North Carolina VCs: Valuations ‘heating up’ with state reporting ‘tons of great deals’ in record year

RESEARCH TRIANGLE PARK – Through the first three quarters of 2021, there have been 235 venture capital deals made in the state of North Carolina, valued at more than $2.8 billion.

The total number of deals surpasses the record number of deals in the state during 2020, during which there were 224 deals made.

That’s not a surprise to those in the venture capital industry.

“Deal flow is certainly not a challenge right now,” said Tim McLoughlin, Partner at Cofounders Capital, in an interview with WRAL TechWire.  “We are seeing tons of great deals.”

They’re coming across the desk as more capital is now available to entrepreneurs, noted McLoughlin.

“With more capital available to entrepreneurs you are certainly seeing more competition for certain deals and valuations going up,” said McLoughlin.  “When that happens, entrepreneurs can take more money for the same amount of dilution, so they take it.”

All facets of U.S. venture capital industry are ‘astounding,’ report finds

And that’s true at each stage of a company’s growth, said McLoughlin, even for early stage companies or for companies who may otherwise choose to bootstrap their efforts.

This is occurring in North Carolina, and it’s occurring nationally, as well, as a new report released today indicates that annual venture capital activity has already reached new record highs, through the first three quarters of the year.

So far, in 2021, $240 billion has been invested into nearly 13,000 deals, the Q3 2021 PitchBook-NVCA Venture Monitor report found, compared to the entire year of 2020, which previously set the prior annual record for investment, when venture firms put in $166.4 billion.

In the first three quarters of 2021, $318.35 million was invested into 40 total deals in the Charlotte area, nearly $725.3 million into 66 deals in Durham, $1.468 billion into 72 deals in Raleigh-Cary, the PitchBook-NVCA report found.

Cary-based Epic Games raised $1 billion in April 2021 and Raleigh-based insightsoftware raised $800 million in July, WRAL TechWire reported.

‘Lot of money chasing not enough companies’

“We’ve seen increased deal flow this year across the board, seed, angel, venture capital,” said John Espey, CEO and co-founder of Defiance Ventures.  “Valuations are definitely heating up, I think there is a lot of money chasing not enough companies.”

Meanwhile, said Espey, other asset classes appear overpriced compared to venture capital funds, which is pushing investors toward allocating greater shares of their portfolio to venture funds and driving some of the increased activity.  But that’s not exclusive to North Carolina, noted Espey.

But while the national trends may continue to influence North Carolina’s venture capital markets, there are homegrown factors to consider as well, said Espey, including this week’s initial public offering, IPO, from AvidXchange, which could drive investor excitement.

The venture capital funds raised by AvidXchange in 2020 were a part of a record year for venture deals in North Carolina, which also included a mega-round of $1.78 billion for Epic Games.  AvidXchange raised $260 million in January 2020, then $127 million in April 2020, followed by $119 million in July and $66 million in September.

While mega-deals were found by the PitchBook-NCVA report to drive the majority of venture capital dollars, some 52% thus far in 2021, funding is still available for companies at earlier stages of growth, as investors are continuing to pour capital into venture capital funds.

And that could bode well for North Carolina’s startup companies, and for investors in the state, said McLoughlin.

“Historically, the pooled returns for early stage US venture funds has outperformed all other asset classes over the last 25 years, so it is an attractive place for investors to put “patient capital” to work,” said McLoughlin.  “North Carolina has several established sub-$100M funds that have tremendous deal flow that larger institutional investors can access through investments in VC funds.”

North Carolina also has “way more early stage entrepreneurial talent than available capital,” McLoughlin noted, which makes the state a “target rich environment for investors.”

‘No surprise’

Plus, with AvidXchange going public, Science 37 and Humacyte going public through business combinations with special purpose acquisition companies, and a bevy of recent acquisitions of venture-backed startups across the state, investors may soon be seeking to redeploy capital into larger and larger deals, said McLoughlin.  Plus, those liquidity events would result in capital infusion to seed funds, entrepreneurs, and the exiting company’s employees, further strengthening the state’s entrepreneurial ecosystems.

“If entrepreneurs that were planning on growing for a few more years start seeing 10-12x revenue offers to buy their company, they will likely jump at it,” predicted McLaughlin.

Still, more investors are interested in later-stage deals, leaving what McLaughlin calls a “dearth of capital” in early-stage markets.

That’s how Brandon Shelton, founder and managing principal of TFX Capital, a veteran-led and service-driven venture capital firm located in Charlotte perceives the state of venture capital in North Carolina, as well.

“Third quarter venture capital activity and subsequent reporting was no surprise to us,” said Shelton.  “We witnessed the intensity of deal execution growing without any let-up throughout the summer months.”

“In the coming months as more investment dollars are deployed into the venture ecosystem, we hope other VC firms will continue to grow interest and coverage in geographies like the Southeast, including in Charlotte and the Triangle area, where there is real growth in Pre-Seed, Seed and Series A investment opportunities,” said Shelton.  “Maintaining price discipline and adequate diligence processes with fast-moving, high priced deals continues to be pressure tested with more capital in the system.”