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An Analysis of the Carolina and Georgia's Venture Capital Dilemma

Below is an analysis of the venture capital industry and the dilemma faced by South Carolina in particular, but also the Carolinas and Georgia as a whole. You may click on each graph to view in larger detail and resolution.

Venture capital is a highly specialized form of corporate finance. The National Venture Capital Association makes the following observations about the industry.

Venture capital is money provided by professionals who invest alongside management in young, rapidly growing companies that have the potential to develop into significant economic contributors. Venture capital is an important source of equity for start-up companies.

Venture capital and private equity firms are pools of capital, typically organized as a limited partnership, that invests in companies that represent the opportunity for a high rate of return within five to seven years. The venture capitalist may look at several hundred investment opportunities before investing in only a few selected companies with favorable investment opportunities. Far from being simply passive financiers, venture capitalists foster growth in companies through their involvement in the management, strategic marketing and planning of their investee companies. They are entrepreneurs first and financiers second.

Even individuals may be venture capitalists. Angel investors may either be wealthy people with management expertise or retired business men and women who seek the opportunity for first-hand business development.

Venture capitalists are seeking extraordinary returns by investing in early stage companies seeking to create large and growing markets. Venture capitalists are not in the risk taking business; rather they are in the risk management business. They mitigate their risks in three primary ways. First they invest in a portfolio of early stage companies. Over time they invest more in their winners and cut off their losers, so that a disproportionate percentage of their investments are in their most successful investments. Second, they generally invest in industries where the principals of the venture fund personally have industry experience and relationships. This allows them to do effective due diligence on potential investments and to help build the management teams and attract other resources to their portfolio companies. Third, while venture firms will invest in unproven companies, they tend to invest in proven managers with successful track records of growing and liquidating venture backed companies. These managers are known in the venture industry as “serial entrepreneurs,” and often venture firms will attract managers from prior successful companies in whom they have confidence into new portfolio companies.

Entrepreneurship that supports the creation of companies that can grow rapidly and successfully enough to deliver the exceptional returns sought by venture capitalists is highly cultural. It occurs primarily in a limited number of industries, which have some exceptional growth drivers, and it occurs in communities with the experience and infrastructure for this type of entrepreneurship to become self-sustaining. Below are several graphs and charts, taken from data provided by the MoneyTree Survey of venture capital investments in the United States.

Venture capital is predominately invested in a limited number of industry sectors. Approximately a third is invested in biotechnology or life sciences, and approximately a third is invested in software and related IT services, media, and entertainment. The remainder is invested primarily in computer hardware or in telecommunications and related equipment.

Venture capital is not invested evenly throughout the country, but rather is invested in highly entrepreneurial communities. Forty percent is invested in Silicon Valley alone, with another twelve percent investing in the Boston area. Hotspots on the east coast include central Florida, Atlanta, Research Triangle Park, and metropolitan DC, though collectively they account for only fifteen percent of the venture capital investments in the country.

The percentage of US venture investments in the Carolinas and Georgia is well below the percentage these states represent of the total US population. In the past ten years, most of the venture capital investments in the Carolinas and Georgia have been in Research Triangle Park and Atlanta.

There have been only scatted venture capital investments in South Carolina since 2002. In the past ten years, only around 18 companies have received a venture capital investment. One company, NuVox, accounted for 70 percent of all the venture capital invested in South Carolina in the past decade. Three other companies, HomePoint, qServe, and iOnosphere, accounted for 75 percent of the remainder. So while venture investments per capita in South Carolina were significantly below the national average in the past decade, even the investments that were made were almost all in only four companies. Yet, the $566 million these four companies raised demonstrate that once emerging South Carolina companies reach a sufficient level of maturity that they can attract additional capital.

Even in the best of times, the mainstream venture capital industry is not geared to provide true seed capital to start-up companies. The primary focus of the industry is providing capital to emerging companies that have gained traction in the marketplace to ramp up their growth. In addition, as previously discussed, an intentional strategy by most venture firms is to invest increasingly more in winning companies in their portfolios and to cut off their losers, so a disproportionate part of their investment dollars end up in successful companies.

The past few years since the technology bust of 2000 have not been the best of times in the venture capital industry. Venture firms in general have pulled in their horns since then and supported their existing portfolio companies, rather than making investments in a large number of new companies.

Over the past decade, professionally managed seed capital has been virtually non-existent in South Carolina. That has also been true in North Carolina and Georgia since 2002.