At the 5th annual DIG South Innovation Conference in late April 2017, a host of young, hopeful companies presented promising business concepts to many different classes of investors. The investors were themselves hoping to run into avant-garde opportunities. In one session, “Investing in the South – The Current State of Deal Flow Around the Region,” four early stage venture capital (VC) investors shared their opinions on the current state of deal flow in the South. Their discussion came on the heels of an announcement that a new VC fund, Good Growth Capital, would open its doors in Charleston. A group of fund managers had shared that they hope to raise $20 million to invest in Southern tech companies, and that they are close to closing on their first batch of funding from this in the next few months. Whereas southern companies have already had access to seed capital, this fund’s goal is to finance what many say is a big void in the market, the Series A and B VC rounds.
The venture capitalists in the room confirmed there are few Series A and B VCs active in the marketplace today in the Southeast. Most VC funds are not headquartered in the South—and they like to be close to their investments. All the while southern companies do need capital: while many might have $1 to $2 million in a revenue run rate, they are still burning capital as they seek market adoption. What makes this money so hard to come by is that the VC funds are seeking returns of 3x to 5x their money invested in a 3 to 5-year period, or a 30 to 35 percent gross Internal Rate of Return (IRR). Very few young companies can deliver those returns.
Who has been investing in the Southeast?
Despite the challenges of raising Series A and B capital, many companies in the Carolinas and Georgia have been successfully raising capital through private placement transactions. In fact, approximately 1,500 private placements have been announced in these states over the past 3 years. So who exactly are some of the more frequent investors here and in what do Southeast focused funds seek to invest?
There are approximately 130 venture and private equity funds nationwide that publicly state that they seek equity investment opportunities of companies headquartered in the Carolinas and Georgia. Many others would invest in Southeast companies despite the fact that they don’t emphasize that fact in their investment criteria. Below is a list of funds that have invested most frequently in this region.
Funds Most Frequently Investing in Companies in the Carolinas and Georgia over the Last Several Years
(NC, SC, GA companies from May 2014 – April 2017)
| Fund | Investment Stage | # of Investments | Fund Description |
| SC Launch | Seed/Startup, Early Venture | 19 | This incubator seeks to invest in the knowledge economy, with a focus on alternative energy, advanced materials and fibers, transportation, defense electronics, military aircraft, military vehicles, automobiles, automotive retail, automotive technology, chemical and engineering and process improvements, life sciences and biotechnology or biomedical, homeland security, information technology and software, aerospace, and energy. Primarily invests in companies based in South Carolina, registered with the SC Secretary of State and having at least 51 percent of payroll in South Carolina. The firm seeks to invest up to $0.2 million in a company and supports its portfolio companies in securing follow-on financing. |
| Hatteras Venture Partners | Seed/Startup, Early Venture, Mid Venture, Late Venture, Emerging Growth | 15 | An SBIC. Typically invests in life sciences and healthcare companies with a focus on biopharmaceuticals, medical devices, medical device research and development, diagnostics, healthcare IT and health related technologies, and services opportunities in human medicine and health. Primarily invests in companies located in the research-driven and capitally-underserved regions of Mid Atlantic such as North Carolina and the Southeastern United States. Seeks to invest between $0.5 million and $4 million initially; and between $5 million and $20 million in total. |
| IDEA Fund Partners | Seed/Startup, Early Venture | 15 | Primarily invests in technology companies with a focus on software, information technology infrastructure, materials technologies, technology with IP protection, medical devices, diagnostics, and biotechnology. Primarily invests in companies headquartered or operating within the state of North Carolina and Florida as well as throughout the Southeast and Mid-Atlantic regions of United States. Seeks to invest between $0.1 million and $1.5 million in companies with revenues up to $5 million. |
| TechOperators | Early Venture | 8 | Focuses on innovative software solutions in cloud computing, cyber security, information technology infrastructure, marketing, mobile computing, and internet services. Targets companies with more than $1 million of sales and makes equity investments up to $4 million. Seeks to be the first institutional investor and can lead or co-lead series A round. |
| BLH Venture Partners | Early Ventures | 7 | Seeks to invest in companies in technology-enabled services, enterprise IT, consumer Internet, and e-commerce sectors. |
| Cofounders Capital | Seed/Startup, Early Venture | 6 | Seeks to invest in business-to-business software sector. Considers average venture investments of about $0.3 million. Prefers to take minority stakes. |
| Salesforce Ventures | Seed/Startup, Late Venture | 6 | The venture capital arm of Salesforce.com, Inc. Seeks to invest in enterprise technology, mobile technology, and mobile enterprise companies creating apps for mobile phones including programs that work on the Salesforce1 mobile platform, listed on the firm’s app exchange, machine learning and intelligence, verticals, internet of things, and wearable smart devices and connected products. Prefers not to lead deals. |
| 500 Startups | Seed, Early Venture | 6 | An incubator, venture capital firm, and an accelerator. Seeks to invest in internet, video and Arabic content, financial services, gaming, payments, SaaS, virtual reality, internet of things, education on mobile and web, e-commerce, e-learning, logistics, search/social/mobile platforms or companies, personal & business productivity, consumer, education & language, family & healthcare, web infrastructure, consumer, B2B, and food technology sector. Also focuses on companies in lending, investment advisory services, personal finance management, insurance, insuretech, money transfers and movements as well as the blockchain sectors. Picks a new batch of startups twice a year. |
Source: S&P Capital IQ
What value does an investment banker add?
So there are funds available for companies in the southeast. Another thing for companies to remember is that when they decide they wish to raise capital through a private placement, it is imperative that the offering be structured properly. Most companies are not experts in the securities field and therefore, run the risk of an improperly structured deal if they attempt to go it alone. A mis-structured deal can mean the difference between attracting serious investors or not.
Therefore, companies will benefit from enlisting the services of a broker-dealer (investment banker) who acts as the underwriter. The broker-dealer takes on the responsibility of creating a pre-offering structure. In doing so, the broker-dealer helps the issuer determine:
- How much money they wish to raise.
- What type of private placement to use.
- How principals maintain a certain percentage of control in the company.
- What the minimum and maximum amount of the offering will be.
- What type of features the stock will have.
Watermark Advisors understands that issuers are seeking investment capital that advances their business plans. Issuers prefer their investors to bring more than money; for example, ideally, investors open doors in their market that are otherwise more difficult to open. Issuers also want patient investors.
Watermark understands that issuers worry about the uncertainty of being successful in sourcing the necessary capital required to execute their strategy. They also worry about giving up too much ownership in the process. They need the capital in a timely fashion and grow concerned when a private placement process drags out too long. Lastly, they have heard stories about how difficult investors can be and fear that scenario could happen to them.
Watermark specializes in private placements that can be more difficult to source. Companies with EBITDA $5MM or less often find the capital markets to be much more challenging than companies with EBITDA greater than $5MM. Watermark brings a specialized process and market depth and breadth across groups of investors. Our job is to find the investor or investors that will be the best partner for the issuer and their company, in the most time efficient process possible. We invest in sophisticated information technology that keeps us up to date on each of these funds and corporations, their investment parameters, appetite, and investment strategies. This allows us to move swiftly to get the issuer’s offering in front of the best and most appropriate investor, no matter where they are located.