Southeast Lures Venture Activity –

RESEARCH TRIANGLE PARK, N.C. – Anchored by Raleigh, Durham and Chapel Hill, Research Triangle Park (RTP) for decades has provided the necessary resources to stimulate a fertile venture capital community.

The region hosts elite universities, Fortune 500 technology and life sciences companies, and, most important to deal brokering, killer golf courses. Further, the Internet 2 was developed at RTP, and Raleigh/Durham currently has the most bandwidth availability in the United States.

Despite its geographical and technological advantages, venture activity in RTP remained tepid until the mid-1990s. From 1995 to 1996, venture capital investments in RTP-based companies grew to more than $150 million from less than $39 million. Last year, $172 million in venture capital was committed to the region, according to Venture Economics Information Services, a sister company of Venture Capital Journal.

What Caused the Boom?

“The mentality here, historically, was to start a company to have somebody acquire it, rather than to build it to become a category leader,” said Dave Bliven, managing director of Southeast Interactive Technology Funds.

Because of the presence of corporations such as IBM Corp., Nortel and Glaxo Wellcome, entrepreneurs in the technology and life sciences industries had little incentive to develop companies past the start-up stage. Mr. Bliven said prior to 1995 the most accessible exit strategy for entrepreneurs was to an acquisition.

“Before the venture people got involved, founders would make money and the angels would make money,” he said. “VCs could not make money because companies were not growing to the next level.”

Jeff Clark, general partner of Durham-based Aurora Funds Inc., believes the gradual development of several industries in the region has produced attractive investment opportunities.

“You can’t grow from infancy to adulthood overnight,” he said. “We are an overnight success that has taken 40 years.”

Mr. Clark adds that after years of having “less-than-polished” business strategies and management teams, RTP-based companies now are constructed to satisfy the requirements of venture firms.

“We now have full-time entrepreneurs putting together deals that already know the process,” he said. “We can get the deal moving down the road very quickly.”

Mr. Clark identifies data communications, software, biotechnology and contract research organizations as industries in which RTP can compete with any region in the country.

“Silicon Valley will never be duplicated,” he said. “But we are building critical mass in a number of disciplines.”

Aurora invests in seed-stage companies in the information technology and life sciences industries. The firm currently is investing from its $12 million Aurora Fund II, and $20 million Aurora Bright Fund, a vehicle that invests in previous portfolio companies. Recent investments from Aurora II include Accipiter Inc., Injury Data Corp. and Protein Delivery Inc. Recently, the firm launched the $100 million Harbinger/Aurora Venture Fund L.L.C., in partnership with Harbert Management Corp (VCJ, July, page 19).

Aurora was incubated in 1994 by The North Carolina Technological Development Authority Inc. (TDA). Since 1985, TDA has developed 26 business incubators that have produced more than 1,000 companies. The authority recently joined forces with North Carolina State University to form the $10 million Centennial Venture Partners, a seed-stage venture fund designed to advance the results of research from the state’s universities into commercial enterprises.

“The sophisticated commercialization of a university’s own technology is one of the last ways for them to earn revenue,” Mr. Clark said. “As important is that the faculty demands this environment.”

Growth Begets Growth

As venture activity in RTP continues to increase, it has become easier for early-stage companies to recruit talented management teams into the region. Duke University, North Carolina University and North Carolina State all have launched entrepreneurial studies programs to educate students at the undergraduate level about how to take advantage of the region’s native resources.

“We are recruiting management into the area with self-perpetuating models,” Mr. Bliven said. “Successful deals spin off new opportunities.”

In 1995, Southeast Interactive launched an $8 million venture fund that invested exclusively in early-stage information technology companies. Mr. Blevin attributed RTP’s investment boom to the specialization of venture firms.

“It had been difficult to generate deal flow in the region because none of the venture firms had been industry focused,” he said. “We were one of the first to feel there was enough opportunity to focus on one industry.”

In April, Southeast Interactive closed the $35 million Southeast Interactive Technology Fund II. The fund has committed more than $24 million to local companies including Koz.com, Opensite and Wave Systems. Mr. Bliven said Southeast Interactive likely will begin raising a third fund this fall.

Protein Delivery Chief Executive Christopher Price, who has worked for Medical Innovation Partners in Minneapolis and received his M.B.A. from the Massachusetts Institute of Technology in Boston, is bullish on RTP.

“Boston and San Francisco are reasonably mature with long-standing venture communities,” he said. “This area is the most promising in terms of new growth on the technology and biotech pharmaceutical side.”

Mr. Clark acknowledged, however, that RTP’s growth could be vulnerable in a bear market.

“If there is a technology bust and life sciences remain stagnant, that could impede our growth,” he said. “The Internet bubble will likely shrink, not burst, and that should allow other windows to open up.”