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Venture capital back to normal levels in the Triangle after Epic’s monumental raise

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Measuring Tech in the Triangle

A News & Observer analysis of local economic indicators for the region’s tech economy.


Last year was an outlier when it came to startups raising capital in the Triangle and across North Carolina.

Off the back of an unusually high number of large deals, records were shattered in the Tar Heel state for venture capital money flooding into startups.

In all, companies based here raised $2.7 billion in total, a 144% increase from 2017. But an oversized portion of that haul went to one company alone: Cary’s video game behemoth Epic Games, which raised nearly 50% of last year’s funding total.

So far, in 2019, things have returned to more normal levels, with the number of companies fetching more than $50 million in a funding round crashing back down to earth.

This story is part of a News & Observer reporting project aimed at monitoring the health of the Triangle’s tech ecosystem. In a survey sent to dozens of people in the local tech industry, the N&O asked what important measuring points matter the most for the ongoing success of the region. We’ll be reporting on individual indicators in coming weeks, then will revisit all of them regularly going forward.

One theme that came through in a number of the responses was the importance of growing large startups through capital.

The Triangle’s ecosystem was, in part, shaped by startups turning into gigantic engines of employment, with companies like SAS and Red Hat each employing thousands and attracting talented workers to the region.

One company that could join their ranks, Cary-based Epic Games, was the 800-pound gorilla in the room last year. Its $1.3 billion round of funding brought the valuation of the “Fortnite” video game maker to $15 billion and allowed its local workforce to grow by hundreds.

“At the highest levels, you have one enormous deal that overshadows everything else,” said Hunter Young, director of capital at the Council for Entrepreneurial Development (CED).

“That is something that is not replicable — at least with any sort of consistency,” he said. “I think the rest of the year we raised $1.5 billion, without that Epic deal, which is still a lot but wasn’t that much higher than the year before.”

Thom Ruhe, CEO of NC IDEA, a foundation that distributes seed grants to startups, said deals like Epic’s can almost “distort reality.”

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Tim Sweeney, CEO of Epic Games in Cary

$50 million investments

But last year was also notable in the fact that it wasn’t just Epic Games bringing in large amounts of money at one time. Throughout 2018, 11 companies in North Carolina raised rounds that were worth more than $50 million — with most of it being done by companies in the Triangle.

In the two years prior, only two companies managed that feat.

Last year, Triangle-based tech companies like Pendo and PrecisionHawk and life sciences companies like Humacyte, Precision Biosciences and AgBiome all raised at least $50 million.

“One thing we haven’t seen that puts this year behind the pace is a lack of $50 million-plus deals,” Young said.

So far in 2019 there have been a couple deals of that magnitude, though Young added the last three months of the year are usually the most active.

Most notably, Raleigh-based Pendo officially became a “unicorn” in October, when its latest $100 million investment round gave the company a billion-dollar valuation.

AskBio, a Research Triangle Park-based gene therapy company, also was an exception. It brought in $235 million in funding earlier this year.

There’s still plenty of time to catch up, Young said, noting that Epic’s whale-sized deal was announced in October. Young estimates that the state is currently on track to land somewhere between $1 billion and $1.2 billion in funding this year.

Attracting out-of-state investors

While it can still be difficult to cobble together the earliest rounds of capital in the Triangle, one thing that has markedly improved over the past few decades is access to large investors. Out-of-state investors’ interest in the Triangle is growing and they have become an important aspect of the area’s investment ecosystem.

Scot Wingo, a serial entrepreneur who keeps a close eye on the Triangle’s entrepreneurial scene, said if your company can put together consistent revenue, money will find you these days.

“If you can get a company up to $10 million in sales,” said Wingo, whose current mobile-car-servicing startup Spiffy has raised around $28 million, “you can attract outside venture capital.”

Last year, 22% of the investors deploying capital in the state came from California. In fact, more California investors put money into companies based in the state than North Carolina based ones, according to CED. (China was the source of the most international investors, with seven Chinese-based funds investing here.)

Many of these investors have been pleasantly surprised by what they find in the Triangle.

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Todd Olson is the CEO of Pendo, a Raleigh software company, which has raised more than $100 million since 2013. On Monday, the state awarded it an $11.7 million incentives package. Travis Long tlong@newsobserver.com@newsobser

After his firm invested in Pendo last year, Ashvin Bachireddy, a founding partner of San Francisco-based Geodesic Capital, said he was surprised by the workforce talent in the Triangle. His company had never invested in a North Carolina-based company before.

“The one criticism in investing in [specific] geographies is that there is typically not enough talent,” Bachireddy said. “That was definitely not the case in Raleigh. In some cases, they have talent better than Silicon Valley.”

Looking for the exits

But if the area wants to keep the money rolling into its startups, experts said, then the number of initial public offerings and acquisitions must increase.

Going public or being bought by another company is an important event for a startup — as it returns money to its investors and employees who can then reinvest their profits back into the area.

Investors, after all, are motivated to invest in companies because of the potential windfall they might receive from helping a company grow.

In 2018, there was only one IPO and 30 other mergers or acquisitions. In 2017, there were five IPOs and 25 mergers or acquisitions, according to CED.

“What we haven’t had in a while is a big exit,” said Ruhe of NC IDEA, “like a large Red Hat-like exit.”

Red Hat, the homegrown software giant that was acquired by IBM earlier this year, went public in 1999, giving many of its employees and investors a huge injection of cash that many used to start new companies or create investment firms.

For example, Bob Young, the founder of Red Hat, was the first investor into PreciscionHawk, one of Pendo’s founders came from Red Hat, and Jason Caplain started Bull City Venture Partners after leaving Red Hat.

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Aerial view of Red Hat headquarters in downtown Raleigh Monday, Oct. 29, 2018. IBM will acquire the Raleigh-based software maker in a $34 billion deal, the two companies announced Sunday. Travis Long tlong@newsobserver.com@newsobserver.com

“We aren’t having those big captivating headlines to attract more venture capital and private equity money,” Ruhe said. “There’s been lots of singles and doubles but no home runs.”

“At the end of the day, you do need those exits to keep people interested,” Young, of CED, said, adding that it’s been a relatively quiet year in terms of IPOs.

“If there is a large IPO and enough employees are shareholders in the company,” Young said, “that does create a liquidity windfall and that can spread throughout the economy.”

Where those exits might come from is uncertain — especially if the economy were to slump into a recession.

But Epic Games has raised gobs of money and investors with Pendo have previously told the N&O they hope to see an IPO in the coming years. One of its investors, Lister Delgado, a managing partner at Durham-based IDEA Fund Partners, said last year he hopes the company can launch an IPO within five years and have a Red Hat-like effect on the community.

“As long as we continue ... to make improvements,” Olson told The N&O in October, “then we will be well-positioned if and when there’s an opportunity to go public.”

This story was produced with financial support from a coalition of partners led by Innovate Raleigh as part of an independent journalism fellowship program. The N&O maintains full editorial control of the work. Learn more; go to bit.ly/newsinnovate

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Zachery Eanes is the Innovate Raleigh reporter for The News & Observer and The Herald-Sun. He covers technology, startups and main street businesses, biotechnology, and education issues related to those areas.
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