Startup ecosystems in Southeast, including North Carolina, are maturing faster than those in established innovation hubs such as the San Francisco Bay area, Boston and New York City. That’s the good news.

The bad news in North Carolina is that while U.S. venture funding is on track to reach record levels this year, with the total funding amount through mid-year well above that in 2018, North Carolina’s 2019 venture funding has slowed relative to its record year in 2018.

At the halfway point, NC has raised only 14 percent of the more than $1 billion in 2018 deals.

So says a wide-ranging new report from Atlanta’s BIP Capital comparing the state of the Southeast startup ecosystems to that of the established hubs of Boston, New York City, and the San Francisco Bay area.

WRAL TechWire editor Rick Smith, however, found that some in the Triangle startup ecosystem expect another $1 billion investment year in the state:

State of venture capital in NC? Investors, watchers say it’s booming

Maturity, explains BIP Capital CEO Mark Buffington in an interview with WRAL TechWire, means a rise in pre-money valuations, valuations of startups with revenue traction, and “All the metrics we see in a more mature venture markets.”

Mark Buffington, CEO, BIP Capital. Photo courtesy of BIP.

He added that “It oscillates between competitiveness and market efficiency, much like a human goes from toddler to teen to super productive years (maturity) then older, reverts to toddler.”

BIP one of the most active venture funds in the Southeast

Buffington founded BIP in Atlanta in 2006 and it just closed a $100 million growth fund. It is one of the most active venture funds in the region, and did 37 deals in the last five years. It focuses on healthcare IT, fintech, media, sports tech, software tools and software as a service.

BIP focused its study on deals between $3 million and $15 million, added Mark Flickinger, COO of BIP.

Mark Flickinger, COO, BIP Capital. Photo courtesy of BIP Capital.

Last year, valuation multiples on aggregate in the innovation hubs were more than double those in the Southeast. This data supported the belief that the Southeast is an attractive place to invest relative to the more established and capital intensive innovation hubs. But, the report states, “That gap is closing.”

Revenue multiples are increasing at a faster pace in the Southeast (40%) than in the innovation hubs (11%). Also, Southeast startups are raising money with less revenue traction then previously.

Another factor affecting the increasing maturity of the Southeast venture ecosystem is that more capital is being deployed by Southeast investors than ever before, creating less opportunity for funds in the innovation hubs to invest in the region. In 2018, 25% of the top five most active VCs in each state were from the Innovation Hubs.

Charlotte market maturing rapidly

Today, that number has fallen to 18%. Local funds are getting larger and, therefore, have a bigger market presence in the region.

According to the report, Charlotte and Nashville are maturing at a rate far exceeding that of the innovation hubs. “This is not surprising, as those cities continue to show rapid growth and an inconsistent supply of both capital and companies” the report says.

Flickinger said, “It’s a surprise how much the Charlotte market is growing. There are an increasing number of deals with both quality and quantity going up. Frankly, from our perspective, we should be paying more attention to Charlotte.”

Buffington adds that Charlotte, long known for its fintech companies, is expanding into broader markets, led by digital media, which includes promotion, and sales and marketing automation.

Success begets success

However, Atlanta and RTP, often thought of as the Southeast’s most mature venture ecosystems, are flat-lining in year-over-year investments. The report proposes that both are “mature” relative to their peers in the San Francisco Bay Area, Boston, and New York City.

Another aspect of a mature market, Buffington said, “Is that success begets success in all these venture markets. Therefore, the handful of unicorns, billion dollar companies such as AvidXchange, Epic Games and successful firms such as Pendo, are important on two fronts.

First, Buffington said, “The people who drove the exits teach what they learn. They’re also tangible examples to investors, who say, ‘I’ll take that risk too.’ It takes you back to the idea of maturity. One measure of maturity in a community is how many people are participating.”

On a final note, while venture funding slowed in NC during the first half of the year, the BIP execs concede that it may yet hit another billion dollar mark.

Specific NC findings of the report include:

  • BioTech/Pharma continues to lead the way in NC, attracting more than $2 billion in investment money over 331 deals since 2014.
  • The Digital Media market has overtaken FinTech as the state’s number two sector, with $1.4 billion invested over 139 deals during the past five-and-a-half years.
  • 2019 is shaping up to be a slower year than 2018, North Carolina’s most active year on record. At the half-year point, total dollars invested in 2019 are only 14 percent of that in 2018. •
  • More than half of the most active VC firms investing in North Carolina over the past five-and-a-half years are from out of state.
  • Total dollars invested: $6.7 billion (since 2014)
  • Number of investments: 1,518