Business

Triangle companies increasingly seek out-of-state investors

AgBiome, Inc. research scientist Billie Espeko adds another flask to the tray of food culture flasks she has introduced a bacterial culture into during her workday Wednesday, October 14, 2015. AgBiome, Inc. is an RTP agricultural biotech company that specializes in plant, root and soil analysis for pest management and plant enhancement. The entrepreneurial agricultural biotech company started up in RTP in early 2013 and has relied more and more on out of state investors to raise money for development of their new products.
AgBiome, Inc. research scientist Billie Espeko adds another flask to the tray of food culture flasks she has introduced a bacterial culture into during her workday Wednesday, October 14, 2015. AgBiome, Inc. is an RTP agricultural biotech company that specializes in plant, root and soil analysis for pest management and plant enhancement. The entrepreneurial agricultural biotech company started up in RTP in early 2013 and has relied more and more on out of state investors to raise money for development of their new products. hlynch@newsobserver.com

When agricultural biotechnology company AgBiome set out to raise its second round of funding, its executives reached out to about 25 institutional investors – all of them outside of North Carolina.

Still, co-founder and co-CEO Eric Ward and the rest of the team involved in the fundraising effort didn’t do a lot of cold calling.

“I think in almost every case, if not every case, we had some kind of referral or knew somebody at those funds already,” Ward said.

AgBiome’s efforts paid off in August when the Research Triangle Park company raised $34.5 million, one of the largest venture capital hauls by a Triangle company this year.

Local entrepreneurial companies, especially life science and information technology businesses, that rely on venture capital to develop new products and boost sales are increasingly looking outside North Carolina to raise money.

And, according to data compiled by the Triangle-based Council for Entrepreneurial Development, many are succeeding.

CED’s data show that North Carolina companies raised money from 55 out-of-state institutional investors in the first half of this year, up 83 percent compared with the first six months of 2014. In all of 2014, North Carolina’s entrepreneurial companies raised money from 100 out-of-state investors, up from 84 the year before. (Although CED’s data cover entrepreneurial companies across the state, Triangle companies account for the bulk of the fundraising deals, including more than 80 percent of the deals in the first half of this year.)

“I think it really does speak to the depth of the local community, the companies, the local companies, the support network,” said Joan Siefert Rose, CED’s president.

The ability to raise money from across the country and around the globe is crucial for local entrepreneurs, who have long complained that few venture capital funds are based in the Triangle.

30 Out-of-state institutional investors that funded N.C. companies in first half of 2014

55 Out-of-state institutional investors that funded N.C. companies in first half of 2015

Local companies are succeeding with far-flung fundraising efforts thanks to a confluence of factors. Among them: a wave of startups founded by serial entrepreneurs with prior successes; venture capital firms based elsewhere that are flush with cash; growing investments by the venture capital arms of corporations that are scattered nationwide and around the globe; and a local network of angel investors and startup funds that have nurtured companies to the point that they can confidently venture afield to land new funding.

In addition, in the past few years, CED has actively focused on helping local companies connect with institutional investors located elsewhere.

Global focus

The CED data don’t break down how much money the out-of-state funds invested, given that deals of any size include a syndicate of investors and, typically, only the total investment amount is disclosed. But clearly the end result has been more funding overall.

The state’s entrepreneurial companies raised $426.9 million in the first half of this year, up 71 percent from a year ago and more than double the total of two years ago. For all of 2014, funding was up nearly 35 percent versus 2013.

Young Triangle life science and information technology companes are casting a wide fundraising net out of necessity. If a Triangle company is raising $20 million or more, its leaders have no choice but to seek funding elsewhere, said Rik Vandevenne of River Cities Capital Funds, a Cincinnati growth equity fund with an office in Raleigh.

When you get into the growth stage rounds of capital, then you really have to have a global focus as opposed to a regional one, because you are simply raising larger and larger amounts of money.

Tony Atti, CEO and founder of Phononic, a Durham producer of solid-state cooling and refrigeration devices

Phononic, a Durham producer of solid-state cooling and refrigeration devices, raised $46 million in funding in December, the largest round of venture capital funding raised by a Triangle company last year. It attracted that money from a syndicate of investors from around the world. Just one of its investors was local: Rex Health Ventures, the venture capital arm of Raleigh-based Rex Healthcare.

“When you get into the growth stage rounds of capital, then you really have to have a global focus as opposed to a regional one, because you are simply raising larger and larger amounts of money,” said Phononic founder and CEO Tony Atti.

Money to spend

That’s also the case for startups in other entrepreneurial hot spots outside the money centers of Silicon Valley, Boston and New York.

“I think what you are seeing (in the Triangle) is what you are seeing in other parts of the country,” said Bobby Franklin, president and CEO of the National Venture Capital Association. “We have seen an increased spread of investment dollars to other regions.”

That’s in part because venture capital funds have more money to spend. Last year, venture capital funds raised $29.8 billion from their investors, up 69 percent from the year before and by far the most since 2007. In addition, investments in entrepreneurial companies from other sources, such as the venture capital arm of corporations, also are on the upswing.

“It’s a great time to be an entrepreneur in America,” Franklin said.

71%Increase in funding enjoyed by emerging Triangle companies so far this year

50%Increase in overall funding for startups nationwide

But Triangle startups have been attracting more than their share of funding recently.

CED’s Rose noted that the 71 percent increase in funding enjoyed by emerging Triangle companies so far this year outpaces a 50 percent increase in overall funding for startups nationwide, according to business research firm Mattermark. Just last week, Humacyte, an RTP biotechnology company, announced raising $150 million from out-of-state investors, including some from overseas.

Vandevenne, who has been based in River Cities’ Raleigh office since 2004, said the current crop of Triangle startups is the best he’s seen.

“There always have been interesting companies, but I feel like, more recently, they are getting more seasoned entrepreneurial teams that have been involved with a couple of local successes,” he said.

The founders of AgBiome, for example, include Ward and co-CEO Scott Uknes, who previously co-founded and ran Cropsolution, a Triangle agbio company that discovered a novel fungicide that it licensed to a major industry player; John Ryals, co-founder and CEO of Metabolon and, before that, Paradigm Genetics; and Mike Koziel, former co-founder and CEO of Athenix.

Attractive valuations

CED has been leveraging the contacts amassed by local entrepreneurs and the 60-plus members of its board of directors to establish relationships with out-of-state investors.

That includes trumpeting that, although the Triangle is best known among venture capitalists nationwide for its life science companies, the region also boasts a burgeoning group of other types of startups, including information technology companies.

The initial public offerings in recent years of digital marketing company MaxPoint Interactive and e-commerce technology company ChannelAdvisor have helped hammer that point home, Rose said.

One selling point for Triangle companies, said Dhruv Patel, CED’s director of investor relations, is that their valuations typically are more attractive than companies based in Silicon Valley or Boston. That means investors can get more for their money.

“If you compare the Triangle to other markets, there is a sense of frothiness in those markets,” Patel said.

When Spoonflower, a producer of on-demand fabrics, raised $25 million in August, co-founder Stephen Fraser credited CED with introducing him to a principal at Boston-based North Bridge Growth Equity, which ultimately led the funding round.

The good news for Triangle entrepreneurs is that it’s easier to attract funding from an out-of-state investor that already has pulled the trigger on at least one local investment because they have already gotten to know the region and many of the players.

Canaan Partners, a Silicon Valley venture capital firm, is invested in five Triangle companies.

“It’s hard, as a venture investor, to be spread too thin in too many places,” said Stephen Bloch, a general partner in Canaan’s Connecticut office. “It’s hard to do one-offs in a geography.”

David Ranii: 919-829-4877, @dranii

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