Venture Capital Report: 1999

Annual Venture Investments Show Exponential Gain
North Carolina Outpaces Much of the Nation
Area Telecomms Prove Big Winners
Outsiders Recognize North Carolina Potential
Signs of Triangle Companies "Maturing"

Annual Venture Investments Show Exponential Gain

1999 brought an increase in venture investments across the nation previously unseen by the venture capital industry. Record market activity on the major stock exchanges drove private equity investments nation-wide to $48.3 billion, a 151.6% rise over 1998, according to the National Venture Capital Association (NVCA). The Research Triangle region in North Carolina was a leader in that trend.

In 1999, the NVCA reported more than $810 million in venture capital investments made in the state of North Carolina. In its annual survey, the Council for Entrepreneurial Development (CED) identified a total of $1.29 billion in the Research Triangle area alone, an increase of more than 417% over 1998.

CED's larger total reflects a different reporting methodology. CED collects and verifies investment information from a variety of published sources such as NVCA reports, PricewaterhouseCoopers MoneyTree© reports, and other business publications; and by directly surveying regional venture capitalists and local entrepreneurs. Vigorous efforts are made to reconcile discrepancies in all information; however, where differences occur, CED relies on direct information from the company and/or its investors. Beginning in 2000, CED and the NVCA will reconcile records throughout the year to continue to improve upon the accuracy of the reported Research Triangle investment activity and the area's position relative to other regions across the nation.

According to CED's survey, in 1999 the Triangle region saw a rise in the mean venture investment to $11.84 million from the 1998 average of $3.33 million. The area's largest total annual investment and the largest single investment honors both went to SpectraSite Communications, provider of network services to the wireless and broadcast industries in the U.S. and Canada, with a single deal worth more than $231.4 million. Including SpectraSite, the area's top ten recipient companies claimed more than 66.9% of the total dollars invested in 1999. Five of the top ten companies are previous CED Research Triangle Venture Conference presenters. Investments greater than $10 million accounted for 82.9% of the region's total dollar amount. Investments ranged from a high of $231.4 million to a low of $20,000, with the median measuring at $3.0 million.

The current Research Triangle venture capital environment looks quite different than when CED began its venture equity survey in 1986, when companies reported $26 million in investments. In 1999, the region took a huge step towards becoming a significant player in the race to attract venture capital, by raising the money necessary to support some of the hottest "new economy" companies. These companies have in turn begun to select the area as the perfect place to build the nation's next wave of new billion dollar companies. With the continuing emergence of revolutionary technologies and groundbreaking research discoveries, the local entrepreneurial trend is almost certain to continue.

North Carolina Outpaces Much of the Nation

In 1999, investors poured more than $1.4 billion into 110 companies in 135 deals in North Carolina. The State ranked fourteenth in the nation with 1.7 percent of the total venture disbursements for the year. The total was a 390% year-over-year increase over the 1998 statewide total of $304.3 million. In the aggregate, North Carolina followed the national trend with a 2260% rise in venture investments during the 1990s.

The number of North Carolina companies receiving investments almost doubled from 58 in 1998 to 118 in 1999, and the total number of investments increased more than 83% to 135.

Regarding some of the specific venture activity both in the Research Triangle region and beyond, last year 12 local companies raised more than one financing round. Regionally, 96 Triangle companies did 109 deals, while 13 Charlotte companies completed 14 deals. Elsewhere, six Triad companies completed seven financing rounds, one Eastern NC company raised two rounds, and three Western NC companies completed one round each.

Eighty-six percent of the state's total dollar investments went to Triangle companies (up from 82% in 1998), and the Triangle claimed 80.7% of the companies receiving venture money. Charlotte captured 8.8% of the total investment dollars and 10.9% of the recipient companies, with the remaining portion going to the other three regions (Triad, Eastern, and Western NC).

As a whole, North Carolina's strong investment performance is tied closely with the national trend towards greater venture disbursements. However, as the state continues to expand upon its reputation of a strong technology environment and firm entrepreneurial infrastructure, North Carolina will most likely continue to see a faster than average rise in venture investments compared with the nation as a whole, resulting in its capture of an even greater piece of the venture capital pie.

The number of North Carolina companies receiving investments almost doubled from 58 in 1998 to 118 in 1999, and the total number of investments increased more than 83% to 134.

Area Telecomms Prove Big Winners

In 1999, North Carolina bucked the national trend in terms of investment growth in the various industry sectors. Unlike in NC in 1998 and in 1999 nationally, the trend towards internet companies did not bring about the greatest industry sector rise in investment dollars in Research Triangle companies.

In fact, the industry sector with the greatest investment was telecommunications, rising from 12.7% of the 1998 total dollar amount to 34.0% in 1999. However, as in 1998, a very small number of very large investments accounted for the total - six investments averaging $73.1 million each.

Although the local internet sector did not see the greatest rise in investments, the internet companies as a group still performed strongly with their portion of the total dollars rising from 19.8% in 1998 to 28.1% this year. The number of internet deals rose slightly from 20 in 1998 to 25 in 1999, or 22.9% of the total.

A rise in the amount of venture investments and the total number of deals was seen across all industry sectors. In fact, the life science sector showed the greatest increase in the number of deals, almost doubling from 17 in 1998 to 30 in 1999, sharing top honors with the computer software category at 27% of all deals. But the life science portion of the total dollars invested declined from 20.1% in 1998 to 14.1% in 1999.

Telecommunications investments went from 12.7% of the 1998 total dollar amount to 37.0% of 1999, with six investments averaging $73.1 million each accounting for the total.

Outsiders Recognize North Carolina Potential

According to the numbers, there seems to be a strong movement afoot outside North Carolina's borders to look more closely at the investment opportunities available in the Research Triangle area and within the state as a whole. This year, indications are stronger than ever that North Carolina is gaining quite a reputation for leading-edge technologies and entrepreneurship.

As in previous years, the majority of investments in North Carolina entrepreneurial companies appear to have come from out-of-state investors. While there was no disclosed state of origin for the vast majority of investment dollars provided to North Carolina companies in 1999, according to the National Venture Capital Association, only 8.0% of the total investment dollars were identified as having come from North Carolina domiciled funds - less than half of the total noted as invested by New York funds. Contributions identified from international investors amounted to 4.8% of the total dollars invested in North Carolina companies.

However, just because out-of-state-investors were busy in North Carolina doesn't mean area venture firms weren't busy in their own right. The total capital under management in NC in 1999, rose to $819.5 million (for an increase of 18.1%) from the 1998 total of $694.1 million. In addition, dollars raised by North Carolina domiciled funds topped $175.0 million in 1999.

In 1999, more than 170 firms invested in North Carolina companies versus the 1998 total of approximately 90, an increase of 88.9%. Some of the venture world's largest names took a look at North Carolina deals for the first time, including Sheng-Hua Venture Capital-the largest investment firm in Taiwan.

In 1999, CED tracked for the first time the level of Triangle investments by financing round, with the uncategorized and fourth and beyond deals coming in far ahead of the other categories. However, second and third round deals made a strong showing, providing compelling evidence for the observation that Triangle-area companies are beginning to mature in their efforts to bring technologically-superior products to market.

According to the National Venture Capital Association, only 8.0% of the total investment dollars were identified as having come from North Carolina domiciled funds.

Signs of Triangle Companies "Maturing"

Based on the 1999 investment numbers, business trends point to the maturing of many Research Triangle-area entrepreneurial startups. For instance, three Triangle-based companies made initial public offerings of their stock in 1999-much watched Red Hat Software, SciQuest.com, and The Pantry (food and convenience stores)-versus one area company in 1998 (computer game maker iEntertainment Network).

As for venture investments in companies at various stages of development, early stage Triangle companies accounted for 59.6% of the total number of deals, but only 20.4% of the total dollars. Greater than 79.6% of investment dollars went to expansion stage companies; and expansion stage companies accounted for 40.4% of the total number of deals.

Although expansion companies participated in fewer deals than early stage companies, expansion company investments as a portion of the total number of deals is on the rise compared with prior years. This movement clearly indicates that earlier stage companies from previous years are maturing and are now classified as in the late or expansion stage. These companies are also often receiving additional venture investments as they fully develop their product lines. The good news is that more mature companies tend to hire more employees, thereby having a greater impact on the local economy and creating a stronger entrepreneurial infrastructure to attract other startups.

Given the recent interest in biotech companies on Wall Street and the still-apparent interest in other technology companies (although the market's current volatility certainly indicates a potential cooling effect), several local entrepreneurs have recently filed the necessary paperwork with the Securities and Exchange Commission to make initial public offerings of their stock. Therefore, assuming market conditions remain favorable, look for 2000 to offer even greater opportunities for companies and venture capitalists alike to pursue that all-important exit strategy by cashing in on their investments through IPOs.