Big money for N.C. tech stars comes from out of state
By Mike MacMillan
For North Carolina’s hottest tech companies, seeking substantial funding is a lot like recruiting for Duke basketball: Coach K goes out of state to get results. Duke’s all-star roster features players from Canada, Pennsylvania and South Carolina, among other places, with a single Tar Heel in the mix. Likewise, four of North Carolina’s most promising tech companies have recently raised from $43 million to $170 million, virtually none of it from in-state sources.
For the entrepreneurs building these businesses, what matters is that capital is available, investors understand the opportunities and founders’ visions, and valuations are attractive. Sure, it might be easier to walk across the street than fly across the country to meet with a partner. But in the end, it’s more important that the money is there.
Still, sources of funding matter for those thinking about North Carolina’s future as a center of innovation, particularly in technology. “We’ve seen huge progress in building out capital vehicles, particularly in the early stages,” says Ted Zoller, director of the Entrepreneurship Center at UNC’s Kenan-Flagler Business School. “But in North Carolina, capital is underweight relative to the deal flow we enjoy as an innovation-driven region.” While North Carolina groups and wealthy individuals are providing 75% of early-stage and 95% of seed funds, “companies looking for funding in the $10 million to $50 million range are often having to go elsewhere to find it.”
About 65% of the out-of-state investment capital put to work in North Carolina is from the New York metro area, Zoller says. Boston and California are other major sources. Collectively, these later-stage investments account for 50% to 60% of all equity capital invested in the state.
Raising money locally has advantages for the state and companies, says John Fogg, a partner in the Chapel Hill office of the Robinson Bradshaw law firm who previously practiced in Silicon Valley. For example, it’s easier to address issues that arise on a real-time basis. More fundamentally, Fogg says, “Local funds often draw a good portion of their capital from local limited partners. When they’re successful, that money goes back to local investors who reinvest it, and the cycle becomes self-perpetuating.”
North Carolina’s two largest private-equity firms, Ridgemont Equity Partners and Pamlico Capital, each have more than $2.5 billion of assets under management, but the Charlotte-based funds have made relatively few local tech investments. (One exception: In August, Pamlico put $19 million into Charlotte-based Airwavz Solutions Inc., which provides wireless service infrastructure in office buildings and hotels.) Some of the state’s most active tech investors historically, such as Durham-based Intersouth Partners, aren’t involved in new deals.
It’s not that North Carolina companies are doing poorly in attracting money. In 2017, the state ranked seventh in private-equity investment, with 112 companies pulling in $24 billion in capital, according to the American Investment Council, a Washington, D.C., trade group. Through the first three quarters of 2018, 151 companies had attracted $9.5 billion. As for earlier-stage venture capital, 79 companies received $868 million through the first half of 2018, according to the PitchBook-NVCA Venture Monitor report.
Startup investing has a Darwinian aspect, of course. “Funding is always difficult to obtain, but that’s good,” says Ryan Stone, co-founder and president of Charlotte-based SmartSky Networks, which offers an innovative Wi-Fi service for aircraft. “Otherwise, ideas that shouldn’t get funded get funded. As an entrepreneur, it’s your job to convince others that what you’re doing is valuable.” While North Carolina is “not the same as Silicon Valley, a lot of people in the state are willing to take early-stage risk, usually the hardest round.”
Here, we take a look at four promising N.C. companies that raised substantial capital in the last year or so. Each had early investors from North Carolina; each relied on money from outside the state for their latest funding.
While finding and paying for a parking space might not seem particularly high-tech, keeping track of the hundreds of millions of spaces on streets and in lots is complex. That’s created a huge opportunity for Charlotte-based Passport Inc., one of two national leaders in providing mobile solutions for consumers to pay for parking, transit and other services. The company has raised about $58.5 million, including $43 million in late 2017 from Bain Capital Ventures. Revenue has repeatedly doubled annually since its founding in 2010, while gross margins exceed 75%. Not surprisingly, many investors want their spot.
“We were able to conduct a reverse roadshow [for this round],” CEO and co-founder Bob Youakim says. “Interested investors came to our office in Charlotte.” Aided by strong demand, he adds, the company’s private-market value is in line with companies experiencing “hyper growth.”
Passport partnered with Bain because of its experience in the financial-technology sector, cultural fit, and its ability to advise on acquisitions and other growth strategies. “They have experience with fintech and enterprise SaaS [software as a service] companies like ours,” Youakim says.
Bain liked the company’s approach and the size of the market opportunity, says Matt Harris, a managing director in Bain’s New York office who focuses on mobile payments. “They recognized that the municipality is the customer, and they provide an integrated solution to a range of transportation challenges,” he says. Harris, who is a Passport director, says that roughly $3.5 billion in revenue is generated annually by public-parking payments, with 10% passing through mobile phones. He expects that share to expand to more than 50% over the next few years. Further, just 40% of cities offer a mobile solution.
In 2010 and 2012, Passport raised early-stage money from Grotech Ventures, whose lead partner, Don Rainey, split time between Charlotte and the company’s Arlington, Va., headquarters.
Though no North Carolina firms were in the final round last year, Youakim says Bain Capital’s investment in Charlotte-based AvidXchange helped spark his initial interest.
Bain views Charlotte as a good place to invest. “The worst thing for a company is shrinking, but the second worst can be growing too fast,” Harris says. “Finding engineering talent [to support growth] is hard. North Carolina has a high-quality, highly educated workforce, and that’s important.” He says Passport is on a similar trajectory as AvidXchange, which has grown from a few hundred employees to more than 1,400 in the last five years. Both companies “are on the cutting edge of mobile payments, and that’s a good place to be,” Harris says.
SmartSky has been a state leader in attracting capital, raising $170 million through a private placement managed by Goldman Sachs. In 2018, it added $18 million from a group of firms including Meritage Funds, Platform Partners and Tiger Infrastructure Partners. Total investment tops $250 million, company officials told Business North Carolina in August 2017.
While the PE firms are not based in North Carolina, Tiger Infrastructure has deep roots here. Investor Julian Robertson, a Salisbury native and founder of an investment firm affiliated with the Tiger partnership, is a senior adviser and minority owner.
SmartSky is developing two-way communications between airplanes and the ground that are 10 times the speed and capacity of existing aerial Wi-Fi connections. In other words, users theoretically get a broadband-like Wi-Fi experience on the plane. The company wanted investors who understood the importance of network infrastructure. “It’s like cellphones — you have to have the infrastructure first,” CEO Ryan Stone says. “Our investors understand that once you have the network, there will be plenty of subscribers.”
The business requires space on cell towers, and the company’s leading backer, Houston-based Platform Partners, is chaired by Fred Lummis, a former CEO of American Tower Corp., a global operator of towers and other wireless infrastructure. It would be more convenient if capital were available locally, Stone says. “But when you reach a certain size, you have the resources to cast a wider net.”
Finding the right investor base depends on how the company is progressing, Stone says. “[Attracting capital] has been a natural extension of executing on our business plan.” He’s pleased with the value investors are placing on SmartSky. “[They] are recognizing that we’re hitting our milestones.”
Since raising $75 million in January 2018, Raleigh-based drone-services provider PrecisionHawk has completed five acquisitions. The most recent, Chicago-based Uplift Data Partners, sells drone-based inspection services for the construction and facilities-management industries.
The purchase strengthens the company’s leadership position in a market that Goldman Sachs estimates will generate as much as $13 billion in revenue through 2020. ”One reason for doing this capital raise was strategic M&A,” CEO Michael Chasen says. “At this point, we’re the No. 1 provider of drone technology in agriculture, No. 1 in energy and renewable energy, and No. 1 in construction.”
That market position appealed to New York-based Third Point Ventures, an affiliate of the hedge-fund company led by activist investor Daniel Loeb, which led the most recent funding. Other first-time investors included Comcast Ventures, which is part of the giant cable and broadband company.
“There’s a lot of capital out there, and the fact that North Carolina is a growing tech center contributes to the willingness to invest in the region,” says Chasen, a former CEO at education software company Blackboard. PrecisionHawk looked for partners with experience in drones and robotics or other sensors. One new investor, ClearSky, has substantial investments in energy, one of the five key markets targeted by the company.
Though the latest funding doesn’t include local firms, PrecisionHawk has strong roots in the state. Red Hat Inc. co-founder Bob Young was the first investor in 2014 and remains a director.
Chasen says North Carolina also has an advantage over bigger metro areas because there is room to fly. “You can’t fly drones over the Washington, D.C., area. You have to have space to do your testing and development.”
Raleigh-based Pendo electrified the Capital City in early December by announcing plans to add 590 jobs over the next five years. The cloud-based software company, which helps digital product developers work more efficiently, closed a $50 million round in September led by Sapphire Ventures of Palo Alto, Calif. Previous investors include three other Bay Area institutions: Spark Capital, Meritech Capital Partners and Salesforce Ventures, along with Durham-based IDEA Fund Ventures, according to Crunchbase, which tracks private capital raising. Total capital raised is about $106 million.
“At our stage and scale, it’s all about the metrics,” says Todd Olson, co-founder and CEO. “You want to have good chemistry, but if you have the right metrics, you’ll have a good round. We have good metrics.”
Pendo is addressing a problem “paramount across all businesses,” says Rajeev Dham, a Sapphire Ventures partner overseeing the investment. “Everyone is going software and digital. Pendo adds a layer that helps their customers analyze and better understand the user experience, which is critical.”
To attract big money, Pendo had to make its promise clear. “Investors want Pendo to be a billion-dollar company,” Olson says. “We had to make the case that we have that opportunity in terms of markets and team.”
Sapphire hadn’t invested in North Carolina previously but thinks Pendo has multibillion-dollar potential, Dham says. “You have a few anchor companies like Red Hat or Epic [Games] or Pendo, and they tend to spin out new businesses,” he says. Erik Troan, another Pendo co-founder and chief technology officer, worked for Red Hat for 18 years.
AvidXchange and Wilmington-based nCino are among the N.C. startup software companies growing as rapidly as Pendo, Olson notes. The 2018 Forbes Cloud 100 list of global private cloud-software companies ranked nCino No. 24, AvidXchange No. 42 and Pendo No. 100. Backers of payments-automation provider AvidXchange include Bain Capital Ventures and Mastercard, while nCino is a spinoff of Wilmington-based Live Oak Bank. nCino sells software that helps banks make loans digitally.
“We have raised money locally, but there aren’t a lot of options [in North Carolina] for late-stage VC like this,” Olson says. “If we could get someone from the state involved we would, but our first priority is to build the highest quality syndicate possible.”
That strategy is paying dividends. “We’ve pushed our growth, and our investors have helped by introducing us to potential customers.” Regarding valuations, Olson says, “My goal as an entrepreneur is to at least double the valuation each round. We’ve more than done that.”