OUTSIDE INFLUENCE: The fastest-growing N.C. tech firms are backed by big out-of-state investors, from Daniel Loeb to Julian Robertson.

Author:Macmillan, Mike
Position::HOT TECH COMPANIES
 
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For North Carolina's hottest tech companies, seeking substantial funding is a lot like recruiting for Duke basketball: Coach K goes out of state to get results. Duke's all-star roster features players from Canada, Pennsylvania and South Carolina, among other places, with a single Tar Heel in the mix. Likewise, four of North Carolina's most promising tech companies have recently raised from $43 million to $170 million, virtually none of it from in-state sources.

For the entrepreneurs building these businesses, what matters is that capital is available, investors understand the opportunities and founders' visions, and valuations are attractive. Sure, it might be easier to walk across the street than fly across the country to meet with a partner. But in the end, it's more important that the money is there.

Still, sources of funding matter for those thinking about North Carolina's future as a center of innovation, particularly in technology. "We've seen huge progress in building out capital vehicles, particularly in the early stages," says Ted Zoller, director of the Entrepreneurship Center at UNC's Kenan-Flagler Business School. "But in North Carolina, capital is underweight relative to the deal flow we enjoy as an innovation-driven region." While North Carolina groups and wealthy individuals are providing 75% of early-stage and 95% of seed funds, "companies looking for funding in the $10 million to $50 million range are often having to go elsewhere to find it."

About 65% of the out-of-state investment capital put to work in North Carolina is from the New York metro area, Zoller says. Boston and California are other major sources. Collectively, these later-stage investments account for 50% to 60% of all equity capital invested in the state.

Raising money locally has advantages for the state and companies, says John Fogg, a partner in the Chapel Hill office of the Robinson Bradshaw law firm who previously practiced in Silicon Valley. For example, it's easier to address issues that arise on a real-time basis. More fundamentally, Fogg says, "Local funds often draw a good portion of their capital from local limited partners. When they're successful, that money goes back to local investors who reinvest it, and the cycle becomes self-perpetuating."

North Carolina's two largest private-equity firms, Ridgemont Equity Partners and Pamlico Capital, each have more than $2.5 billion of assets under management, but the Charlotte-based funds have made relatively few local tech investments. (One exception: In August, Pamlico put $19 million into Charlotte-based Airwavz Solutions Inc., which provides wireless service infrastructure in office buildings and hotels.) Some of the state's most active tech investors historically, such as Durham-based Intersouth Partners, aren't involved in new deals.

It's not that...

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