RALEIGH – As macroeconomic conditions changed, venture capital markets did, too, according to an analysis released earlier this quarter. Are we headed toward another ‘dot com’ style bubble and bust as we saw in 2001-2002 and a huge slowdown in the “Great Recession” of 2008-9?
But in the Triangle, the funding environment for startups may not have changed much, local investors told WRAL TechWire this week.
What’s happening: During the third quarter of the year, venture capital activity nationwide slowed, the latest PitchBook-NVCA Venture Monitor report showed.
“There has been some decline in deal activity,” Karen LeVert, a venture partner at Pappas Ventures and the president of Ag TechInventures told WRAL TechWire in October. “But not enough to wring our hands.”
Data from PitchBook-NVCA Venture Monitor showed that companies in North Carolina had closed a total of 224 deals through September 30. And a review of the SEC database shows 34 companies have disclosed capital fundraising between October 1, 2022 and November 17, 2022. That could mean that the state would see 300 startups raise capital in 2022, which would fall below the total number that raised capital in 2021 but would be the highest on record compared to any prior year.
“Our early stage deal flow now is as high now as it’s ever been,” said David Gardner of Cofounders Capital in an interview last week with WRAL TechWire. “Although the venture capital funding numbers are in decline, several reports have shown that very little of that decline consists of seed round funding and that tech sector investing is the least affected overall.”
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Life science investment slowing, too, but NC is well insulated
And even outside of the technology sector in North Carolina’s startup economy, the state may be well-positioned to be resilient compared to other markets that are more reliant on large venture capital commitments, said Eric Forshee, executive vice president – life sciences at JLL.
“We have seen a slowdown when it comes to venture capital funding nationwide, and probably here locally,” said Forshee. “With the macroeconomic conditions occurring right now, VCs are being more hesitant with their investments.”
But, not all companies are the same, of course.
“Probably more of a slowdown with investments in later stage companies than in early-stage companies,” noted Forshee. And life science startups in the Triangle and across North Carolina aren’t necessarily as reliant on venture capital funding in order to grow or scale, though more venture funding is needed in the state, Forshee said.
“VC firms have become more selective because the biotech market is down, in general, and because of the geopolitical uncertainty,” said Forshee. “We’ve still seen a decent amount of activity [in North Carolina and in the Triangle], because our market has the right fundamentals.”
That includes a healthy ecosystem where life science research is conducted at universities and research institutions, and then spun out into the startup ecosystem, noted Forshee. And another factor is that companies that are ready to start the manufacturing processes can access an excellent statewide ecosystem, said Forshee.
“That continues to be a trend that we’re seeing locally, due to the great fundamentals of our market, particular to the biomanufacturing space,” noted Forshee.
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Reasons for optimism
There are plenty of reasons that venture capitalists may be feeling optimistic.
Gardner told WRAL TechWire that valuations may continue to drop due to macroeconomic conditions, which could yield better deals from the venture capital side of the table, and then result in deal flow increases in 2023.
“I suspect that 2023 will be a good year in NC for both tech startups and their investors,” noted Gardner.
For instance, said Justin Wright-Eakes, managing partner of Oval Park Capital, there’s still a “huge capital overhang” in venture, growth, and private equity markets.
“I think investment appetite will remain strong,” said Wright-Eakes.
And venture capital firms based outside of the state remain interested in the state’s entrepreneurial economy, recently ranked fifth in the nation, said Scot Wingo, the CEO and co-founder of Spiffy and a general partner at the Triangle Tweener Fund, which invests in early stage companies based in the Triangle.
Earlier stage companies continue to be active in the fundraising ecosystem, said Wingo, noting that while there’s “a lot of activity” there’s also “a bit of decrease on valuations as the public market comps have ‘rolled down-hill’.”
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Business as usual
Across town, it’s “business as usual” at Bull City Venture Partners, said Jason Caplain, a co-founder and general partner of the Durham-based venture firm.
“We are experiencing record deal flow levels,” said Caplain. “This is not only seed stage companies but also companies that were funded maybe a year or two ago by another VC and coming back to market.”
Bull City Venture Partners invested in Green Places earlier this year, and committed additional funding to Tiny Earth Toys.
Still, though activity continues, Caplain noted that for entrepreneurs, raising capital will remain a challenge during the fourth quarter and potentially “deep into 2023.”
“The best companies will still be able to secure financing, but the pendulum has swung back to a buyer’s market,” said Caplain. “There is a greater focus by founders and investors on capital efficiency rather than to get growth at all costs.”
Another sign of optimism: A lot of capital is remaining on the sidelines, said Caplain, “so raising capital is still very much on the table.”
And, said Caplain, a silver lining for startups is that during periods of macroeconomic uncertainty, talent might be easier to attract and retain, with less competition.
