By Jason Caplain

As we near the end of 2004, the timing seemed right to look back on the local venture capital market for the last 12 months. Based on the numbers I reviewed for this column, which were all pulled from PricewaterhouseCoopers, Thomson Venture Economics and the National Venture Capital Association, most entrepreneurs seeking ‘seed-stage’ capital are probably looking forward to 2005.

How Does North Carolina Stack Up in the Southeast?
Historical data shows that during 2002 and 2003, North Carolina-based companies grabbed about 33 percent of the dollars that venture capitalists plowed into the Southeast. However, that percentage is down to 25 percent for the first three quarters this year with $220 million being invested in 43 N.C.-based companies. Companies based in Georgia raised more money in 2004 and that is affecting North Carolina’s percentage drop. Unfortunately, the $220 million invested in the first nine months of the year are the lowest in our state since 1997.

Venture Capital Not Available for Most Start-Up/Seed Stage Companies
How bad is it? Depends who you ask. Many venture capitalists shied away from investing in seed-stage companies this year. Despite all of the good business ideas floating around, just three start-up/seed stage companies received funding in North Carolina during the first nine months of 2004. This demonstrates an ongoing and significant need for more local seed-stage capital.

Growing Trend in Biotechnology Investments
Not a big surprise to many was that biotech companies are the biggest sector grabbing venture capital. This has been a growing trend every year since 1999 when 11.4 percent of the capital deployed went into the biotech sector with it now up to 29.1 percent.

‘Expansion Stage’ Companies Get the Attention
Capital was more readily available for expansion stage companies, which have demonstrated significant revenue growth, but may or may not be showing a profit. This year, over 50 percent of the companies in North Carolina that received funding were in this category. There are several companies in North Carolina that are closing in on large rounds of venture capital. All of them are recognized as expansion stage companies. The capital seems to be more available and at attractive valuations for companies that have gained significant traction within their industry.

With more interest in companies at this level by venture capitalists, some companies are seeing competing term sheets. As a recent example, one local company received five term sheets from out-of-state funds. That put the management team and existing investors in the driver’s seat as they were able to carefully select their investment partner. While this is not a common occurrence, it demonstrates that market conditions have changed favorably for expansion stage companies in 2004.

Helping fuel this even further are the venture capitalists outside of North Carolina that visit here frequently shopping for investment opportunities. Also, the number of calls I am receiving from venture capitalists from outside our state interested in looking here for the first time is growing. Some of them are planning their first trip to North Carolina in 2005. What they like about North Carolina is that the valuations are more attractive here, the cost of building a company is less expensive and the competition for deal flow is typically a lot less than what they see in Boston or Silicon Valley.

For more information on the quarterly or annual historical numbers, visit www.pwcmoneytree.com, www.ventureeconomics.com and www.nvca.org.

Jason Caplain is a partner with Southern Capitol Ventures, a Raleigh-based venture capital firm dedicated to helping outstanding entrepreneurs build market-leading companies. Southern Capitol Ventures provides capital and strategic guidance to early-stage technology and life science companies across the Southeast. Select portfolio companies include ChannelAdvisor, Motricity, Synthematix and Batanga. Jason can be reached at jason@southerncapitolventures.com.

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