Born and raised on the country’s coasts, venture capital has turned its primary homes, Silicon Valley and Route 128 outside of Boston, into New Economy code words for VC investing. The association is so strong that when someone mentions either location, it instantly conjures up fanciful images of VC’s handing out money to eager entrepreneurs and two-year-old Internet start-ups reaching record-breaking valuations on their first day of trading. In fact, their established reputation helps to explain why other regions have taken such a long time to build a critical mass of investors. But as of late, with so much committed capital waiting to be invested, that’s starting to change – most noticeably in the Southeast.
Helped by an increase in the size of homegrown funds, robust deal flow and a maturing infrastructure, Southeastern VC activity has jumped dramatically in the last six months. According to Venture Economics data, VCs invested $1.28 billion during the first quarters of 2000, compared with $1.23 billion for all of 1999 and just $27.36 million in 1995.
Atlanta, one of the Southeast’s hotbeds of VC activity, has seen disbursements rise to $530 million through the first two quarters of 2000 from $8.95 million in all of 1995. Meanwhile North Carolina, home to Research Triangle Park – another Southeastern center of innovation – has seen VC activity increase to just under $253 million through the first six months of the year from $12.96 million in VC disbursements five years ago.
What accounts for this increase in VC activity? A number of Southeastern VCs point to the growing amount of capital local firms have under management as part of the answer. “A tremendous amount of money has been raised and deployed in the Southeast in the last few years,” said Charles Moseley, general partner at Noro-Moseley Partners. The Atlanta-based firm, which backs early- to late-stage information technology and medical technology companies, held a late-July final close on $320 million for its latest vehicle, Noro-Moseley Partners V LP. This is nearly three times the size of the firm’s previous vehicle, the $112 million Noro-Moseley Partners IV LP, which closed in February 1998. Moseley said he believes this fund is the Southeast’s largest vehicle.
“While companies in the Southeast have had some access to VC dollars, it’s generally true that the Southeast traditionally has been under served by local VCs,” says Mark Dunkel, managing partner at Southeastern Technology Fund, an early-stage information technology investor located in Atlanta and Huntsville, Ala. The over reliance on out-of-state venture capital is changing as local VC firms are raising more money, he says. Indeed, Southeastern Technology was set for an Aug. 15 final close on its latest vehicle, the $100 million Southeastern Technology Fund II, which is five times as big the firm’s $20 million first fund, which closed in 1997.
“Clearly, I think there is 10 times more money domiciled in the Southeast than there was three or four or five years ago,” said Dennis Dougherty, founding general partner at InterSouth Partners. InterSouth, based in Durham, N.C., backs early-stage life science, technology and Internet infrastructure companies. The firm closed on $175 million in May for its latest fund, InterSouth Partners V. Like the rest of its Southeastern brethren, this represented a dramatic increase in fund size for the firm, whose previous vehicle, InterSouth Partners IV, closed on $65 million in 1998.
“VC is in many ways a very regional business,” says Brian Bailey, managing director at Carousel Capital, a Charlotte, N.C.-based private equity shop that engages in early- to late-stage investments in the form of VC and leveraged buyouts in growth industries. “It is a lot more difficult for a firm in California to spend meaningful time and effort with a company in the Southeast that is thousands of miles away.” More local funds on the ground translate into more deals – the good ones, not just the can’t-miss ones – getting funded these days, Southeastern VCs say. Meanwhile, larger fund sizes also demonstrate that the Southeast seems to have finally gotten onto the radar screens of institutional investors who previously doubted the area’s ability to sustain meaningful deal flow, Intersouth’s Dougherty adds. “Raising Fund V was the first time we did not have to sell limited partners on the fact that there were enough quality deals in the Southeast,” he notes. “Now people see us as having our own unique deal flow.”
“In 1983, we raised our first fund, the $17.5 million South Atlantic Venture Fund I LP, and the big knock on us from New York was that there were no deals in the Southeast,” said Donald Burton, founder and chairman of South Atlantic Venture Funds, which backs expansion-stage telecommunications, health-care products and services and consumer-related businesses located in the Southeast and Texas. “A lot of people still think of California as the center of VC, but our investments have a 35% weighted average compound return, which is just as good as anywhere else.” Burton adds, “there are plenty of deals in the Southeast…so VC investment is coming here now.”
The more deals these growing funds do, the more new innovators are encouraged by their surroundings to take risks because of the chance they will get funded, says Jeff Clark, general partner at The Aurora Funds Inc., a backer of early-stage life sciences and technology companies with offices in Durham, N.C.; Birmingham, Ala.; and Washington. “We probably see about 100 deals a week and we are almost overwhelmed by the deal flow,” he adds. “The quality and the quantity of the deals we see continue to improve.”
Success Breeds Success
VC activity in the Southeast is a bit like television host Regis Philbin – an overnight success that, truthfully, was a long time coming. “When I first moved to Atlanta in 1983, I used to joke with my friends and say this area is going to get going and it won’t be long before everyone in the country recognizes redneck high-tech,” says Southeastern’s Dunkel.
“It’s a matter of evolution over a period of years; there is a certain math required for the development, and it has been accelerating over the last few years,” Noro-Moseley’s Moseley says. InterSouth’s Dougherty agrees. “It is like making soup – until all of the ingredients are there and together, all you have is various stages of hot water. I think the Southeast has all the ingredients now,” he said.
Among those ingredients is the talent pool and research activities provided by the Southeast’s businesses and institutions of higher education like Duke University, the University of North Carolina at Chapel Hill, North Carolina State University, Emory University, Georgia Institute of Technology and the University of Florida, VCs say. In the Research Triangle Park area, the Council for Entrepreneurial Development, a private, nonprofit institution, aids entrepreneurs and their companies through mentoring programs, conferences and other activities. However, the key ingredient to developing a thriving center of venture-backed innovation is achieving some notable successes, a number of VCs from the Southeast said.
“Success breeds success to some degree,” said Steve Nelson, managing director at The Wakefield Group, which invests in early-stage information technology and life sciences companies. Nelson is in charge of the firm’s Research Triangle Park office. He and Moseley each pointed to OpenSite Technologies, a company both of their firms invested in, as a successful venture-backed company that helped put the Southeast on the map. Founded in 1996 by Michael Brader-Araje, OpenSite developed software and services to allow companies to hold auctions over the Internet on their own Web sites. It went through three rounds of venture financing totaling slightly less than $29 million, before it was acquired in May by Siebel Systems Inc. for $542 million.
Besides proving an area’s mettle, successful companies help add to the Southeast’s developing infrastructure by pumping proven entrepreneurs back into the entrepreneurial community for a second or third go-round. “Five years ago you never saw a completed A-team management group come to you with a deal,” says Aurora Fund’s Clark. “Now you see the A-team coming back a second time. They know the drill and there is great comfort in working with an entire team that knows what to do and can execute their plan.” In the case of Brader-Araje, he is adding to the Southeast’s VC infrastructure through truePilot, his Research Triangle Park-based early-stage investing firm. TruePilot’s offices are down the hall from Wakefield’s offices, a branch of Silicon Valley Bank and another VC firm. “I tell people I work on Sand Hill Hallway,” jokes Wakefield’s Nelson.
Wither the Southeast
So how much bigger can the Southeast grow in terms of VC activity? Will it ever rival Silicon Valley or Route 128 in total VC disbursements? Probably not – if only because of those areas’ head starts, say VCs who operate in the region. However that doesn’t mean the area has hit its growth ceiling yet. In fact, VCs see it continuing to grow and develop rapidly as the entrepreneurial spirit and technological innovation become more of a fixture of the American economy. Other VCs are simply moving to the area because they believe, despite the upswing in VC activity over the last five years, that the region is still under served and retains plenty of room to grow and accommodate new-comers. David Simonetti, managing principal of VentureNow!, a firm founded in 1999 and located in Fort Lauderdale, Fla., said he chose to set up shop in the Southeast because of its growth potential. “Certainly the market is still under served, and we have a focus as a group to go to markets that are under served,” he added.
On the other hand, the Southeast remains attractive to VCs and entrepreneurs for a variety of reasons that seem, charmingly, very Old Economy in their origins. “I moved to Tampa from Boston 22 years ago,” says South Atlantic’s Burton. “There is a lower cost of living down here, nice weather and lots to do…my commute to the office is now five minutes, [while] in Boston it was an hour a day. So it’s much better, personally.”