Mr. Jones is co-founder of Bull City Venture Partners in Durham, NC, and partner of Southern Capitol Ventures in Raleigh, NC. He previously co-founded and served as the Chief Technology Officer of Orthocopia.com.
- In today’s market, growth is one of the greatest definers of value. Consequently, private equity groups are competing to invest in tech companies because they are fast growing, require relatively little upfront capital and offer the potential for a quicker return.
- Traditional tech centers like San Francisco, New York and Boston are investing outside their region because markets are overcrowded and value can be found in innovative companies in areas like the South.
- The startup market is gaining strength because successful entrepreneurs who have sold their businesses are choosing to reinvest in their local communities by funding early stage companies.
- Industries that have a binary outcome – meaning they are either approved or not, like biotech – are becoming less attractive to investors. Meanwhile, hardware companies like 3D printing are gaining traction.
- Companies should seek to build relationships with funders long before they think they need the money. By engaging funders in the business early on, companies position themselves to call on them when the time is right.
Q: How available is capital to middle market companies in your part of the country?
A: From my perspective as a venture capitalist focused primarily on early stage technology companies in the Mid-Atlantic and Southeast, access to capital is alive and well.
There are several reasons for this. For example, large growth equity firms over the last 10 years have created outbound calling programs that are using other data sources to track companies’ performance. Access to this information is prompting investors to get into new markets and uncover companies that they weren’t spotting 15 to 20 years ago.
Another reason for the availability of capital is the willingness of investors to look outside their market. A friend of mine running a large growth equity shop tells his partners, “You are not hunting in the right market if you aren’t making at least one flight connection.” In other words, investors realize that markets are becoming heated and they want to make sure they’re not going to the places everyone else is going.
Lastly, there is strong access to capital for middle market companies because many early stage venture funds have migrated upstream, creating an abundance of capital at the growth stages.
Q: Why is tech so attractive to investors?
A: Those in the tech space are receiving multiple offers for capital because the industry is fast-growing, has higher gross margins and is less capital intensive upfront than most other industries. Not only that, but you are able to plow a lot of the profits back in. These days, growth is one of the biggest definers of value.
Q: What kind of multiples are people getting for tech companies in your part of the country?
Again, focusing on tech and companies with good customer traction in the middle market, companies are receiving between 4 and 6 times the revenue for financing multiples these days.
Q: Is capital more available in some regions of the South than in other regions?
A: No doubt. There is a surge of capital in the Research Triangle, and in other cities like Charlotte, Nashville, Dallas, Washington, D.C., Atlanta and Austin. These larger markets tend to get more capital because of the higher density of entrepreneurs, the presence of strong airports and availability of Fortune 500 companies to draw talent from.
Q: Have you seen a shift in recent years of some markets becoming stronger than others?
A: Speaking on the tech side and for the Research Triangle area, we’re seeing a lot more startups and fewer middle market companies.
The big boom for startups is built on the successes of past founders. What commonly happens is that founders of successful startups will sell their companies and reinvest a large portion of the sale proceeds in their local community’s early stage companies. For example, David Cummings co-founded Pardot in 2007 and later sold the company for over $100 million. He then invested back into the Atlanta community, creating the Atlanta Tech Village, which is helping to grow over 50 tech startups. David provides mentorship and firmly believes that investing back in the community keeps the market going. I see this similar scenario played out across the South.
Q: What kinds of companies are attracting the most investor interest?
A: For tech companies that are past the startup stage, doing over $10 million or $20 million in revenue, it’s the middle market growth equity or small buyout where I’m seeing the most amount of capital. For example, a company in Charleston called BoomTown had national firms competing for them and raised $20 million in growth equity recently.
Q: Are you seeing increased out-of-region capital coming to North Carolina?
A: Yes, North Carolina has a history of firms coming in from New York, Boston and, occasionally, the West Coast.
Q: What is causing the influx of out-of-region capital?
A: On one hand, it is extremely expensive to invest in businesses on the West Coast, and private equity firms are seeking value where there is less competition. I believe, though, that no matter where they are located, great companies will always find funding. For example, we were investors in a great company here in North Carolina called Channel Advisor that attracted considerable capital from outside our region. Our co-investors were Ebay, Advanced Technology Ventures, and NEA – one of the largest venture capital firms in the world. There were also a couple of angel investors, but mostly it was these large groups from out-of-state. Channel Advisor went public last May, and was a great outcome for the team and investors. I wouldn’t be surprised to see most of these big co-investors back in this market soon. The more major funders find success in the South, the more likely it is that they’ll keeping investing here.
Q: Do you often partner with out-of-state venture capitalists to make deals?
A: We look for the best partner for the business. For early stage investments, the South tends to be more cautious, so we usually go outside of the region. One reason for this is that the risk tolerance in the Bay area and Boston tends to be higher than that of private equity firms in the South. Also, we are driven to look elsewhere for partners because we just don’t have the amount of venture capitalists in the South that there are on the West Coast.
Q: What can middle market businesses do to make themselves more attractive to funders?
A: Keep focused on building a great business. If you’re looking for outside money, get an introduction by a trusted source to private equity/venture capital firms that are coming to your market for board meetings. Spend time with them. Also, add great advisors and board members who have some reach. This will help get your business noticed. It is also important to have a consistent public relations and marketing plan and pursue opportunities to speak at conferences and gain exposure. Talk with capital sources or funders before you need it or want it. Get them engaged in your business early. Finally, building a network of good partners, such as lawyers, bankers and accountants, can get your business in front of the right funders.
Q: What types of businesses other than tech are most attractive to funders?
A: Hardware companies like 3D printers are becoming more and more attractive. This is a shift from 10 years ago, when investors would shy away from something so capital intensive. In North Carolina, we’re seeing investment in the software, technology and hardware for 3D printing. E-commerce is also a strong market in the South. The least attractive companies are those with a binary outcome or those with regulatory hurdles.
Q: What can North Carolina do to attract more outside capital?
A: North Carolina needs to be as tax-friendly as we can. The state and city need to continue to get behind entrepreneurs and help pave the path.
Q: What can be done to get more local investors involved?
A: Education always helps. Angel groups are popping up and educating people. The best way to get nearby investors involved is for a local startup to have a great win and then reinvest in other companies in that area.
Q: Does it matter where the capital comes from?
A: It’s important to have both strong local and outside investment. The increase in outside investment builds bridges to the West Coast, which means more access to capital for everyone.
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