What’s real story about state of VC in North Carolina? A newspaper headline reads: “Triangle companies raise $40.1 million from venture capitalists.” Sounds like a lot of money, right? But the fact is, VC deals continue to lag.
The Skinny ran into two early-stage investors at the grand opening of the American Underground@Main St. in Durham on Thursday evening, and I posed this question: “How’s the deal flow?”
“Great,” replied John Cambier of IDEA Fund Partners.
“Very strong,” added Andy Schwad, an angel investor who also runs the First Flight Venture Center.
“Wait a minute,” I responded. “The latest venture stats don’t show that.”
Both shook their heads. They didn’t mean “institutional level” investing where venture capital firms pump millions into startups that are maturing with products and revenues.
“We’re talking about angels and early stage,” replied Schwab. Cambier nodded his head.
In fact, both said they were having trouble keeping up with the “deal flow.”
“It’s hard to find time to do all the due diligence,” Schwab said.
While angel investments are not reported on as regularly as institutional deals and are not included in statistics compiled by PriceWaterhouseCoopers as part of its MoneyTree report or Dow Jones VentureSource – the latest reports came out this week – most of the investment action these days is coming from them and IDEA Fund along with its affiliated NC IDEA grant program. Angels, the IDEA programs and the Startup Factory in Durham are pushing numerous ventures toward potential success in big numbers.
But as the MoneyTree figures that were announced this morning show, the bigger deals are lagging even as “exit ramps” such as IPOs (exemplified best by ChannelAdvisor and some life science firms so far this year) as well as mergers and acquisitions (the buy of Geomagic) are open.
The MoneyTree figures show 11 deals worth just over $60 million. That total is slightly higher than reported by VentureSource, which we wrote about Thursday.
While the MoneyTree figures are far better than a disastrous 2012 and were up $22 million from the first quarter, North Carolina has plunged far below a traditional near-top 10 ranking as an investment state. It’s 15th in the latest data.
Quarterly figures for the past six:
- Q1 2012: 8 deals, $15.3 million
- Q2 2012: 6 deals, $35.6 million
- Q3 2012: 11 deals, 44 million
- Q4 2012: 10 deals, $86 million
- Q1 2013: 8 deals, $41 million
- Q2 2013: 11 deals, $63 million
The Skinny asked Laura Robinette, partner at PwC in Raleigh, for her views about the state of VC.
“More Triangle companies got funded,” Robinette noted, “but the dollars invested were less than our average on a per deal basis.”
Three of the investments were first stage and five were second stage, implying VCs are not ignoring startups.
“I was pleased to see the significant number of early stage/startup deals that got funded in Q2,” she explained. “While I can’t speak to specifics, I think this is a very positive sign that newer companies are getting funded, likely due to the fact that the VCs are getting some liquidity with the public market activity.”
The “liquidity” point is significant. With IPOs way up and bigger companies awash in cash (IBM, Cisco, Oracle which bought Morrisville-based Tekelec) and gobbling up smaller firms, VCs should be making deals because they have a real chance to make some nice returns for a change.
“Domestically, 21 venture backed IPOs raised $2.1 billion during Q2 2013, a significant increase over Q1 2013 and all of 2012,” Robinette explained. “Thirteen of the 21 were life science, or 62%.
“Both of these facts, increased IPO activity and life science activity, as positive for the Triangle, given the companies we have here.”
Robinette also sees the M&A trend continuing.
“For Q2 2013, 84 venture-backed M&A deals were reported in the US – another good sign of market strength,” she said.
So the venture market isn’t dead – not by a long shot.
But with firms such as Aurora not expanding its portfolio, with Jason Caplain and David Jones shifting their efforts to Bull City Partners away from Southern Capitol, with Intersouth, Hatters and Pappas casting eyes for deals across the southeast and nationally, startups in North Carolina still have to face a grim fact:
The institutional VC business is just not it used to be.
Far from it.
The National Picture
“VC investment overall was up for the quarter, driven by the continued strength of the IT sector,” notes the National Venture Capital Association about the MoneyTree report. “Life sciences investing appears to have stabilized and perhaps is poised for recovery in the second half of the year if we see continued progress on the regulatory front. Clean technology continues to evolve as the sector shifts from capital intensive to more capital efficient deals.”
That’s good news.
“Quarterly venture capital investment activity rose 12 percent in terms of dollars and 2 percent in the number of deals compared to the first quarter of 2013 when $6.0 billion was invested in 896 deals.”
But let’s look back at previous quarterly totals:
- Q2 2010: 1,020 deals, $7.1 billion
- Q2 2011: 1,081 deals, $8.2 billion
- Q2 2012: 970 deals, $7.3 billion
So the trend is …