Three Roots Capital Impacting Communities By Funding Their Startups

Innov865 Week is a week-long series of events, taking place September 18–21, 2017, to celebrate and showcase Knoxville as a great place for entrepreneurs to start and grow businesses. We have partnered with the Innov865 Alliance to bring you stories of innovation born in East Tennessee.

If a VC or private equity firm won’t fund it, it’s possible that Knoxville, Tennessee-based Three Roots Capital will. This Community Development Financial Institution (CDFI), which is a designation given by the U.S. Department of Treasury, is working to increase access to capital for companies and projects in low income and rural areas of East Tennessee and the surrounding region — companies that fall outside of the “sweet spot” for traditional startup lenders.

We talked to Grady Vanderhoofven, president and CEO of Three Roots Capital, to learn more about this innovative nonprofit, how it’s impacting the communities of East Tennessee and the role the company will play in the upcoming Innov865 Week.

Was there any particular moment that prompted you and others to create this group?

In our prior and ongoing venture capital and private equity activity, we have raised and invested a lot of capital in this region. We have participated in the creation and/or financing of dozens of companies. Over the course of the past 20 years, we have observed a gap in the capital continuum in the region; that gap exists between the stage at which VC or other equity investment is the most appropriate source of capital for a company and the stage at which a bank is the most appropriate source of capital for a company. Some of my own portfolio companies (in our prior and current VC and PE funds) in the region, as they matured beyond the need for equity investment from VC or private equity, would find it necessary to go outside this part of the country to raise capital prior to becoming truly bankable. As specific examples, in the past few years, I’ve had portfolio companies in Chattanooga, Knoxville, and Greenville, SC raise debt from investors on the west coast and in Texas because they could not find a local or regional source for the kind of debt they needed. We formed 3Roots, in part, to play a role in filling that gap. Frankly, it’s impossible for a single CDFI to fill that gap, and it would be naive for anyone to suggest one CDFI could fully address such an unmet need. That would be like suggesting a single bank could provide all mortgage financing, or all auto loans, or all commercial lines of credit or inventory financing.

CDFIs are not all that common. Why create one?

We work very closely with a number of banks in the region, and we are interested in working with an increasing number of banks. Because a CDFI is a CRA (Community Reinvestment Act) eligible investment vehicle, working with a CDFI can be attractive for a bank. We want banks to view us as a partner and as an institution that can add value for them. Similarly, but from the other end of the capital continuum, we want the equity funds that are investing in the region to view us as a potential source of capital when their companies reach the stage where debt is the appropriate mechanism for financing a company.

Grady Vanderhoofven

What’s next for Three Roots Capital?

I envision 3Roots as a sustainable investment platform, with a number of different tools in the financing toolbox, focused on positively impacting the region. We cannot be all things to all people, but we have background, experience, and skill sets that position us to work collaboratively with others in a number of different places along the capital continuum. In the past 15 months, we have financed and assessed companies and projects throughout East Tennessee and Southeastern Kentucky. As a few examples, we have financed expansion for a manufacturing company, a growth opportunity for a technology-based business, and a real estate development project that is attracting businesses, service providers, and jobs to a rural, low-income, underserved community. We are working now on a number of new deals, ranging from $250K to $10M, looking at everything from operating companies to community facilities. In addition, we are positioning now to explore opportunities in Southwest Virginia, Western North Carolina, Northern Georgia, and Northern Alabama. I have been meeting as part of an informal group in Knoxville to talk specifically about “impact investing,” and some of the topics we are talking about are affordable housing, quality job creation, and place making opportunities. 3Roots is also leading an effort to form an evergreen, proof-of-concept, seed-stage investment fund. I presented the concept at a meeting of the Community Development Venture Capital Alliance in Washington, D.C., this past spring, and the structure was widely regarded as innovative and compelling. The University of Tennessee Research Foundation has been a great partner with us on that initiative. Each of these vehicles — CDFI, seed-stage equity fund, and a broadly defined “impact fund” — can capitalize on opportunities and help solve problems at various places along the capital continuum. We are focused on the region and on collaboration and partnering to generate attractive investment returns and to help solve problems and fuel opportunities using financial tools.

Why support Innov865 Week — and Knoxville? What makes you stay and invest in this community?

We are big fans of the Innov865 Alliance and Innov865 Week. We’ve been involved in this event in numerous ways over time; we participate in planning and fundraising, we’re a sponsor, we’ve produced programming, we mentor presenting companies, and we invite other investors to visit Knoxville and participate in the event.

We love entrepreneurs, and we want to work with those who support and encourage entrepreneurship. To use an analogy, I believe entrepreneurs are the spark plugs in the engine that is the economy, and capital is the fuel in that engine. I grew up in Colorado, went to school in the Northeast, and moved to Knoxville after graduate school to work at Oak Ridge National Laboratory in 1990. I didn’t really expect to live here forever, but I found this area to be a great place to live and raise a family. We have an opportunity to do meaningful work that is economically rewarding for our investors and for us and is gratifying and fulfilling from a social perspective. I did not move into this part of the country expecting to do this as a career, but after I got here, I perceived the need and seemed to have a knack for this.

Innov865 Week is an opportunity to pull the critical components of our entrepreneurial ecosystem together. I like a campfire analogy; the idea that we can put hot coals near each other and see if we can create a constructive and productive fire. If the hot coals remain apart from each other, they have a tendency to cool off and even burn out over time.