Atlanta-based venture capital firm BIP Capital has released their State of Startups in the Southeast report for the second year, a comprehensive chronicle of recent activity in the region. The analysis offers a high-level look at trends that aren’t commonly well-reported in regions outside VC-heavy coastal cities — the amount of money invested in early-stage companies, the best-performing local industries, and startup valuations both before and after deals.
While the report illustrated the continuation of a trend also highlighted last year — and one those of us in the innovation space are hearing about constantly these days — of investors increasingly moving “beyond the Valley,” it also captured some new, promising statistics for southeastern startups.
Note: BIP Capital’s report considers startups in a 9-state region, including two states, Florida and Virginia, which Hypepotamus does not normally report on. We’ve kept the data the same for the purposes of this article.
More funding, less deals
Let’s look at the first, more-commonly documented trend. Investors are increasingly evaluating and selecting companies outside of the big technology hubs to invest their money in. Total funding in the Southeast has averaged a 20.6 percent annual growth rate over the last two years. This year, the region should expect to see about $6 billion in total VC funding.
On a state-specific basis, every state with the exception of Mississippi (decreased) and Georgia (stayed exactly the same) saw an increase in total funding in the past five-year period when compared to last year’s report.
This funding is not all coming from within. Of the 45 most-active VC firms in the region that the report identified (using the top five most-active per state), almost one-third were headquartered in the tech hubs. The coasts, from Silicon Valley to New York, are beginning to recognize the South.
“The impact we’re seeing is a steady rise in interest (and earlier interest) from funds that are based on the West Coast, New York City and Boston in the innovation that is happening in our own backyard,” BIP Capital CEO, Mark Buffington, told Hypepotamus in an email.
One interesting observation is that this funding increase is not due to an increase in the number of deals — rather, the contrary. Mid-year numbers for 2018 show the smallest number of deals in the previous 5-year period.
What does this indicate? A few factors could be at play here. One, companies are remaining in the Southeast as they grow and scale, rather than feeling the need to relocate to the coasts. More mature companies attract larger deals.
Two, the rise of the mega-fund, illustrated by the SoftBanks of the world, is having an effect all across the U.S., not just in the tech hubs. Equity funding rounds, in general, are simply getting larger.
Getting more for your money
As anyone who has traveled abroad knows, in different places you can see a very different value for your dollar. One would likely think the same principle would hold true for startup investments.
“We anticipated that we would find significant disparities in the percent ownership that a dollar buys from region to region and perhaps from state to state,” wrote Buffington in a blog post. “We were wrong.”
Across the U.S., investments generate approximately the same equity percentage of comparable companies. The data showed that an early-stage investment of $1 to $5 million yielded ownership of between 11 and 38 percent of the startup.
But, the data also shows that the pre-money valuations — what the startup is valued before the round closes — are different on the coasts versus in the Southeast. BIP took a look at companies’ revenue figures prior to deals, and found that startups in the Southeast saw higher revenue than their coastal counterpoints that were valued the same.
What does this indicate? Investors in the Southeast are seeing more mature, higher-grossing companies, with less capital than required on the coasts.
“From a geographic perspective, the report confirms that there are plenty of exciting companies in second-tier innovation cities that are innovative and potentially disruptive,” Buffington told Hypepotamus. “This confirms our investment thesis and the investment thesis of many firms around the country.”