Triangle VC market showing signs of strength, resilience despite softening economy

RALEIGH – There’s still momentum in venture capital markets, despite ongoing concerns that the United States may be heading toward an economic recession.

That’s according to the latest summary of data from PitchBook, which was obtained by WRAL TechWire upon request.

As of June 30, 2022, deal counts across the entire venture capital markets in the United States is tracking ahead of the full-year data from a record 2021, when there were 17,637 deals tracked in the data set.

Through the end of June, 9,421 venture capital deals appeared in the PitchBook data set.

But that’s not to say that the deals, in the aggregate, tracked similarly to those made in 2021, as total deal value lagged far behind at the middle 0f 2022 compared to total annual deal value in a record-breaking 2021.

Here’s how the two years compare: In 2021, the deal value across the entire year was $341.5 billion, whereas in the first half of 2022, just $144.2 billion has been invested in U.S.-based firms.

And North Carolina companies receive a portion of this capital. Of the more than $3.6 billion in venture capital funding raised by North Carolina firms in 2021, nearly 70% went to just two firms.

NC startups raised $3.6B in VC in 2021 – but nearly 70% went to two firms

Tap still open—but for whom?

And just because deal flow is pacing close to 2021 levels doesn’t necessarily mean it will continue, said Michael Lee, a senior associate at Bull City Venture Partners. That’s due to the fact that many companies who were planning to raise capital in 2022 may have accelerated their timelines, said Lee, “in anticipation of a more difficult fundraising environment.”

Some of that is playing out in North Carolina and in the Triangle, as well, where there are “tons of companies” scrambling to raise capital to give 18-24 months of runway, but without the necessary track record to justify the valuations they’re hoping for.

“Leading to suppressed valuations across the board,” said Lee.

And big technology unicorns, including Epic Games, which recently raised an additional $2 billion, may now be catching their breath, said Scot Wingo, a Triangle-based serial entrepreneur and founder and general partner of the Triangle Tweener Fund told WRAL TechWire this week.

Epic Games raises another $2 billion from investors for building ‘metaverse’

Early stage companies may fare well

“As an industry we should more clearly define stages—I believe based on revenue bands—and then look at it by stage,” said Wingo in the interview with WRAL TechWire. “What you would find is the deal value at early stage is maybe down a tad, but at the top C/D/E levels it’s slowed dramatically and if rounds are getting done they are small.”

The Triangle Tweener Fund has already invested in 25 local companies, with 14 last quarter, Wingo announced earlier this week.

Still, though, venture capital firms have raised nearly as much capital in the first six months of 2022 as they raised in all of 2021, a record-setting year.

In 2021, the data set showed $138.9 billion raised by venture capital firms, and through mid-year in 2022, the data shows $121.5 billion in capital pouring into funds.

But those funds may not be evenly distributed across the active venture capital firms in the industry. Lee noted that almost all funds outside of the top 20 “premier firms” are having more difficulty in closing funds.

Triangle serial entrepreneur Robbie Allen joins Triangle Tweener Fund as general partner

Money in, exits down

Even though deal flow and fundraising continued, exit activity has decreased significantly in 2022 compared to 2021. That’s because the “IPO window remains closed, keeping exit value depressed,” the report’s summary notes.

During the first half of the year, the report notes a “complete lack of traditional IPOs.” Compare that to 2021, when nearly 86% of all exit value—overall, a record $777.4 billion—came from public listings of venture capital-backed companies.

“Reduction in SPACs and IPOs makes sense with the declines in late stage and public market valuations,” said Justin Wright-Eakes, founder and managing partner of Oval Park Capital, in an interview with WRAL TechWire this week. “Going public is a much less attractive exit path under current conditions. I expect we’ll see increased M&A activity in the next couple of years as larger, well-funded companies begin to pick off earlier-stage companies that may have solid technology and strategic value but are not growing capital efficiently and are struggling to raise additional capital to stay afloat.”

That’s consistent with the viewpoint of the analysts behind the PitchBook report summary. The report notes more activity at the other end of the startup lifecycle, with seed-stage deals “pushing toward recent highs at an estimated 1,400 deals.”

Venture capital biz slows nationally but NC investors are bullish – here’s why

How NC is faring

In April, North Carolina investors remained bullish on the state’s entrepreneurial economy. Not much has changed in the Triangle’s economy since that point, nor has the outlook for the Triangle changed much, either, said David Gardner, general partner of Cofounders Capital, in an interview this week with WRAL TechWire.

While valuations are dropping, somewhat, across the nation, and new deal investing may be showing signs of a slowdown, said Gardner. “This is less of an issue in the Triangle because our valuations here are already less than one half of that of other metropolitan technology hubs,” Gardner noted.

VC veteran Michael Lee joins Bull City Venture Partners as dollars continues to pour into NC

What’s happening

Here’s what’s happening, according to the analysts who authored the PitchBook report: “The outsized deals that became a theme of 2021 are not being completed as investors take a more cautious approach to the largest deals in the market.”

In Gardner’s view, venture capital firms are holding more capital in reserve “to protect against a possible slower growth rate in their portfolio companies.”

But Cofounders Capital is in the process of deploying its third fund, Gardner noted, adding that it’s possible that investments made in early-stage Triangle-based firms now would be ready to exit in a few years during another boom market for venture-backed technology startups. Gardner has also made a decision to move from a Cary home—for sale at more than $8 million—to move to downtown Durham, one result of which is being closer to entrepreneurial activity, he told WRAL TechWire last month.

And Wingo agreed that is how the Triangle Tweener Fund is perceiving the marketplace. Given that the cadence of a venture business cycle is typically between three and five years in length, he’s putting the time and money on bets that right now is a great time to raise capital and invest in the region’s early-stage startup companies, even hiring on Triangle serial entrepreneur Robbie Allen as an additional general partner this week.

“Because we’re capital constrained, our companies are scrappier, and thus more able to navigate economic downturns than overfunded companies that have super high burn,” said Wingo.