SC Capital Formation Picks up Speed: An Interview with Matt Dunbar

Mr. Dunbar is Managing Director of Upstate Carolina Angel Network in Greenville, SC; Co-Founder and General Partner of the Palmetto Angel Fund; and a board member of the Angel Capital Association.

Key Takeaways

  • Capital formation in South Carolina is catching up to an already accelerating entrepreneurial ecosystem.
  • There are millions of dollars on the sidelines; we need to educate accredited investors about the opportunities to invest.
  • Businesses need to be strategic about the exit process and plan for it from the beginning, as exits are the key to fueling the ecosystem through recycling of capital and know how.

Q: What is the current capital landscape in South Carolina compared to the rest of the Southeast?

A: South Carolina is currently underserved in terms of access to early stage capital, as is the Southeast in general. But South Carolina is not sitting still. Organizations like the Upstate Carolina Angel Network in Greenville, the Capital Angels in Columbia and Charleston Angel Partners are helping to inject more capital into growing businesses, and we are in active discussions with new groups we expect to form in the next 12 months as part of the South Carolina Angel Network. We are also expecting the newly passed Angel investor tax credit to encourage investors to put their money into high growth South Carolina businesses, including through our new Palmetto Angel Fund, which will co-invest with the active angel groups.

We have historically seen some promising high-growth companies leave South Carolina because they were unable to land the necessary early stage funding, but we’ve also see companies and investors moving here because they enjoy the quality of life. One of the best things we have going for us is South Carolina itself – it’s just a great place to live: the climate, the geography, the people and the low cost of business and living are attracting a lot of newcomers. We’ve also had a lot of folks across the state working hard to build the foundation of a healthy entrepreneurial ecosystem for the last decade or so, and those efforts are bearing fruit. The entrepreneurial ecosystem here is accelerating, and now capital formation is slowly starting to catch up.

We look up to many of our neighbors in the Southeast who have done a good job building their ecosystems and attracting investors. I think Georgia, North Carolina, Tennessee and Florida have all made some smart investments in their startup ecosystems that are paying off, and we are trying to learn from and implement smart programs of our own.

Q: Are there any specific contours or patterns in South Carolina in terms of who does and doesn’t attract capital? 

A: In general, I think those contours are still emerging, but becoming more well-defined. Certainly talented and resourceful teams are a common theme, and I think across the board companies here have an easier time raising capital if they can be capital efficient and lean in their initial approach, given the relative scarcity of early stage capital.

In terms of industries, we see clusters like the digital corridor in Charleston and a nice mix of software, life sciences and advanced materials in the Upstate. We’re also seeing interesting technologies in each of those sectors from our 3 research universities.

I think over time we will see those emerging clusters help put South Carolina on the map. Establishing a reputation for strength in a particular sector brings in a concentration of talent and tends to create a positive feedback cycle. And of course we need to see these companies grow and exit to recycle the financial and intellectual capital back into the ecosystem. And we also have to help local markets develop a healthy perspective on exits. The short-term view is to lament the potential loss of a headquarters or talent – but I take the long view, which is that these exits drive the whole ecosystem, generate capital and talent and gravitational pull for entrepreneurs, ultimately leading to companies strong enough to grow and stay put and become acquirers themselves.

Q: What can companies and entrepreneurs do to help South Carolina’s progress continue?

A:   I think the first thing they can do is to get educated about how the early stage capital marketplace works so they can be smart about approaching investors. I’m also a proponent of a lean startup approach in most cases, as its key for the entrepreneurs to gain as much market feedback as they can with limited resources, then leverage our capital to scale-up once they’ve gotten a good handle on product-market fit. Of course, I also think they need to really think carefully about an exit strategy and process from the beginning.  Most of our investors here are individuals rather than institutions, so we generally like to target three to five year exits rather than eight or ten.

Q: What can investors do?

A: We want accredited individuals to step off the sidelines and into the fray. We provide opportunities for them get educated about this asset class and can give them the process and infrastructure they need to execute a disciplined approach to angel investing.   With the new 35% angel tax credit for angel investors in South Carolina, their risks can be mitigated – and they have an opportunity to realize attractive gains while supporting the entrepreneurs needed to grow our economy. If one percent of the accredited population in South Carolina invested five percent in this asset class (assuming the minimum net worth of $1 million), it would mean over $60 million to support promising early stage South Carolina companies.

Since we know all net job growth comes from startups, we can’t ignore these early stage companies and only focus on recruiting large, established companies and headquarters to the state. Those efforts are not without real benefits of course, particularly in the short-term, but if we want to lay the foundation for a healthy economy in ten or twenty or thirty years once those industries have been disrupted, we need to also be investing in the entrepreneurs and technologies and job creators of the future.

Q: Who else can help the capital formation process in the state?

A: In addition to more infrastructure for angel investing, we’re also interested in bringing corporate partners to the table. Corporate venturing has grown tremendously of late, and we want to make sure our local headquarters understand the benefits of plugging into the entrepreneurial ecosystem.   And like most states, we’re also trying to work with the universities to help cultivate more synergies around technology commercialization and entrepreneurship education.

Q: What is hindering capital formation in South Carolina and in the South in general?

A: A lot of it boils down to lack of awareness and infrastructure. There is a significant amount of latent capital here that’s just not plugged into the startup ecosystem. In 2012, there were about 150,000 accredited investor households in South Carolina, and that is projected to grow to 220,000 by 2020. However, among most of that population, angel investing just isn’t on the radar screen and part of the atmosphere here like it is in more traditional venture centers. Once we get more angels into the marketplace and generate more successful companies and exits, the gravitational pull will grow for more and deeper capital to flow into a more robust marketplace for early stage companies. Along the way, we need to build out the ecosystem for facilitating that market structure.

Q: How do you gauge the availability of capital for buying established companies?

A: In many ways, it is much easier for larger more established companies to attract large amounts of capital in acquisitions than it is for early stage companies to find smaller amounts of startup funding. Certainly, its far less risky at the later stages, and markets for larger amounts of capital are more fungible than those for early stage capital.  If we can get promising companies through the valley of death and enough growth capital to sustain their momentum, I don’t worry as much about access to later stage capital and buyout opportunities. There are mountains of cash out there in private equity and hedge funds and corporate balance sheets for companies that have proven themselves.

Brought to you by the team at FourBridges

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