North Carolina

Startups are breaking records in NC. But are younger companies being ignored?

More from the series

Measuring Tech in the Triangle

A News & Observer analysis of local economic indicators for the region’s tech economy.

Measuring tech in the Triangle: First in a series.

Investments in the youngest companies in the Triangle are declining.

The share of venture capital deals that went to seed and angel investments across the region, an important marker for the future health of a startup ecosystem, fell last year to its lowest level since 2011, according to data compiled by the companies PricewaterhouseCoopers (PwC) and CB Insights.

Angel and seed investments — which include the earliest money brought in by startups — are vital because they help kickstart the launch of many companies. The money often comes before a company has created any revenue or products. But in recent years, analysts say, investors appear to favor placing bets on more established companies.

With this story, The News & Observer is launching a new reporting project aimed at monitoring the health of the Triangle’s tech ecosystem. In a survey sent to dozens of people in the local tech industry, the N&O asked what important measuring points matter the most for the ongoing success of the region. We’ll be reporting on individual indicators over the next five weeks, then will revisit all of them regularly going forward.

One indicator showed up frequently in survey responses: access to early capital.

The numbers in the Triangle follow a nationwide trend. Across the country, seed investment has been falling, with those types of deals falling to their lowest levels in six years, even while total funding continues to break records, a recent PwC report said.

PwC, which tracks data on venture capital in its MoneyTree report, ran an analysis on early-stage investing in the Triangle at the request of The News & Observer.

The data is compiled from venture capital databases, Securities and Exchange Commission forms and through self-reporting from companies and investor groups, so some deals may have been overlooked. However, the report is one of the more comprehensive trackers, following deals and trends in nearly every metropolitan area in the country.

Investors have been more interested in older startups in recent years, as they are looking to make larger investments rather than smaller ones that young companies usually take, according to a report from Pitchbook. The median age of a company receiving angel and seed financing has risen to 3.1 years, up from 2.8 years in 2018, according to Pitchbook, which tracks venture capital.

David Gardner of Cary-based Cofounders Capital said while many investment groups have raised lots of money in recent years, they have been hesitant to bet on the youngest startups, preferring older startups that might be considered less likely to fail.

“There aren’t many writing pre-revenue checks,” he said, meaning investments into companies that haven’t sold a product yet. “That is where the risk is, but it is also where the reward is.”

That means a typical startup raising angel and seed financing today is the same age as a company raising a Series A round — a term for money brought in after a seed round — was in 2014, the Pitchbook report stated.

“This longer initial period is particularly noteworthy considering the resources available today that enable startups to scale more quickly and less expensively than ever,” according to the Pitchbook report. But “even at the earliest financing rounds, investors are continually reducing risk by favoring more mature startups.”

This can make companies more resilient — as they need to survive off their own revenues earlier — but it can also cause ideas to flame out quickly or discourage a potential entrepreneur from ever starting. It could also potentially lead to less diversity in who receives money, as women and people of color already receive just a sliver of venture capital money raised in the U.S.

In 2018, about 14% of funding deals done in the Triangle went to seed-stage companies.

For the years between 2012 and 2017, the share of seed deals never dropped below 23% and peaked in 2015 at 40%.

So far in 2019, about 17% of funding deals have gone to seed-stage companies, but what will happen the rest of the year is unknown.

Why seed money is important

“We have a great startup ecosystem here. We really do,” Gardner said. “But the ingredient we don’t have is early-stage, seed capital.”

Gardner thinks the area is attracting the wrong kind of money.

“It is all stacked at the later end,” he said. “If we aren’t investing in early-stage companies, then where are the later-stage companies going to come from? You need someone planting seeds so you can harvest later on.”

Lister Delgado, a managing partner at Durham-based IDEA Fund Partners, said venture capital money moves in roughly 10-year cycles, with more money flooding in towards the end of one. He said there is a lot of competition now in investing in maturing startups, leading to larger rounds of investment and higher valuations.

”Competition comes in when the companies are a little bit further along,” Delgado said. “But there are very few [investors and individuals] writing those seed and angel rounds.”

Thom Ruhe, CEO of NC IDEA, a foundation that provides seed grants to startups, said he is seeing an increasing number of companies his organization has given money to leave the state to find capital.

“With an increasing frequency, more of our grantees, companies that get like $50,000 from us, are leaving the market to find early-stage angel and seed rounds,” he said in an interview. “They are just not finding it easier in the Triangle.”

Sometimes those companies leave permanently to be closer to their funders, he said.

“It is bumming me out, and I am wondering if we are not just a great farm team for other parts of the country,” Ruhe said. “The last 12 months, they are going to the usual suspects of New York and San Francisco, but also San Diego, Austin, Boston and even St. Louis.”

He agreed that more local money has gravitated toward later-stage and less risky companies.

Fortnite is developed by Cary-based Epic Games. Epic Games

Venture funding levels

The Triangle isn’t hurting for venture capital when it comes to later-stage companies. Companies based in North Carolina raised a record amount of venture funding last year, bringing in $2.7 billion in total, a 144% increase from 2017.

Almost half of that, though, went to a gigantic funding round for Cary-based Epic Games, which raised $1.25 billion just in 2018, valuing the company at $15 billion.

In general, the U.S. is on a high when it comes to venture capital, with the first six months of 2019 seeing the largest venture capital investment PwC has ever recorded in the first six months of a calendar year. Investment into tech companies hasn’t been this intense since the dot-com bubble of the early 2000s.

But the earliest rounds usually still come from local investors.

“Given that the Southeast is not a huge source of larger deals, relative to elsewhere in the country,” said John Nee, a partner at PwC, “the local startups know they need to get local interest in order to do ‘proof of concept’ on the business model.”

The Triangle needs to become more self-reliant, Gardner argued.

“I don’t think we are going to attract enough startup capital from outside the state, so that is something we are going to have do ourselves,” he said.

There are groups trying to fill that hole. The local universities have put together angel investment groups, and more sector-specific funds are being founded here. But most of those have smaller capabilities.

Some companies, like MetLife, have started accelerators in the Triangle, and employees from some of the region’s biggest tech companies put money into startup investment funds, said Jason Caplain, a general partner at Durham-based Bull City Venture Partners.

While the Triangle has carved out a niche when it comes to investing in biotechnology companies, multiple people said the technology sector has just four really active players: Cofounders, IDEA Fund Partners, Bull City and Hatteras Venture Partners.

Not enough Triangle investors

Caplain said his firm is taking meetings with more companies than ever. The problem is there aren’t enough firms or investors to give them money.

He’d like to see more participation by entrepreneurs who have made money from selling shares of their companies.

“I think the trick is getting some of the people that have had a successful exit in North Carolina to get back in the game,” he said.

Jason Caplain, Bull City Venture Partners

“That could mean coming back and helping run a company as an adviser or as an investor,” he said. “In the D.C. area, I see a lot of people that have had success as an entrepreneur write checks for a company and people still employed running small checks to their friends for five to six-thousand dollars.”

That doesn’t happen in the Triangle to a serious degree, he said.

Gardner also said his firm is seeing an uptick in the number of companies they meet with. But there are just too many promising companies for them to invest in and advise all of them.

“We have three presentations every day,” he said. “I am turning my nose up at things that would get funded in Silicon Valley.”

Ruhe, of NC IDEA, said the area really needs another fund focused on early-stage companies.

“There is a lot of private wealth in the Triangle sitting on the sidelines,” he said.

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Igor Jablokov, now CEO and founder of Pryon, and formerly founder of Yap which was sold to Amazon and used in its Alexa smart speaker technology, stands for a portrait at the NC Museum of Art on Friday, Aug. 2, 2019, in Raleigh, NC. Casey Toth

Finding investors outside the Triangle

Igor Jablokov, who just raised more than $20 million for his artificial intelligence startup Pryon, said he needed to look outside the Triangle for money to grow his company.

He advises other founders to buy a plane ticket when it comes time to finding investors.

There’s just not enough money here, he said, especially with Intersouth Partners, once one of the largest funds in the area, no longer making investments. Intersouth stopped investing in new companies in 2017.

His company’s first round of funding was led by firms based in New York, Atlanta and Washington, D.C. — though the Carolina Angel Network also joined in on that round.

“One of the things that I realized is that there was no money here,” Jablokov told the N&O earlier this year. “If you go to Cofounders, IDEA, Bull City and Hatteras and they pass on you, who else is there?

“So what ends up happening is you end up getting on airplanes.”

This story was produced with financial support from a coalition of partners led by Innovate Raleigh as part of an independent journalism fellowship program. The N&O maintains full editorial control of the work. Learn more; go to

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Zachery Eanes is the Innovate Raleigh reporter for The News & Observer and The Herald-Sun. He covers technology, startups and main street businesses, biotechnology, and education issues related to those areas.