Startups Face Funding Hurdles, but Gaining Steam in Raleigh

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Scott Moody could have moved to San Francisco or New York or Austin in 2012.

He sold the computer and mobile security firm AuthenTec for a reported $356 million to Apple last October and was ready to leave Melbourne, Fla., where he’d raised his family and spent 14 years building the business.

Moody had money to invest and knowledge to share. He wanted to be part of a community committed to building high-tech businesses that could transform industries and create jobs.

“I made a bet on this area, that the infrastructure would continue to build,” said Moody, who chose Raleigh last December and has since plunged himself into the local movement to make the Triangle a top five region nationally for entrepreneurship.

Moody’s decision wasn’t entirely in a vacuum. He graduated from N.C. State University in 1980 and has a daughter enrolled at the school. But what he saw in Raleigh, and the wider Triangle area, was a place where his deep connections with venture capitalists around the nation and his experience running a startup technology business would be valued and welcomed.

He saw a place flush with tech and life science startups — at least 1,800, according to the Council for Entrepreneurial Development (CED) — and with three universities ramping up efforts to create companies from cutting-edge research. Innovative corporations like SAS, Cree, Red Hat and Epic Games call the Triangle home; it was a hub of research and development for global technology leaders like IBM, Cisco Systems and GlaxoSmithKline. New fashion, food or craft beer businesses were popping up almost weekly.

Forbes named Raleigh a “Next Big Boom Town in the U.S.,” “Best Place for Business and Careers,” and one of “America’s Most Wired Cities.”

But missing were the Silicon Valley investors roaming university corridors and co-working spaces in search of the next big thing. Lacking were serial entrepreneurs trying their hand at a second or third startup, while mentoring and investing in other promising opportunities.

“It’s just a little immature,” Moody said. “The region needs more capital and more experienced founders.”

The lofty Top Five goal — considering the headway already made by San Francisco’s Silicon Valley, New York City, Seattle, Boston and others — came more than a year ago when community organizers hosted the first Innovate Raleigh event.

After several years of little startup activity in the mid-2000s, they’d seen momentum building with the sales of homegrown startups ShareFile to Citrix Systems in late 2011 and iContact to Vocus early in 2012. The group hoped to identify other promising entrepreneurs in the city and determine how to better support and promote their growth.

A goal of Innovate Raleigh was also to attract more investors to the region. Raleigh fell far behind peer cities for its access to capital, earning it a local reputation as a place difficult to raise money to grow a business. Finally, Raleigh needed a critical mass of startups interacting with each other, a central place where entrepreneurs could gather, learn and collaborate.

The group looked to Durham as a model. There, entrepreneurs, the city and Durham Chamber of Commerce partnered to make the American Tobacco complex a hub of startup activity, housing the offices of software developers, graphic designers and venture capitalists, co-working space for entrepreneurs, and the Triangle Startup Factory, the region’s only business accelerator program mentoring and training national technology startups. Bars and restaurants opened in street-level retail spaces around them.

“Durham had cheap, cool, urban, dense space, and American Tobacco became an epicenter for startups,” said Chris Heivly, a MapQuest co-founder and serial entrepreneur who started the accelerator. “RTP couldn’t have done this, because it’s not dense enough. You don’t bump into people like you do at [Durham’s] Tyler’s or on Main Street at Beyu.”

Soon, work was underway to establish the HUB Raleigh, a co-working and meeting space on Hillsborough Street. Developed by husband and wife tech entrepreneurs Jesse Lipson of Citrix/ShareFile and Brooks Bell of Brooks Bell, the HUB would offer educational programming for entrepreneurs and others, as well as desks and offices for rent, event and meeting space. Lipson then announced plans for Citrix to renovate warehouse space downtown, create 337 more jobs and lure other startups to move beside it. The facility opens late in 2013.

HUB Raleigh

HUB Raleigh opened last year, offering small offices and co-working space for startups. Photo by Blake Perdue/HUB Raleigh.

Meetups of those in the entrepreneurial community began to happen monthly throughout 2012. A second Innovate Raleigh event in January 2013 attracted several hundred attendees.

And late last year, the city of Raleigh hired its first innovation and entrepreneurship manager, Derrick Minor, to network with startups and find ways government and other regional organizations can support them. A key role is uniting around events and promotional efforts with leaders in Durham, Chapel Hill, Cary, Morrisville and elsewhere in the region.

“We look at the areas we’re competing against, Silicon Valley, New York, Boston or even Austin. We’re still much younger from the standpoint of initiatives in place,” Minor said. “Regionally is where we have the most power: the three universities, the enclave of tech companies and employers. We have to work together.”

CED got to work building an interactive tool that maps and provides detailed data about the region’s startups and organizations that support them. It launches this spring.

NC State also got involved. It’d recently created the Chancellor’s Innovation Fund to make small investments in university-born technologies to bridge the gap between federal grants and venture capital. The university also beefed up its office that licenses technology and research developed at the university and spins off startups. NC State now launches eight to 10 startups a year versus four to five just three years ago.

The mobilized office recently licensed to a team of NC State graduate students a sponge technology that can draw salt out of water. The university’s officers made introductions to venture capitalists in the region. And the company, called Tethis, raised $800,000 within weeks.

Social entrepreneurship, arts entrepreneurship and technology entrepreneurship programs were added. Opening this fall, a new Live Learn community is meant for 1,200 students interested in entrepreneurship. The initial 200 spots have already been claimed.

“We provide an innovation engine for the community, with lots of great ideas coming from our students and faculty that we can turn into new enterprises,” said Terri Lomax, vice chancellor for research, innovation and economic development.

Similar efforts are underway at Duke University and the University of North Carolina at Chapel Hill.

But there’s still work to do to solve a funding shortage that happens when startups need to raise their first round of institutional venture capital in this region.

According to a MoneyTree Survey Report from PricewaterhouseCoopers and the National Venture Capital Association, venture capital investment into North Carolina slowed in 2012, to 35 deals worth $168 million. That’s compared to $304 million in 2011 with 48 deals and $428 million in 59 deals in 2010.

CED’s only local data is aggregated from 1997 to 2011. It estimated that $7.7 billion went to 400 Triangle-area businesses during those years.

Those statistics don’t usually factor the investments totaling $100,000 or $300,000 made by private individuals and angel investors. They also leave out corporate investments or acquisitions. CED said that 200 corporations in the Triangle area acquired other firms in the last 15 years. At a recent regional entrepreneurship event at Research Triangle Park, venture capital executives at IBM and Fidelity shared about their involvement with startups globally and locally.

Heivly argues that it’s too soon to measure the companies that have just formed in the last two years. Many are self or angel-funded and have yet to raise a true round of funding.

“Capital is not frothy by any means. It’s one of the challenges,” he said. “But I’ll go to my grave saying that great companies and great entrepreneurs get funded. One reason there isn’t a lot of money here is there haven’t been a lot of great companies and entrepreneurs.”

He and Moody believe that’s changing. Moody has made two local investments, in online video delivery startup Joosy, and Pengo Loans, which is making loans to small businesses in Africa. He’s helping companies like WedPics, a mobile wedding photography startup, find outside investors.

Heivly helped 11 Triangle Startup Factory companies raise nearly $3 million in the last year. Five companies received $50,000 each when they began the program this spring.

“Naturally, I’m not a patient man,” Heivly said. “But I’ve found a more patient view of this than anything else in my life.”

Some entrepreneurs will still need some convincing, even as the startup community matures.

Take George Saines for example. He’s commuting to San Francisco two weeks every month to start a mobile gaming company with his co-founders in another business.

He was skeptical he could build a tech business with high growth potential in his adopted hometown of Raleigh.

“If there were four American Undergrounds spread over the Triangle, three HUB Raleighs, six co-working spaces in the Park, I would have been much more willing to consider,” Saines said. “But there is so much inertia in the Valley that you either have to have inertia like the Valley magically or you lose.”

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