realizing that deals there are overpriced; that it costs too much to grow a company in those places; that many talented people would rather not live and work there…that the quality of life isn’t what it used to be. So, opportunity is being created by the pronounced shift that’s happening as more and more entrepreneurs start and grow quality companies outside of traditional venture capital hot spots. And now, the investors in those same hot spots that once rested-on-their-laurels for deals to come to them, are starting to venture out to the middle of the country, trying to uncover great new companies. Often times they don’t have the right relationships in the Heartland, and don’t know well enough where to look to find some truly innovative small companies. So, Angel Capital Group has been active in trying to help outside investors land in the right places when they come to explore Appalachia, the Midwest, the Mississippi River Valley, or the Coastal South. It value-adds our busienss model and portfolio to work with next level capital.
We know several VC’s who have already visited and come away very surprised, even impressed. For starters, investors that have been focused on companies built on aspirational marketing to Millennial smart phone junkies are blown away when they visit a place like Oak Ridge National Laboratory (ORNL) here in Tennessee, and are introduced to world-leading advanced materials, advanced manufacturing, and new energy technologies. We like to say that this is re-defining “tech” to mean more than just software. You drop this tech and it goes “thud,” and some might even go “boom!” But that’s what our region is particularly good at developing. Southwestern Virginia has its sights set on becoming a center for the drone or remote piloted vehicle industry. Nashville and Memphis are preeminent when it comes to medical innovation and investing. Kentucky, Ohio, and of course Alabama and South Carolina have made big commitments to the aerospace industry. The future of the automobile industry in the US is here in the Southern Auto Corridor along I-65. For many people that haven’t been paying attention, the fact that the South and Middle West are at the heart of a next generation industrial “renaissance” is a revelation.
The renaissance of industrial innovation and advancement is happening in the Heartland, not California or China. Not to dismiss or exclude other places, but we feel that “green fields” for new industries built on new and disruptive technologies can arise just about anywhere that intellectual and financial capital can make a marriage. We happen to like advanced materials—graphene for instance. Last year we made the first investment in a graphene manufacturing startup out of ORNL. Graphene was discovered just 12 years ago. It’s a form of carbon that looks like chicken wire under an electron microscope, just one atom thick. But it’s the strongest material on earth—200 times stronger than steel. A sheet the thickness of Saran Wrap would be able to hold up an elephant standing on a sharpened pencil! And it’s near ideally electrically and thermally conductive, so the possibilities for using graphene in electronic devices, construction materials, vehicles, batteries, and other products are staggering.
What excites us about a new, revolutionary material, such as graphene, is that we know from history that every time a great leap in material science has occurred, economic and political power follows the material science. We can go all the way back to the ancient Sumerians 5,000 years ago creating bronze, to iron being forged in India, China and Egypt 1,000-2,000 years later…. Wherever material science made a great leap forward, new manufacturing technologies were also invented to manipulate the new materials. Advanced materials and advanced manufacturing go hand-in-glove. And wealth and power has attended the people who controlled these technologies. The industrial age British forging steel in blast furnaces; Americans and French developing a cost-effective, electrolytic way to manufacture aluminum, which made possible 20th century aviation. Yes; the Chinese, Koreans, and Europeans are all working now to get to the forefront of advanced materials and manufacturing, but we’ve seen evidence from laboratories such as University of Alabama, ORNL, and University of Tennessee’s Fibers and Composites Manufacturing Facility (just to name a few!) that our region is at the forefront of innovation, and hopefully commercialization.
We saw this trend two years ago and moved to create a syndicate of angle group and funds to harvest technology in the heartland. We realized that someone had to organize this fragmented industry that is spread across the “flyover states.” We are working in communities from southern Minnesota to South Florida and from Denver to Charleston. We are finding outstanding technology and teams that we expect to ride the next run-up in the economy. We see a financial collapse approximately every 30 – 50 years in this country (Roaring 20’s, Post-WWII boom, computers/internet). That collapse sees the formation of companies that create entirely new industries often where no market existed before. Entrepreneurs lead the way, and investors fuel the growth. We believe we have come through the collapse and are sitting at the foot of the next great run-up in the economy based on advanced materials and advanced manufacturing. It should be a great ride.
Copyright Eric L. Dobson and Scott A. Ewing, 2016