Durham venture capital fund Hatteras Venture Partners has reached its goal of raising $125 million for its fourth investment fund – with a major assist from a new federal program.
Hatteras is the first venture capital fund nationwide to be licensed by the Small Business Administration to receive government-backed, low-interest loans under the agency’s new Early Stage Innovation Funds initiative. Hatteras raised $88 million from private investors and plans to tap into SBA-guaranteed loans to boost its investment capital to $125 million. It could go even higher, since it’s eligible for up to $50 million in loans under the program.
“It gives us deeper pockets for our companies,” Clay Thorp, Hatteras co-founder and general partner, said of the SBA program. Hatteras focuses on seed and early-stage investments in biopharmaceutical, medical device and diagnostic companies, as well as related technologies and services.
Since venture capital funds like to invest close to home, Hatteras’ fundraising success is especially welcome news for local startups. Hatteras’ third fund, which totaled $83 million, invested in 10 companies – five of which are based in North Carolina.
Venture capital funds such as Hatteras raise money from investors and then plow it into high-risk private companies in hopes of generating outsized returns. The venture capital funds receive an ownership stake in the businesses they fund and cash out when the companies are sold or go public. They also can be left holding the bag if the companies go belly up.
The new federal initiative, part of the SBA’s Small Business Investment Company program, aims to make it easier for early-stage companies with high-growth potential to raise the funding they need by increasing the pool of available capital. To qualify for matching federal loans, venture capital funds have to raise a minimum of $20 million from private investors and invest at least half of their funds in early-stage businesses.
“Two-thirds of the net new jobs creation comes from small companies,” Sean Greene, associate administrator for investment and special adviser for innovation at the SBA, . “As you can imagine in this economic environment, they are facing tremendous challenges across the board, but in particular in gaining access to capital.”
‘Valley of death’
It’s so difficult for early-stage technology companies to raise between $1 and $4 million in funding – not a large amount in the world of venture capital – that it’s known as the “valley of death.”
Less than 10 percent of all venture capital funds invested over the past five years has gone to early-stage companies, Greene said. Moreover, 70 percent of that early-stage funding went to companies in three states where venture capital funds are plentiful – California, Massachusetts and New York.
Last year, venture capital funding became a relatively rare commodity for Triangle companies. Through the first nine months of 2012, Triangle companies raised a total of $82.8 million in venture capital, by far the lowest amount since The News & Observer began reporting the Triangle’s quarterly numbers in 1999. The data is from accounting firm PricewaterhouseCoopers and the National Venture Capital Association, based on data supplied by Thomson Reuters.
No cost to taxpayers
A total of 33 venture capital funds across the country applied for the new SBA program last year and so far six have received preliminary approval, Green said. Of those half-dozen venture capital funds, Hatteras is the first to close on its funding and qualify for the program.
“We’re excited to have Hatteras in the program,” Greene said. “They have a clear, focused strategy. They’ve got a good historical track record...They have a very strong team with good experience both as investors and operating professionals.”
Hatteras’ roster of partners includes Robert Ingram, former CEO of Glaxo Wellcome, now GlaxoSmithKline; Kenneth Lee, former co-head of the International Life Science Practice at Ernst & Young; and Christy Shaffer, the former CEO of Inspire Pharmaceuticals.
The SBA has committed up to $1 billion over five years for the Early Stage Innovation program.
“It’s important to clarify that the entire SBIC program operates at zero cost to taxpayers,” said Greene, who noted that companies like Hatteras have to pay back the money they obtain through the program.
Hatteras previously announced – in August 2011 – that it had raised $74 million for its fourth fund but was continuing to seek additional commitments from investors. On Monday, the company is announcing its “final closing,” meaning that its fundraising is over.
Thorp said raising money from private investors is never easy, but it was especially difficult this time around because investing in early-stage life science companies has fallen out of favor.
“The broader market headwinds against us were much stiffer than we thought,” he said.