Expert Columns

Early Stage Capital at a Crossroads

By Monica Doss

Editor's note: This article was first published in the Spring 2005 edition of Business North Carolina's Innovation NC.

North Carolina is a state where cutting-edge research, innovation and entrepreneurship abound. But too often, even experienced entrepreneurs struggle to raise enough funding to launch and sustain a business until venture capitalists are interested. Recently, I discussed this issue with Rich West, CEO and co-founder of Adigy Corporation, a new Durham-based company whose products will allow wireless monitoring of medical patients. West was formerly the CEO and founder of TriVirix, a company he grew from start-up to over $70 million in revenue. He is chair of CED's Access to Capital task-force, created to study and make recommendations regarding early-stage funding in North Carolina.

Rich, what is your view of the capital environment for new companies in North Carolina today?

Studies clearly show that relative to the amount of research being conducted here, our start-up capital resources fall well below competitors like Massachusetts, Maryland, Texas and regional peers like Georgia and Florida. We are not taking advantage of our position as one of the world's best research locations in terms of launching companies and creating great jobs.

In this area there are a few well-established venture funds. As they grow, their minimum investment rises. We want them to grow – that is a sure sign of success! However, we need to continually renew the sources of seed capital to bring deserving companies to a place where the traditional venture capitalists will invest.   

What specific challenges do early stage companies face when trying to raise capital?

In North Carolina there really are very few avenues for early stage funding. The recent downturn took a toll on available angel capital. Many angel groups have moved upstream, and they now have expectations rivaling those of professional venture capitalists. Although individual investors are out there, you have to have a very good network to find them. Some early stage funds in the region that started in the late 90’s have not raised new funds. Some companies compete for SBIR or other federal grants, but those solicitations focus on specific industries and are very competitive.

Is the capital-raising atmosphere different than when you were starting TriVirix in 1998?

It is much harder now. A lot of investors got burned by the dot-com crash, so if they are still around they've become more risk-adverse, and seed stage companies are naturally a more risky investment. Some had success and have left early stage altogether and are providing midstage growth capital instead of startup capital. There's nothing wrong with what they're doing, it's just left a big hole.

How have you experienced this in your efforts to raise capital for Adigy?

Adigy addresses a large market, is run by people experienced in using venture capital, and we have proprietary technology. But we have no product, no revenue, and no patents yet. If we had an early stage investor, we could quickly develop a prototype product and test it in a clinical environment. That would make us attractive to venture capitalists, as well as to potential commercial partners. But traditional venture capitalists and commercial partners aren't going to do anything with the idea of a product. We are having good conversations with a few early-stage investors, but there is just not enough money around to fund all of the promising companies.

What do you see as the bottom line for this issue?

We need to fill this huge gap between an idea for a business and actually getting the business off the ground. North Carolina does the job better than most regarding technology development and knowledge resources, but the early stage capital is not available to take the next step. That creates a constricting bottle neck at a critical part of the pipeline between innovative knowledge and growing high impact companies that create jobs and community well-being. That's a key part of the puzzle.

Rich, thank you for taking the time to speak with me. Clearly, seed-stage capital is at a critical point in terms of its potential to commercialize some of our most innovative ideas. For North Carolina to continue to maintain its leadership in the innovation economy, leaders in government and business need to understand and propose the type of leading-edge solutions that the state has long-since gained reputation for.