Public Startups Venture

The Capital Without The Costs: How North Carolina Is Rising As An Entrepreneurial Hub

The Research Triangle area in North Carolina (made up of the cities of Raleigh, Durham and Chapel Hill) has consistently topped lists related to startups and tech hubs in recent years.

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Just last week, Forbes ranked second (for the third straight year) in Forbes’ annual list of “Best Places for Business and Careers.” The publication noted the city’s “strong economy and educated workforce.” It also pointed out that Raleigh’s business costs are 14 percent below the national average, per Moody’s Analytics.

In this June 2018 Inc. article, Jeff Barrett, CEO of Barrett Digital, wrote that North Carolina’s (NC’s) State’s Centennial Campus, just west of downtown Raleigh, “looks and feels like Silicon Valley.” The state has something else in common with Northern California: it’s home to a combination of beaches and mountains that attracts tourists from all over the nation.

But it’s not just skylines and beaches that make North Carolina attractive to folks in tech. Venture capitalists, large funding rounds, big acquisitions, and the possible arrival of major tech companies are helping propel the state forward.

The Numbers

So far in 2018, venture funding in NC startups is up 154 percent to $2.57 billion compared to $1.01 billion in all of 2017,  according to Crunchbase data. Compared to 2013 when NC startups raised a combined $516.5 million, funding this year thus far is up nearly 400 percent.

Just in the past week, two North Carolina companies made headlines for being involved in major deals.

On Oct. 26, Cary-based Epic Games closed a $1.25 billion round. Then on Oct. 28, IBM announced plans to acquire Raleigh-based Red Hat for $34 billion in the largest software acquisition ever.

Both deals were large and significant for the picturesque southeastern state; however, other notable deals have been made. In September, Pendo raised a $50 million Series D led by Sapphire Ventures and Prescient brought in $50 million in July.

Combine the number of pretty big raises by NC-based companies with the rumors that tech giant Apple is nearing the close of, or has already closed on, the purchase of a huge chunk of land on which it could build its “second headquarters,” and it’s safe to say that North Carolina is quietly, and resoundingly, becoming a real competitor to Silicon Valley. (In the interest of full disclosure, my husband is an Apple employee but that’s immaterial here.)

A Region Transformed

While Charlotte, NC, has long been known for being a hub for financial companies, the Research Triangle area has historically struggled to be a formidable alternative for tech startups to call home. The sheer number of universities has been an asset for the region. (They include Duke University, UNC-Chapel Hill, NC State University, and nearby Wake Forest University, just to name a few) But many of the schools’ engineering or computer software graduates often left North Carolina after graduating, lured by the higher tech salaries and the potential to raise more venture capital in other markets.

David Gardner, managing partner of Cary-based Cofounders Capital, was a serial entrepreneur who started seven business-to-business software companies and sold all for somewhere between $12 million and $100 million each. He launched Cofounders Capital to help other budding companies in the software space grow and to help keep companies from leaving the region because they couldn’t find capital in the state. About 85 to 90 percent of the firm’s deals are in companies based in the Research Triangle.

“We’ve done a great job of building a startup community,” he told Crunchbase News. “It’s cool to be an entrepreneur now. As evidence of that, entrepreneurship is the fastest-growing degree at local universities. But kids don’t want to be a cog in someone else’s machine. Right now the, the best and brightest want do their own thing.”

Cofounders Capital raised $12 million in its first fund and has raised about $25 million of the $50 million it is targeting for its second fund. Its accelerator arm, Cofounders Lab, offers companies free office space, internet, and supplies. Most of the fund’s LPs are serial entrepreneurs and local CEOs, Gardner said.

“Even though it’s a traditional venture fund, I run it like an angel group,” he said.

So far, his firm has invested in 18 companies. It likes to be the “first money in a deal,” according to Gardner, and is more than ok with putting capital into companies that don’t yet have revenue.

“We’re the only guys in town that will write a pre-revenue term sheet,” he said.

Besides the local universities and growing number of tech companies opening offices in the region, Gardner points to another asset that North Carolina has: a culture that’s rooted in southern hospitality.

He relates the story of a young woman with a sugar-free candy business who was trying to tape up some candy under every seat at the competition where she was presenting. (The winner would get a $100,000 prize.)

“A number of her competitors got up to help her tape the candy under the seats,” Gardner recalled. “I remember thinking to myself, ‘That probably wouldn’t happen in NYC.’”

In general, he believes the region just has “something special.”

“I believe we’re the best kept secret in VC,” he told Crunchbase News. “I don’t have to leave even the area to find deals. But I don’t think the country has caught up yet with what a hotbed this place is.”

And although Gardner wants there to be more funds in the region, he acknowledges that he’s “making out a like a bandit” because they’re not.

“I’m paying one-fourth in valuations compared to what they pay in the Valley,” Gardner said. “And when you have such a large deal flow, you have a much better opportunity of picking the best companies. I’m a big fish in a pretty small pond.”

Pendo founder and CEO Todd Olson agrees the region has seen “a tremendous increase in the number of new startups, as well as new venture firms and incubators.

Overall, he also noted that the downtowns of both Raleigh and Durham have evolved dramatically. Their transformation into lively centers with high-rises and new restaurants is creating an “attractive enough environment to keep some of the young people here,” Olson told Crunchbase News.

Many people who had left the region to other more expensive urban areas are finding their way back, he said.

“Once they’re ready to settle down and start a family, Raleigh looks very attractive,”  he said. “It’s a place that we’re seeing people want to come back to.”

It also doesn’t hurt a couple giants in tech may soon reside in the state.

Impending Giants

This year, it’s been reported that both Amazon and Apple were eyeing big parcels of land for second headquarter campuses in North Carolina. If both companies did establish campuses in Raleigh, that could mean a $6.5 billion investment and 60,000 new jobs, according to reports. Plus, Apple is no stranger to North Carolina. The company in recent years began work on a $55 million, 100-acre solar energy farm that generates 17.5 megawatts of power for the company’s large data center in Maiden, North Carolina.

A source told me that the Amazon campus deal was a no-go but that the Apple plans were more likely and would probably involve incentives from the state. A NC economic development official told me she could only comment “once” Apple made its own announcement. (You can interpret that any way you like.) But since the iPhone maker is notoriously secretive, most people are refusing to comment when asked about the possibility. But we should point out that CEO Tim Cook is a graduate of Duke’s Fuqua School of Business, along with a number of other top-ranking executives in the company.

For Gardner, the arrival of a large new campus for either Amazon or Apple would be what he describes as a “mixed blessing.”

“If either of them were to locate here, it would be great to have the jobs, tax bases, and credibility in the area,” he said. “At the same time, one of the great things about this area is the low crime, great schools and healthcare, low pollution and low traffic. As you get these mega companies starting to come here, you start to compromise some of those things.”

Since I grew up and went to undergrad in North Carolina, I have to say I feel a certain sense of pride at how the state has made a name for itself in the tech and startup community. And from the way things look and what I hear from people on the ground in the state, this could be just the beginning of a whole new chapter for North Carolina.

Top Image Credit: Li-Anne Dias.