Triangle sustains healthy venture capital buzz despite funds’ mounting caution
In August 2021, the Durham battery storage company FlexGen secured $150 million in a major fundraising round.
The deal came at a time of historic venture capital activity: Triangle startups landed a record 217 investment deals last year, totaling more than $3.1 billion. But when FlexGen held its next funding round this summer, CEO Kelcy Pegler noticed investment funds had grown “more particular about the types of investments they wanted to make.”
“The level of conviction to make them became much more important,” he said.
This shift suggests the Triangle’s venture capital (VC) ecosystem has come down from its dizzying 2021 heights, chilled by higher interest rates and encroaching economic uncertainties that have slumped VC activity across the country. And VC firms have indeed pulled back locally; compared to the same point last year, the area has seen 16% fewer deals in 2022, according to the financial database PitchBook, which released its latest quarterly VC market report on Oct. 13.
But FlexGen’s fundraising experience also shows the Triangle market’s resilience: For while Pegler may have encountered more cautious investors, his battery technology company raised another $100 million in July.
Raleigh’s national VC ranking
2022 is not like last year, investors and analysts say, but Raleigh and Durham companies have continued to attract investment deals at levels that exceed anything that came before.
“If you’re an A-quality company and you’ve got the right team, the right market size, the right growth rate, that company is still commanding very robust valuations,” said Jason Caplain, general partner and cofounder of Bull City Venture Partners in Durham, which has invested $53 million in tech companies so far this year.
Among American cities, the greater Raleigh market — including Cary, Durham and Chapel Hill — is ranked 13th by PitchBook for venture capital deals completed in 2022, one spot ahead of Salt Lake City and one below Dallas-Fort Worth. This week, the Raleigh software developer Allstacks became the latest local startup to land a deal, raising $12.3 million in Series A funding.
“We had never seen anything like 2021,” said Kyle Stanford, a senior VC analyst at PitchBook. “This year, with the slowdown in the economy, we wanted to see which markets could sustain that growth. So far, the Raleigh market has been able to do that.”
When gauging the health of a local VC market, Stanford recommends using the number of deals made as a barometer, not the amount of capital raised, so that single outliers, like Cary’s Epic Games raising $2 billion last April, do not distort overall trends.
‘I think we used to be a little bit of a secret’
The rise of VC funds in the Southeastern United States has buoyed the Triangle’s market, Stanford said, with Atlanta, Miami and Raleigh itself expanding their local funding capabilities.
“(Raleigh is) starting to get surrounded by some larger capital centers, and the availability of capital in the Southeast will filter across all of those markets,” Stanford said.
Jason Caplain, who has managed VC firms in the area since 2000, said outside investors have become more curious about Raleigh and Durham.
“I think we used to be a little bit of a secret,” he said. “Now we’re seeing more and more private equity firms coming here visiting, calling, asking what’s going on here. What are we seeing? Like I just got off the phone a few minutes ago with one. They’re a $500 million fund, 10 times our size, asking ‘What’s happening in NC?’”
Headwinds loom
But while the CEO, the analyst and the investor say the Triangle VC market is strong, none said it’s without legitimate warning signs.
According to Caplain, funding has largely evaporated for what he considers “B-quality companies and below” that hold promise but fall short on a key metric (or metrics) like growth potential or quality of leadership team.
“It’s almost like there’s now no outside new capital available to that business,” he said.
When the economy slows, late-stage startups are typically the first affected, PitchBook’s Stanford says, because their valuations are tied more closely to the stock market. A late-stage startup is one closer to completing an exit, perhaps by going public or being acquired.
“The longer we see the economy slowdown continue, the further into the VC market the slowdown will penetrate,” Stanford said. “We can expect a little more pain across the entire VC ecosystem over the next few quarters or to a year.”
Even if the VC sector sputters, Stanford said, Triangle businesses have proven able to insulate themselves from the worst effects. It’s a position, FlexGen’s Pegler believes in wholeheartedly.
“The Research Triangle and the Durham area in particular will continue to thrive,” he said. “It’s certainly one of the smartest ZIP codes in the country. It’s a big part of why FlexGen is in the area, and I don’t see that changing.”
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.
This story was originally published October 27, 2022 at 5:30 AM.
