Raising Capital in the Southeast Isn't Impossible

Frustrated entrepreneurs often tell me how hard it is to raise money in the Southeast - and I guess I hear it most here in North Carolina since that's where I live. The entrepreneurs in NC point to the lack of venture capital available to local companies. But I hear the same message when I visit Atlanta or Virginia.

If they are pure tech based, they point to the shortage of local VC firms. In our market, there are 6 active VCs. The angel groups in NC - TIG, Atlantis and Charlotte Angel Partners are done writing checks (for now). Piedmont Angel Fund is the only active angel group in the state (groups that actually have a fund in place). And there are still some angels around, but it seems most are either waiting for exits or trying to play it safer by investing in a fund.

So, has all the cash dried up like these entrepreneurs say? Not exactly.

I have always believed that the markets are efficient. Great companies or great entrepreneurs + a good ideas are always able to get money. Always. The entrepreneurs that are sulking saying they can't raise the money in NC, either:

1) Don't have such a great idea (today) or the VC feels they might not be the right person to be backed

or

2) Aren't knocking on the right doors or enough doors

I'd like to help with #2 with this post.

First of all, I am thrilled so many entrepreneurs call us and give us the opportunity to partner with them. And we work hard as we possibly can to make sure that continues. But if you can't get capital from us and the other firms in your region, don't call it quits. Instead, focus on building a list of VCs out of state that are interested in your geography. Seems simple, but I don't feel enough entrepreneurs take that extra step. They simply throw up their hands and surrender after they can't raise the money from the handful of local VCs. Then they complain. If they're that passionate about building a great company, why give up so easily?

So what's the best way to build a solid target list of out of state VCs that might be interested in your company?

1) I know my last post on PWC's Shaking the MoneyTree had a PowerPoint slide in there towards the end which identified all the active VCs in the state - a lot of them we have co-invested with. And I know there are a TON of VCs interested in getting into great deals in Atlanta and RTP. Why are they so interested? Valuations are lower, there is strong access to technical talent and the cost of building a company is a lot cheaper than Boston or Silicon Valley. A lot of VCs like the convenience of being able to fly down and back in a day.

2) If you don't have the PWC report as a resource in your market, compile your own list and review all the VC backed companies in the last 12 months. Where did the capital come from?

3) I'd suggest taking a short cut and speak with entrepreneurs that have raised money in your area. If they raised VC, chances are they spoke with a bunch of other firms that were also interested. What other firms were they impressed with? Getting that list will also show other firms that are interested in that geography. Do some homework on those firms and ask for intros as appropriate.

4) Again, focusing on NC, a lot of out of town VCs go in and out of our market. And I'm not just talking about when the local venture conferences are happening. They're coming for board meetings for their local investments, they're meeting with new companies or simply trying to plant the seeds and looking for deals. Some just come here socially. Find out who they are. Most of the time, they are making 1 day trips.

Comments

[Elliott Dahan]

Jason –

I will direct my comments to seed and early stage investments.

I have found that later stage investments are usually done or not done – not sold to investors. Either the growth, numbers, acceptance, hype, etc. are all in place and later stage investing makes sense or something is wrong. (I’m not going to get into the world of “down rounds”, “salvaging for spare parts” and “shotgun weddings”)

Misdirected Mixed Signals: First you say, “I have always believed that the markets are efficient. Great companies or great entrepreneurs + a good ideas are always able to get money. Always.” – Then you say, “But if you can't get capital from us and the other firms in your region, don't call it quits.” You then go on to say, “Instead, focus on building a list of VCs out of state that are interested in your geography.”

Your simplistic answer leaves out the most important element an entrepreneur should look for in a potential investor – The Space. Bio/Medical guys are not going to look at Software. Hardcore Platform/Infrastructure guys are not going to look at B2C. “Green” guys are only looking at Green. Instead of flippantly telling folks to look elsewhere, geographically, you should be telling them to look for investors who are in their Space.

You do not mention the need to know the financial investing parameters of any target investor. What is the minimum investment ? What is the maximum investment over the life of the company ? Does the investor require the entrepreneur to find a “lead” investor ? Lots and lots of research that must be done by the entrepreneur.

There is another reality check you did not mention – most non-RTP VCs will want a local-RTP VC to join in the funding round so there will be some local oversight. And, this brings us back to the problem of local-RTP VC firm as “gatekeeper” – not risk taker.

There is another reality check you did not mention – don’t bother “throwing your business plan over the transom” – or, the odds of you getting any attention from an investor without some kind of introduction or valid name dropping are little or none. (even a snappy LinkedIn intro is good).

The Angel Funding process, all too often, involves genuflecting in front of some folks with spare change who then add little or nothing to the entrepreneur. I have been involved in both the organized Angel and the individual Angel process both in the Silicon Valley and RTP. If an entrepreneur doesn’t really, really need money – he/she should avoid that route unless the Angel money is coming from active and knowledgeable people. Entrepreneurs should definitely source Angel $$ - but only after doing good research on the background of the Angels and their investments.

Do not confuse this institutional Angel funding from Friends&Family money.

There is a new development – probably the most important of all, that you didn’t mention – the recognition by both established and new investment firms that the Seed/Early Stage market is both underserved and potentially quite lucrative. Look at Charles River Venture’s “Quick Start”. I have been approached by some savvy folks in L.A. who are putting together a dedicated Seed Fund of about $25 million. Look at what other VC firms and new firms announce in Q1/2007. This will be the future of Seed investing.

I hope this helps.

Elliott Dahan

[Knox Massey]

Hi Jason--
Stop by next time you are in Atlanta. Atlanta Technology Angels (ATA) is still alive and well. We're very active in the Atlanta market with 3 new deals in 2006 (and 10 follow-ons). Other angels, VC funds and entrepreneurs are welcome to call or stop by anytime.

Best,
Knox Massey
Executive Director
Atlanta Technology Angels
www.angelatlanta.com