Understanding the North Carolina Venture Capital Landscape

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Research by Charlotte Burnett, MBA Class of 2019, Kenan Scholar

Charlotte Burnett, Kenan-Flagler MBA Class of 2019 and Kenan Scholar conducted research under the tutelage of Maryann Feldman, S.K. Heninger Distinguished Professor of Public Policy and Professor of Finance. Each year, the Kenan Institute of Private Enterprise distinguishes a small group of incoming undergraduate and MBA students as Kenan Scholars. Students are selected for their superior scholarship and genuine interest in putting the private sector to work for the public good. They engage with prominent leaders in business, academia, policy and government to gain real-world experiences that advance their problem-solving and leadership abilities. The Kenan Scholars Program enhances the Carolina experience and prepares students to succeed in a diverse world and interconnected global economy.

The presence of venture capital in the entrepreneurial ecosystem has undoubtedly increased as evidenced with the median VC deal size marking double-digit percentage growth from 2017 to 2018. In fact, 2018 is expected have the most venture capital invested in a single year, with over $84.2 billion invested. Understanding the North Carolina venture capital landscape is imperative to understand the greater entrepreneurial ecosystem and subsequent policy implications. Our research explored how venture capital in the Research Triangle is evolving by looking at aggregate venture capital firm information, analyzing venture capital resources specific to the region, and understanding the key players in the region.

Over the course of our research we collected over 3,000 data points and conducted interviews with local venture capitalists and other key local stakeholders. Our research had three major findings: (1) North Carolina companies face a funding gap for follow-on (2) majority of venture firms are located in the Triangle, despite the majority of funding going to Charlotte firms and (3) North Carolina is trailing other states in venture funding.

North Carolina companies face a funding gap for follow-on investing, specifically between seed or grant dollars and Series A funding. This funding gap is highlighted with the amount of NIH dollars and venture equity funding. In 2016, North Carolina ranked sixth in the nation for NIH grants at $1.15 billion compared to 16th in the nation for venture funding at only $806 million capital committed. Firms in the area recognize this gap, noting there is fantastic science in the region, but a growing need for venture dollars and more firms investing in the region. In order to address this funding gap, the North Carolina legislature passed the Venture Capital Multiplier Fund, LP (VCMF), which allocated $60 million in capital for co-investments in North Carolina Nexus companies. In addition to research to explore the impact of the VCMF, there are also important policy implications that could help to fill the gap between seed and Series A, whether it’s through direct investment, fund of funds, or investor incentives.

Past research has suggested that venture firms invest in local companies, however, our research identified that despite the majority of venture capital firms are located in the Triangle, the majority of funding went to Charlotte in 2017. The shift of capital to the Charlotte region can be explained by two large deals: Avid Exchange and Smart Sky. In 2017 Charlotte received over $614 million in funding, compared with the Triangle’s $408 million in funding. These two large deals also caused a sector swap where historically healthcare received the most funding, but switched to technology companies. This swing towards Charlotte highlights the need for additional research, including a deeper analysis of the role of Charlotte in the entrepreneurial ecosystem and research on the entirety of the Carolinas, not limited to the Triangle.

Finally, we discovered that North Carolina is trailing other areas in venture funding, ranking 16th in the nation, despite the fact that it has arguably some of the best human capital in the world. Raleigh and Durham rank among the top 20 cities in the world for innovation, as demonstrated by the number of patents filed each year. Interestingly, when Durham and Raleigh are combined, the Research Triangle is the only region that has the most number of patents filed for technology and biotech, highlighting that it is one of the richest regions for intellectual property in the healthcare and technology space. The Research Triangle has the highest number of PhDs in the world, which is a direct result of three nationally ranked universities within a 30-mile radius. We can attribute that one of contributing factors to the North Carolina gap in venture funding is related to the low number “unicorns” (valuations that are greater than $1 billion) coming from North Carolina. Compared with peers in California, Massachusetts and New York, North Carolina has only had one venture-backed company that is valued at more than $1 billion. Unicorns are a large driver for outside venture investment and help to explain why fewer venture dollars have come to North Carolina compared with other regions despite our strong human capital.

Our findings suggest a few key policy implications. The first is that supporting our current venture capital community is vital for continued growth. In the venture community, having local players is imperative for co-investment. Providing additional resources for the existing venture capital through resources such as the Center for Entrepreneurial Development, NCIDEA and Small Business and Technology Development Center are important to support firms in the region. In addition, continuing to provide state support through initiatives such as the VCMF help address the funding gap and while also supporting the growth of firms in the region. Secondly, in addition to supporting existing venture capital, it’s also important to attract outside investors. Providing tax incentives for firms or limited partners is something that is done in other states and can make North Carolina more competitive on the national level. There is also an opportunity for North Carolina to increase marketing around our regional excellence by highlighting our human capital, preeminent universities, Research Triangle Park and other entrepreneurial hubs. There is a foundation for robust venture capital in North Carolina, however the state must build a stronger framework to support our existing venture firms and attract outside firms.