The US Southeast venture market has a problem. Despite its swath of large corporations, lower cost of capital, and emerging tech hubs, the region is having trouble flourishing and the setbacks stem from the seed-stage.
Recent research compiled by Atlanta-based seed investor Valor Ventures found that the gap may be as large as $1.8 billion annually.
The report found that since 2008, less than 30 percent of companies in the Southeast, which would be ready or eligible for seed funding, were able to successfully raise it.
General partner Lisa Calhoun said that companies that manage to raise funding are held to a higher standard than those founded in more VC-flush areas, such as California and New York.
“When you do see those seed-stage fundings in the Southeast, those companies were so outstanding,” Calhoun said. “They weren’t just head and shoulders above everyone else they were waist high above everyone else.”
This gap can’t be directly attributed to any one reason, but stem from a perfect storm of longstanding trends.
One of the biggest factors is that seed capital is generally raised at the local level. Thus, a growing, but still relatively small batch of VCs, in the region don’t have the capital to cover every opportunity.
“I think it remains difficult for a seed-stage investor from the outside to pull together a seed round,” Calhoun said. “The capital matters a great deal, but the connections, the network also matter a great deal.”
The problems start before entrepreneurs even pitch. Many local firms also have trouble raising capital from regional LPs due to a variety of different state laws that lock seed funds out of the conversation.
She said that states like Georgia don’t allow public institutional capital to invest in funds smaller than $100 million in size, which isn’t meant to single out the venture market specifically, but typically does.
The report highlights that this funding gap is unfortunate because the Southeast could foster a robust market. Investors get the most bang for their buck in the US in this area, grabbing an average of 32 percent equity from a $1 million investment, compared to 13 percent in Silicon Valley and New York.
Valuations are also typically 13 to 23 percent lower in the Southeast compared to the Pacific and Northeast regions, and the region has 25 percent more start-ups than California and 75 percent more than New York.
There have also been multiple notable companies that have formed in the region, including Kabbage, Magic Leap and Fanatics.
The region is also home to 28 percent of the largest corporations in the country, New York and California have a combined 22 percent.
Cariana Morales, an associate at Valor and one of the authors of the report, said that having a bigger pool of available seed capital will not only help close the seed gap but also boost the overall VC activity.
“It will make the market grow in the Southeast and will impact further rounds,” she said. “More companies going on to Series A and Series B will have a positive impact on the pool of companies traveling through the venture trajectory.”
Expel, a Herndon, Virgina-based cybersecurity company raised a $50 million Series D round that closed in mid-May. Capital G led the round and was joined by Battery Ventures, Greycroft Partner and Index Ventures, among others.
Also, in mid-May New Orleans-based Resilia closed on a $8 million Series A round. Mucker Capital and Callais Capital Management led the round with participation from Cultivation Capital.