Startups & venture capital: It’s a ‘white hot’ market – here’s what’s happening in NC

RALEIGH – Valuations of startup companies, across the spectrum, increased during the second quarter of the year, says a recent report from PitchBook.  But, as the report looks at the United States in aggregate, those increases in valuation may or may not affect North Carolina’s companies.  WRAL TechWire asked for perspectives from venture capital firms based in North Carolina to identify trends that would pertain to companies based in the state.

“It’s a white hot market right now,” said Jason Caplain, cofounder and general partner of Bull City Venture Partners, based in the Triangle.

Nationally, the US VC Valuations Report Q2 2021 from PitchBook found that early-stage, pre-money valuations set records in the second quarter, with a median valuation of $50 million and an average valuation of $105.4 million.

For late stage companies, the median valuation hit $160 million, and the average valuation was $882.4 million, which PitchBook called a “sharp increase from values recorded in previous years” and the authors of the report noted that this growth in valuation is in part “driven by investor willingness to write increasingly larger checks to pre-IPO companies.”

One of the largest late stage deals in the quarter came when Epic Games closed a $1 billion raise with participation from Sony, valuing the company at $28.7 billion, by the company’s own estimates.

For exiting companies, valuation grew at a record rate, compared to the last decade, PitchBook found.  Median acquisition step-ups were 2.2x, and public listing step-ups were 1.7x, from the last valuation in the private marketplace, the report found.  And cash is still pouring in to venture capital funds.

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“There are favorable trends occurring in acquisitions that bode well for early stage companies,” said Karen LeVert, a venture partner at Pappas Capital and president of Ag TechInventures, an innovation lab for agricultural technologies, speaking to WRAL TechWire about the agtech ecosystem in North Carolina.  “According to Pitchbook, the median acquisition in 2021 was valued at over 2.2x its last private valuation as corporations maintained their appetite for startups to drive inorganic growth,” said LeVert.  “I see this continuing in 2022.”

But in North Carolina, about 50% of all deals are early stage deals, said Caplain.  And that mark is up considerably, on a percentage basis, said Caplain, estimating that between 2016 and 2018, about 35% of deals in the state were early stage deals.

“For early stage companies in North Carolina that have the right team and the right market it is a great time to raise money,” added John Espey, managing partner and co-founder of Defiance Ventures, based in Charlotte.  “It is pretty well understood now that there are more opportunities in second- and third-tier cities.”

One of the long-term impacts of the onset of the COVID-19 pandemic, and the subsequent transition to more virtual meetings, including in the venture capital industry, is that location is less important now than ever before, according to Espey.

And that could actually benefit early-stage companies, noted Espey.  “For very early stage companies the local scene is probably more important than it is for Series A firms,” he said.  “We will probably pass on investments that some firms may be more interested in and also we may take deals that aren’t as attractive to others.”

Part of that is based on their geographic location, and part of it is based on their investment thesis and strategy, said Espey. He and his co-founder are seeking companies where their role will be more than financier.  “In the Carolinas, we see less local companies than a VC operating in say San Francisco or Austin,” said Espey.  “But we also probably pay attention to deals that may fly under the radar of VCs operating in more traditional VC cities.”

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That focus has yielded investments in the North Carolina companies Boxmagic, BatteryXchange, Lucid Drone Technologies, Rabbu, and Rent Ready, which has now raised an additional $10M in capital.

For Espey, the increasing valuation in early stage companies is beneficial.  But it depends on your perspective, Espey noted.  “Great companies are having no problem finding funding,” said Espey, noting Charlotte-based companies such as AvidXChange, Payzer, Ekos, Passport, Stratifyd, and Precision Lending.  “Most of those checks have not come from NC-based companies and I don’t think that’s a problem.”

Nevertheless, there are other companies trying to raise funds right now, and for many, they’re struggling to compete in an environment that is more demanding regarding their prospects in order to deploy capital with the proper measure of risk and potential reward.  “There are a lot of second and third tier companies that are trying to raise funds and struggling,” said Espey.  “I think that is more reflective of the prospects those companies face than it is an indictment of being in Charlotte.”

And, just because valuations are increasing nationally, that doesn’t mean it’s occurring system-wide, noted Justin Wright-Eakes, co-founder and managing partner of Oval Park Capital. “We really haven’t seen similar valuation increases in the Southeast and in the particular verticals and sectors we’re focused on,” said Wright-Eakes in an interview with WRAL TechWire, in which he noted that he holds the suspicion that the aggregate data is in part skewed by deal activity and valuations in large, well-known technology hubs, despite not having data to demonstrate that as fact.

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But there are trends in venture capital that are important beyond deal valuation, said Wright-Eakes. “Another trend we’re seeing is large, historically late-stage investors are moving downstream to invest in the venture space,” he said.  “That includes hedge funds, Tiger Global, to name one, and even PE buyout shops.”

“As demand and liquidity move downstream, especially from investors with lower costs of capital,” said Wright-Eakes, “They can afford to pay higher valuations, and they drive up the price of deals.”

That’s typically occurring at the top of the market, with later stage deals, but there may still be downstream effects, said Wright-Eakes.  Even if these type of new entrants in the marketplace aren’t coming to early stage or seed deals in the Southeast, perhaps because they can’t write big enough checks into the deals, said Wright-Eakes, their activity in later-stage deals may yield additional liquidity or valuation multiple increases for the companies that do successfully grow into later stage venture targets.

“Series A and Series B funding sources are still few and far between in the Southeast, so we can use all the help we can get,” said Wright-Eakes.

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There’s still promise for the future, said LeVert, noting that agriculture is North Carolina’s top revenue source.

“We’re seeing more efforts unfolding to ensure NC is the go to place for an early stage AgTech company,” said LeVert.  For instance, EnviroFlight will open new R&D facilities and establish its corporate headquarters in Apex, its parent company announced in April.

“From a valuation perspective, according to Pitchbook, seed-stage valuations have not seen a year over year decline since 2009,” said LeVert.  “The funding for this sector, however, is still lagging in this region but there is the opportunity to improve,” she noted.

Yet there is also opportunity, and the onset of the COVID-19 pandemic and subsequent disruptions to supply chains present an opportunity for agtech entrepreneurs to solve challenges, said LeVert. “Cracks were exposed in the industrial agriculture system, especially the vulnerability of the food supply chain,” she explained.  “There will continue to be an appetite for companies to shore up the supply chain, use less inputs, and increase profits on the farm.”