Economic Outlook - August 2006

CED seeks to sow more seed money

North Carolina companies struck fewer venture-capital deals in 2005 than the year before. But the amount they received grew 61% to $507.5 million, according to the MoneyTree Report, a national study of the industry. Companies in Research Triangle Park grabbed about 80% of the state’s total, says the Council for Entrepreneurial Development, a Durham-based nonprofit that helps new businesses in the state. One concern: Seed funding declined 62% last year. Monica Doss is president of CED.

BNC: Why the increase in venture capital?

Doss:The economy has a lot to do with it. Venture capitalists were very wary in 2001, 2002 and 2003, the years following the high-tech bubble, but that didn’t stop the influx of companies. We were seeing a steady stream of new technologies and entrepreneurs coming out of universities. They just weren’t getting funded.

What industries are benefiting the most?

Life sciences were very strong. Because they take such a long time to gestate, those are companies that have been on the radar for a while, and they are ready to take on significant capital.

What about high-tech?

We’re seeing a lot of the investments made in things that are going to change industries. They are less in software but more in convergence technologies such as new chips and sensors.

Where should I go for startup money?

First, go after grants and loans from North Carolina Biotechnology Center, NC IDEA — a seed-capital fund for technology startups — or federal-government sources because you don’t give up any equity. Federal Small Business Innovation Research grants are particularly attractive because North Carolina has such a strong matching program. Second, you should talk to angel investors, individuals who invest in startups or business concepts. CED can help identify matches, but lawyers and accountants are also good referrals to angel groups or other high-net-worth individuals. If you’re in a research-based industry, you probably need to go to venture capitalists next.

What do investors look for?

Proven management, early benchmarks, a sizable market and/or evidence of secured intellectual property.

Why are most of the VC deals in RTP?

Most of the people who are starting these companies and getting the money have their roots here. They’ve worked in RTP companies or nearby research universities.

North Carolina ranked eighth in venture capital raised. What does that mean?

It means we’re not screwing up. It’s highly competitive, and we passed Georgia. They are investing a ton of activity and money throughout the state. It’s validating, but in no way is it time to sit back and relax, because someone was No. 8 in the country before.

Is the drop in number of deals a concern?

No, venture capitalists are doing larger deals in later stages. That’s a national trend. We’re concerned about the lack of investment in the early stages. Some of this is as a result of investors funding companies over a longer period of time. They release the money when benchmarks are met. That way, venture capitalists have a bit more control over their funding position in later rounds.

Why is seed investment dropping?

It’s down more than 60% from 2004, and the year before that it was down 40%. A lot of that investment was from angel funds. They’re individuals who are investing their own money, so when they get burned, generally they don’t come back. In North Carolina, you can count the available seed funds that are not angel funds on one hand. That’s an area we have to beef up through public investments. It’s an economic-development activity. If we don’t get them developed on the front end, we won’t have these later-stage deals down the road.

Seems risky, possibly controversial.

We’re talking about a relatively small amount of money — a couple hundred thousand dollars per company. Government funds can leverage a company to the point where the private sector picks it up. The data shows that these companies are good investments if you can get them out to that point where other sources will pick them up.

How else can we improve?

We should consider replicating incubators that have a high success rate — either in the public sector or private sector. Universities can follow the same strategy to support companies for a longer period of time. That provides state-of-the-art equipment and gets a company farther along on less money.

What’s CED’s role?

I’m going to get behind any credible effort to develop seed capital. We do an angel-investor retreat twice a year. We’ve started doing more on a statewide basis. It’s difficult, because angel investing is so word-of-mouth. If you’re in one area, you may not know what’s available to invest in five counties away. We’ve seen a lot of that, so the idea is to pull these people together.