Triangle defies downward venture capital trend – a look at the numbers in 6 charts, VC players weigh in

Editor’s note: WRAL TechWire’s Sarah Glova goes deep inside the latest PitchBook-National Venture Capital Association Venture Monitor report to show through a series of graphics how the Triangle region is defying the recent decline in VC business.

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RALEIGH — Between scary inflation data, roller coaster job reports, and a few high-profile bank failures — the first quarter was a tumultuous time for investors.

And the data shows it. A recent report on venture capital (VC) investment in the US reveals a significant drop in deal activity across all stages and sectors.

But what does this mean for the Triangle region?

Sarah Glova

“I know the early-stage investors and angels in our ecosystem well, and I don’t think they see this as a lack of confidence in the sector but rather as a short-term cash flow tactic,” said David Gardner, local investor and startup expert.

Gardner is founder and general partner of the seed fund Cofounders Capital. He’s also an experienced entrepreneur who’s started or co-founded seven companies and the author of the entrepreneurship book, The StartUp Hats.

“Historically, the Triangle has outperformed the nation in early-stage deals even when later-stage investing was down,” Gardner told WRAL TechWire.

To show how our region stacks up against state and national trends, WRAL TechWire analyzed the Q1 2023 PitchBook-NVCA Venture Monitor report and created six new visuals. Here’s what we found:

Raleigh-Cary-Durham compared to State, National trends

The significant drop is visible in the Venture Monitor report’s national data, which shows a downward trend in 2022 after 2021’s climb.

Visual 1: Capital invested ($M) in the US

I also reached out to Hunter Young, Head of Capital for the Council for Entrepreneurial Development (CED), to ask for his reaction to these numbers.

"The analysis of the national data we have been looking at says that the big reason total dollars invested is so far down is a lack of big deals," said Young. "CARTA Ventures just showed that deals in the B+ series’ are way off versus the deal volume at the seed and pre-seed stages."

How does our state compare to the national trends?

North Carolina had a similar climb in 2021 but featured spikes in 2022 and a quarterly increase for 2023 Q1. These spikes include big raises from Cary-based Epic Games, which raised $1.7B in 2021 and $2B in 2022.

Visual 2: Capital invested ($M) in North Carolina

"For markets like ours, big deals (like Epic Games) really do have an outsized impact on the dollars in that quarter that year," Young told me. "Due to this, it would be more impactful to focus on the number of deals or companies funded when compared to the prior quarter. There is too much noise from the large deals that clouds the reality on the ground."

Jason Caplain, General Partner and Co-Founder of Bull City Venture Partners, told me that large companies like Epic are a big difference maker for our region.

"I also think the strength of a tech region comes from having at least 3 $10 billion tech companies," said Caplain in an interview with WRAL TechWire. "That really helps propel that flywheel. Here we have SAS, Epic and Red Hat."

Caplain, who was at Red Hat - now owned by IBM - in their finance group through the successful IPO in 1999, also mentioned how employees of large companies in the Triangle often stay here to start their own ventures.

"Within the last 12-18 months, we have seen teams leave companies like Epic and start new companies that also raised capital, like Matt Schembari at Lightforge Games," said Caplain.

How does our region compare?

Following the North Carolina trend, the Triangle data showed spikes in 2022 and a quarterly increase for 2023 Q1. (The Venture Monitor report separated the Raleigh-Cary MSA and Durham MSA; our analysis combines the two into one region.)

"Locally, the earlier deals have been consistent with 2022 actually being a record year for early investment, which portends well for bigger deals in the future," said Young.

Gardner agreed, reflecting on recent activity at Cofounders Capital.

"We just closed on our third $50M early-stage seed fund in Q1 and we are making two investments this month so we may be bucking the current trend a bit," said Gardner.

Visual 3: Capital invested ($M) in the Raleigh-Cary MSA and Durham MSA

Caplain told me that he thinks investment from outside the region is also a big difference maker.

"I think the headline for our region is that the founders and companies here are getting increased attention from investors outside the area," said Caplain. "This is happening more now than I have ever seen. Many Boston, NY and Valley based investors are investing here for the first time. Then they come to our conferences like CED Venture Connect looking for deal number two and that will hopefully snowball into even more activity in the years ahead."

To show how the region and state differed from national trends, here's a visual representation that demonstrates the variation between regional and state trends when compared to the national average.

Visual 4: % Change in capital invested from previous quarter

The graphic displays the percentage change in deal flow for each quarter over the past five years.

Krista Covey, president of First Flight Venture Center, told me that she thinks growth in the area has helped startups in the Triangle raise capital on a different trajectory than state and national trends.

"The region's economy has been growing at an impressive rate, thanks to the presence of our world-class universities, research centers, RTP, and a highly skilled workforce," said Covey. "More people are moving to the area to work and live, creating a very favorable business climate, particularly for startups."

Young also described how the region's conservative investor approaches could support startups during economic downturns.

"One of the characteristics of our ecosystem is a bit more on the conservative side for both investor funding as it relates to traction, as well as company vision for growth and liquidity, versus the hypergrowth mentality of [Silicon Valley]," said Young. "Less cash burn allows some businesses to survive downturns with more time to find their path instead of failing fast and trying something new."

MSA Comparison

To understand how the Triangle is performing, we've compared its deal flow trend against that of 12 other selected metropolitan statistical areas (MSAs). These MSAs were chosen based on their similarity to the Triangle and their frequent comparison to our region in terms of innovation and economic growth.

Here's a look at how the Triangle ranks against:

Washington-Arlington-Alexandria, DC-VA-MD-WV MSA
Nashville-Davidson-Murfreesboro-Franklin, TN MSA
Denver-Aurora, CO MSA
Philadelphia-Camden-Wilmington, PA-NJ-DE-MD MSA
Boulder, CO MSA
Miami-Fort Lauderdale-Pompano Beach, FL MSA
Dallas-Fort Worth-Arlington, TX MSA
Minneapolis-St. Paul-Bloomington, MN-WI MSA
Columbus, OH MSA
Salt Lake City, UT MSA
Indianapolis-Carmel, IN MSA
Portland-Vancouver-Beaverton, OR-WA MSA

(I'll note—I shared these comparisons with Young and Caplain, and both said that we should include Austin in future comparisons. Young also suggested that we combine Boulder MSA and Denver-Aurora MSA data and add San Diego and Seattle as well.)

Visual 5: % Table of deal flow broken down by MSA

Covey told me that the Triangle "seems to be performing well" on capital raised in the region, "especially compared to other communities."

"Regarding the capital front, the Triangle region is doing well, but of course, there is always room for improvement," said Covey. "The region's startup ecosystem is healthy, and entrepreneurs receive support from the area's innovation hubs like First Flight Venture Center, as well as other entrepreneur support organizations and economic development organizations. However, like any other region, there are still challenges, such as access to enough venture capital to sustain startups through to commercialization, including seed capital and follow-on funding and access to federal funding, especially through grants and contracts."

Visual 6: Deal Flow ($M) per quarter by MSAs, with Raleigh-Cary and Durham data highlighted

This visual shows how the Raleigh-Cary, Durham data compared to those same 12 MSAs over the last four years. The data is broken down by quarter, and the Triangle, highlighted in red, is often in the middle, sometimes at or near the top, but rarely toward the bottom.

"Deal flow is as good as I've ever seen it in the Triangle and early stage valuations have dropped dramatically," said Gardner. "This combined with less angel group activity has created a wonderful opportunity for those with cash to deploy. Our early stage valuations on average in the Southeast were already less than half that of other metropolitan areas in the US."

Learn more about the Q1 2023 PitchBook-NVCA Venture Monitor report here.