CED Innovators Report 2015 Equity

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Last year, the RTP-based biotech company Humacyte raised $150 million, raking in the largest life science investment and the second largest of all deals in North Carolina in 2015. 

The company took an unusual—but increasingly more common—path to raise the funds. Rather than approaching venture capitalists or angel investors, executives signed on as investors 27 family offices from places as far flung as Hong Kong, Dubai, Russia and Kuwait. Only a few investors were from the U.S. 

Humacyte’s story is significant because it highlights several trends in North Carolina's startup ecosystem, all of which contributed to a blockbuster 2015 that brought nearly $1.2 billion in equity funding into the state, a 122 percent increase over 2014 dollars. 

The Council for Entrepreneurial Development (CED) unveiled the impressive stats from its 2015 Innovators Report report this morning. Humacyte's CFO Paul Boyer and tech founder Karl Rectanus of Lea(R)n joined the CED executives to share their stories of raising funds from unconventional, and increasingly out-of-state investors, helping to paint a picture of a very different funding environment from just two years ago, when CED started collecting in depth funding data from 1,500 companies around the state and producing the biannual report. 

CED predicted last September that the state would have a banner year of funding if investments in the second half of the year kept pace with the first two quarters. Reality far exceeded expectations. Total equity funding represented a 122 percent increase from 2014 and a 200 percent increase from 2013. And the funding total isn’t even complete—CED is still waiting for the federal government to release the amount of grant funds dispersed to NC companies in 2015. 

Deals by sector 2015 Innovators Report
Here's a breakdown of equity deals by sector in 2015. Credit: CED

It’s also important to note that the nearly $1.2 billion funding CED reports is 57 percent higher than the $675.5 million the National Venture Capital Association (NVCA) previously reported that NC companies raised last year. The key difference between the two data sets is depth of data. The NVCA only reports venture capital deals reported to the SEC, whereas CED collects data (confidentially) from individual company founders, enabling it to include funding from undisclosed investors, angel investors, family offices and grants. 

According to CED president Joan Siefert-Rose, her team has been able to "uncover a lot of information that doesn't normally show up in other sources."

Let's get into the big trends:

Diversity of investors

Last fall, we noted an increase in funding to NC companies from outside of the state. But with a full year of data compiled, there's an even bigger trend. The investors in NC companies are increasingly more diverse in type, origin and scope. 

While a chunk of deals continue to come from existing NC investors—there were 36 last year—59 percent came from new investors. Of those new investors, 82 percent were from outside of NC. And of the 16 international investors, 68 percent had not invested in NC companies before.

Funders in NC Startups 2015 Innovators Report
75% of institutional investors doing deals in NC were from out of market in 2015. Credit: CED

CED reports 146 unique institutional investors invested in NC companies in 2015 as compared to the 109 counted in 2013 when CED first began collecting this data. Investments from angel groups, family offices, growth equity investors and non-traditional investors rose significantly this year—less than half of the total funding came from VCs. 

Boyer said Humacyte sought funding from family offices because they were able to close deals quickly and were willing to take a short-term risk for a long-term play because they’re not as sensitive to valuations and obtaining immediate returns on investments. And Rectanus, who raised $800,000 last year, was most interested in partnering with investors who were passionate about improving education and EdTech. Most of them (90 percent) happened to be located outside of the Southeast region. 

More and bigger deals

Another trend worth noting is the increase in the number of deals. CED reports that 191 deals were done by 170 companies in 2015—up from 85 deals in 2013. The Triangle region accounted for 78 percent of those deals (with 149) and Durham came in on top with 49. Durham companies also raised the most money—topping $300 million to beat out Charlotte, Raleigh and RTP, the other major hubs of investment activity. 

Durham Equity Deals 2015 Innovators Report
Durham led the state in number of equity deals in 2015. Credit: CED

CED reports the size of deals has grown too. On the tech side, AvidXchange, Inc. in Charlotte raised the largest round at $225 million. Humacyte’s $150 million series B raise topped the life science companies. The median deal size was roughly $900,000 for tech companies and just over $1.9 million for life science companies. The overall median deal size is $1.1 million because many funds go toward the seed rounds of early-stage companies—89 deals were less than $1 million. 

While mid-year, it looked as if life-science companies were going to significantly outpace tech companies in deal size and investments, the final numbers show that tech companies mostly caught up to life science in deal volume. Life science companies did outrank tech companies by about $67 million to total almost $584 million. Tech investment hit nearly $516 million. 

More M&A, less IPO

Another trend noted in mid-year stats—the demise of the IPO—did continue. Only two IPOs were filed in 2015. But overall exit activity rose in 2015, with 22 mergers, acquisitions and buyouts. Acquisitions included Ansible’s sale to Red HatNetsuite’s acquisition of Bronto and Valeant Pharmaceutical's $1 billion purchase of Sprout Pharmaceuticals

It's hard to say if M&A activity will continue with less than two months of data so far in 2016. But CED's leaders see strong activity at the seed stage as a strong indicator that there is a “really strong pipeline” both in tech and life science, and increasing in AgTech and clean tech. Industry diversity continues to be a huge asset for the state.

Impact of national speculation/over-valuation

With such a big 2015, it’s hard to imagine topping these numbers in 2016. Especially since the stock market has taken a dive, investors are being more cautious and valuations are down

But CED's data seems to show companies being more resilient because they're less reliant on traditional funding sources. They've also maintained reasonable valuations, which could prove to be an advantage for NC since the high-valuation companies or those seeking to be highly-valued are taking hits in different parts of the country.

Along with CED and the rest of the region, we'll be closely monitoring investment activity in 2016, so stay tuned. But in the meantime join us tonight from 8-9 p.m. for a Twitter chat with CED's Dhruv Patel, who compiles the stats for the Innovators Reports and stays in regular touch with dozens of investors around the world. He'll be answering questions about today's data dump and what it means for local companies and the community.