CARY, N.C. – A fourth-quarter surge in venture funding that lifted North Carolina to seventh nationally, a solid year overall and an opening for “exits” has many investors thinking positively about 2007.
“I do think this is going to be a good year,” said Jeff Clark of The Aurora Funds. “We are very bullish.”
Aurora Funds is reported to be close to closing on a new fund, but Clark can’t comment about that. Rather, his optimism following the quarterly PricewaterhouseCoopers venture capital overview event on Thursday was based on action he is seeing in the market – not from just an investment standpoint.
“We are seeing strong merger and acquisition activity,” he said. “We received several unsolicited bids for some of our portfolio companies in the fall.”
While initial public offerings as an exit for venture-backed firms increased slightly to 58 in 2006 from 56 in 2005, that total is far from the 93 reported in 2004, based on statistics from PwC, the National Venture Capital Association and Thomson Financial. The number of M&A deals for venture-backed firms declined slightly to 335 in 2006 from 347 the previous year. However, the average value of M&A deals jumped to $113.8 million, up from $95.8 million in 2005.
In the fourth quarter, the values of M&A deals skyrocketed to $165.3 million.
“Most people believe that good companies can pull off an IPO,” said Jeff Barber, PwC’s partner for the Carolinas. “But it’s still a challenge.”
Venture funding in North Carolina totaled $118.8 million in the fourth quarter, lifting the state to seventh. For the year, North Carolina firms raised $471.6 million.
In discussing the numbers before the event, Barber said he was impressed by the spread of investment across the state. Generally, most funding events happen around the Triangle.
“We had a good quarter, and the numbers were up,” Barber said. “This is the highest year we have had in the past four. We have shown some nice, steady growth over the past couple of years. This shows there is a lot of stability in the market.
“And from what I am hearing on the street, this year is going to be even better. Several funds are reloading, or are reloaded, so all have capital to invest. I predict this is going to be a real strong year.”
Aurora is among those in the process of raising new funds. So is NC IDEA. Intersouth Partners closed on a $275 million fund last year, and Southern Capitol Ventures has a new $15 million fund.
With M&A as a growing appeal for exits and the IPO route seen as not being impossible, venture funds are more eager to get in on deals.
“There is more competition, especially at the later stage,” said Jason Caplain of Southern Capitol. “More deals are getting done.” Caplain also noted that the value of M&A deals has more than doubled since 2003.
Garheng Kong of Intersouth Partners told the PwC event audience that while “early stage deals are pretty steady” the later-stage competition “has certainly gotten more heated.” The more mature firms are closer to an exit, and if the IPO environment improves, Kong said the venture funds will be even more aggressive in deal making.
A report out this week from Dow Jones VentureOne pointed out that valuations of venture-backed firms are increasing, especially in later stages of growth.
In North Carolina investments, Barber noted that the state had its best year since 2002 even though biotech financing dropped 43 percent from 2005 to $102.4 million. Offsetting that drop were big increases in telecommunications-related deals (up 136 percent to $101.1 million) and huge jumps in healthcare services ($41 million) and financial services ($32 million). Semiconductor deals jumped to $26.6 million, up more than 60 percent.
Software, however, increased only slightly to $24 million.
“To me, that’s a surprise,” Barber said of software, noting that back in the boom years software was a much larger generator of deals.
However, the drop in biotech and the lower profile of software is good news, Barber said in an interview.
“We’ve gotten beyond biotech and software. Materials and chips and other types of opportunities are growing in our region,” he explained. “We’re not a two-trick pony. We’ve gotten beyond that.”
Barber also noted that the number of deals in Charlotte is growing, given North Carolina. more balance. Statewide, the number of deals increased in 2006 to 65 from 54 in 2005 and 55 in 2004.