Venturing beyond VC

Venturing beyond VC

Venture capital is declining nationwide, but that is not stopping Research Triangle entrepreneurs.

Venture capital deals in the region peaked in 2007 with 62 transactions totaling $461 million and involving 51 companies. By contrast, 2013 saw only 27 deals, the fewest in the past decade.

The lack of local capital is a longstanding problem, said John Glushnik of Intersouth Partners, a Durham VC firm that invests throughout the Southeast and frequently partners with out-of-state funds.

“I think there is a consistent level of deal flow and deal activity and (out-of-state) funds travel here a lot,” he said. “But there’s not a lot of venture capital that is domiciled in the region. We fight to import capital into the region.”

“My worry is the (funding) rounds after the angel round,” said Jan Davis, head of Triangle Angel Partners, an angel funding network. “We really need people to come from elsewhere, from D.C. or Atlanta, because there’s just not enough local money.”

However, VC has never been the primary source of funding for entrepreneurs. Here’s how three local companies launched themselves with little or no help from traditional VC.

Bronto Software

A Durham provider of a cloud-based marketing platform for retailers, Bronto never sought or received outside investment, said CEO Joe Colopy. Instead, Colopy and COO Chaz Felix, both veterans of Red Hat, stayed lean, teaching themselves to do much of the coding and design and expanding only as their revenues permitted.

That self-reliance was made easier, Colopy admitted, by a general lack of interest among investors in Bronto, which 11 years into its existence, has more than 170 employees and annually makes Inc. magazine’s list of 5,000 fastest-growing companies.

“And when people would approach me, local angels or early stage VCs, it was always, hey, well, it would be great if you had a million dollars in revenue or more key customers. What would happen is when I got there, I was, like, why do I need you?” he said.

Even now, while Colopy is regularly wooed by investors with the potential of being able to grow Bronto faster, he remains wary: “I firmly believe that a lot of people raise money to kind of cover up problems or they don’t really know what they want so they think, oh, I’ll just raise money, that will solve all my problems.”

Most of all, Colopy values the control he hasn’t lost to investors: “We’ve built ourselves this way and so if we were to raise money it, of course, would have advantages, but it would also change us and our business.” 

Organic Transit

When Organic Transit went to raise money it had the advantage of a product with a passionate fan base. Organic Transit makes the ELF, a three-wheeled, teardrop-shaped, solar/pedal hybrid vehicle.

Bike enthusiasts and people who believe in carbon-free transportation have provided much of the funding. After trying the ELF, a local architect gave CEO Rob Cotter money and a free workspace. Cotter went on to raise about $1 million through several small angel rounds and a Series A round, mostly from fellow enthusiasts.

Late last year, the company launched a Kickstarter campaign, taking ELF pre-orders for $4,000. Cotter set a goal of $100,000, but sold 51 models and raised nearly $226,000 through the campaign (Jerry Seinfeld bought one).

Cotter said he deliberately has kept his fundraising limited: “We raised money only when we needed it and when we needed it. The valuation has gone up as the progress of the company has increased.”

Like Bronto’s Colopy, Cotter does not like the idea of surrendering even partial control to investors.

Now based in a former appliance store in downtown Durham, Organic Transit has opened an assembly facility in California to meet West Coast demand and is eyeing Europe for expansion. Cotter predicted the company would have $3 to $5 million in orders within 10 months.

Advanced Animal Diagnostics

This manufacturer of onsite testing for mastitis in dairy cows has cobbled together money from a variety of sources, including angels, a private nonprofit, a traditional VC firm and one of the largest pharmaceutical companies in the world.

President and CEO Joy Parr Drach said AAD raised about $1 million in angel funding while simultaneously getting a grant from the North Carolina Biotechnology Center, a private nonprofit that boosts the state’s biotech industry. The grant paid the salary of a post-doctorate researcher for two years and the center also loaned AAD $25,000.

“That $25,000 might not sound like much, but at that point in the company’s history the $25,000 was really important,” Drach said.

In 2011, the company closed a $17 million institutional round led by Intersouth. Partnering with Intersouth was Novartis Venture Funds, the Boston-based investment arm of the giant Swiss pharmaceutical company.

Corporate VC is a growing source of funding and not only for strategically aligned startups. Such giants as Google, Intel, SAP, Microsoft and Bloomberg are investing for returns and diversification as well as R&D and possible acquisitions. In addition, corporate VC is beginning to make Series A investments, helping fill the gap left by private VC.

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