Katie Gambill, CEO of Council Ventures is clear that her goal is to create an institutional venture capital firm in Nashville

It was a memorable moment during the Nashville Health Care Council's recent mergers and acquisitions conference.

One by one, a panel of out-of-town venture capitalists had just confirmed that -- despite Nashville's pride in its healthcare services startups -- most of the nation's VCs know little about the city's entrepreneurial track record. Worse, when it comes to technology, the city's seldom a blip on major VCs' radar.

Then, panelist Allen Moseley, managing partner of Noro-Moseley in Atlanta, lightened the moment by reminding the audience of 450 executives they don't need to go New York or California, because his firm lies just down I-24, anytime they'd like to visit.
Moseley later told VNC his execs are frequently in the Nashville and the company currently has another term sheet on the table in Nashville, in addition to N-M's current stakes in locals BioMimetic Therapeutics, Direct General and FrontStream Payments. (More on N-M, on The VN Blog.)

The day's events and ensuing public discussion seemed to broaden the dialogue in Nashville about capital -- prompting VNC to touch base with members of the local VC community, on a variety of issues.

PETRA CAPITAL: AFFIRMING HEALTHCARE SERVICES

Petra Capital recently announced it has raised about $160 million for its third venture fund. Petra recruited about $150 million for two previous funds.

During an interview with VNC, Petra's Mike Blackburn (at left) suggested that a desire for more investment in technologies and other riskier ventures shouldn't lead to criticism of local investors' penchant for more familiar healthcare-services ventures.

"I think we just need to be careful not to throw the baby out with the bathwater," he cautioned. He explained that while Nashville is "certainly predominantly perceived as a healthcare services market," most cities with which Nashville competes don't enjoy any such reputational advantage among investors.

Offering an example, Blackburn said Louisville, in his opinion, has no such advantage, while here in town companies are fairly regularly attracting major VC capital from elsewhere, a fact he described as "pretty amazing," A case in point: Louisville-based Chrysalis Ventures, which recently announced it has raised $163 million for its latest fundm has invested with Petra in Nashville's ConnectivHealth. Chrysalis also has stakes in locals Cybera and HCCA International.

Second, said Blackburn, "money doesn't grow on trees, so we have to raise it, in order to invest it." Underscoring a point he believes seldom occurs to entrepreneurs in hot pursuit of money, Blackburn noted, "We raised money ourselves for our fund. It was very hard. It took two years of our life, out pitching literally to about 250 [potential] investors."

Third, Blackburn said Tennesseans need to know that institutional investors in Nashville and Tennessee do not enjoy the sort of legislated support that gives a boost to their counterparts in such areas as Silicon Valley, Austin and Boston. Blackburn pointed to Tennessee laws that he said prevent those who manage state pension funds from investing in "alternative assets," a situation he described as "archaic," in that it precludes prudent diversification of investment and allocation of assets.

Worth noting in the context of business climate and incentives or disincentives: Petra Capital has been awarded grants from the state governments of both Arkansas and Iowa. In exchange, Petra has promised to pursue good deals in those states, but with no obligation to invest. Blackburn said the two "capital starved" states are helping market Petra and other venture initiatives.

SOLIDUS WILL NOT RELY ON INSTITUTIONS

A complaint sometimes heard is that Nashville has too few "institutional venture capitalists" (IVCs). However, interviewing numerous local players, VNC found that the definition of an institutional VC is fluid, at best.

Hoping for a benchmark, VNC interviewed Paul Kedrowsky (at right), a senior fellow at the highly regarded, pro-enterprise Kauffman Foundation in Kansas City. Kedrowsky doesn't mince words. Said he, "It has to do with the nature of the investors... [IVCs] make an explicit allocation to investment every year," if the target fund meets metrics. "You're an institutional venture firm when you stop taking money from individuals and you start taking it from pensions funds, retirement funds, endowments and foundations."

Anything less, Kedrowsky said, is typically "just a bunch of high net-worth individuals." He added that almost all funds are forced to be non-institutional VCs initially, and "then over time almost all of those funds try to make the leap" to IVC status. He added, "The trick is that these institutional investors are pretty skittish characters, and they want ten years of great results, and they wants lots of infrastructure -- so, they can be a pain in the ass, so be careful what you wish for."

Solidus Co. Partner Vic Gatto (at left) was not enamored with Kedrowsky's definition of IVC. Gatto told VNC, "I think I'm disagreeing completely with him." He explained: "Everyone can choose their own way to define it... [but,] when I think of an institutional venture firm, what I'm picturing is the quality, the attention to detail, the due digilgence, and working with entrepreneurs to build important companies -- that leads to good returns for the fund and a venture institution that's known for quality..."

He said, "having institutions investing in a fund, in my mind, does not automatically make the fund it an 'institutional fund'..." He explained, "many of the things that it takes to build what I'm calling the institutional firm involve putting your own ego aside..." Institutional capital and quality management are not necessarily synonymous, Gatto stressed.

Gatto, who joined Solidus from Massey Burch, said the Solidus fund, which has about $50 million under management, has been designed to work well with individual or family offices, "and most of our investors are individuals or family offices." He added that while while Solidus doesn't "really pursue large institutional investors," the fund has two such.

"At Solidus,we believe that success breeds success: If you have successful individual deals that lead to a successful fund -- meaning the entrepreneurs are happy and the LPs are happy...," then that leads to more and more investors and entrepreneurs wanting to work with you. "That is real and matters and we're hoping to create that at Solidus... and we're going to do that without institutional money, for the most part."

COUNCIL VENTURES: BUILDING AN INSTITUTION

Alluding to laws and regulations governing fundraising, the Council Ventures (CV) management team declined to comment on how they're faring in attempting to raise funds for Council's second fund.

However, during an extensive interview and e-mail exchanges with the CV management team earlier this summer, Co-Founder and Managing Partner Denny Bottorff (at right) said that while he believes there is wide recognition of Nashville's leading role in the healthcare services sector, it is nonetheless true that investors do often react with skepticism to the suggestion that Nashville is home to what Bottorff referred to as "investible deals."

Bottorff, who began his banking career here 40 years ago, noted that "Tennessee has a lot more intellectual capital than financial capital," stressed that CV realizes the need to demonstrate for institutional investors that Council Ventures has both financial expertise and operating expertise and insight.

Council Ventures is unequivocal in declaring it aims for nothing less than institutional venture-capital status. CV Co-Founder, Managing Partner and CEO Katie Gambill told VNC, "We are building a Nashville-based venture capital institution to invest across all stages of venture capital including early-stage."

Prior to forming CV, Gambill was president and head of Equity Capital Markets and a member of the board of directors of SunTrust Equitable Securities Corporation and Equitable Trust Company. Since CVs founding in 2000, the company has invested in ten companies from its $55 million first fund.

Gambill (at left) stressed that institutionalizing a local VC "contributes to a more vibrant entrepreneurial community." She said she believes principals in a Nashville-based IVC are inevitably closer to their investments than out-of-towners and have more time to work with local entrepreneurs. Such factors produce additional future transactions with Nashville's "serial entrepreneurs" -- a process Gambill said "helps keep as much of the wealth as possible in Nashville."

"Probably the hardest thing we have to do at Council is convince people that we are 'real'," said Gambill. Toward that end, she said, CV emphasizes that "Our operating partners and CEO Council members, many of whom have been CEO/president of large national companies are not just a perfunctory 'advisory board' for Council Ventures."

Gambill said CV's "investment focus is healthcare, financial services and the increasingly prevalent intersection of the two industries. These industries are where we have the most overlap with our CEO-level operating expertise. Also, they are two industries where there is a lot of expertise in Nashville."

'Heavyweight' is a term that could be fairly applied to the members of the CV CEO Council, as well as to its clutch of operating partners that now includes serial healthcare entrepreneur Charlie Martin and Luke Simons, long associated with J.C. Bradford/UBS.

Gambill and CV Partner Gary Peat (at left) provided a rundown of substantive CEO Council roles that have included due diligence, deal sourcing, mentoring of portfolio-company CEOs, chairing portfolio boards, fund investment committee, interim executives, help in management recruiting, vendor selection and high-level assistance for portfolio companies sales efforts.

Peat, who has been with CV eight years and has broad experience with technology startups, added that he believes CV can leverage local expertise to create, among other things, a new generation of ventures centered around data-management and business-process requirements within healthcare enterprises -- spanning informatics, revenue-cycle management, clinical outsourcing and other targets. ♦