The Latest Trends in Angel and Venture Capital

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Amid the madness of March and signs of spring, it’s also time for two other important milestones on the calendar for early stage investors – tax time and annual reporting season.  The Angel Resource Institute and the National Venture Capital Association recently released their annual reports for 2015, and the South Carolina Secretary of State recently reported 2015 numbers for the state’s Angel Investor Tax Credit.

A quick study of the data reveals several insights and trends worth noting for those of us working to improve the environment for early stage capital formation in the Upstate and beyond.  By many measures, 2015 was a record-setting year – but beneath the surface, disturbances began to create waves that entrepreneurs and investors shouldn’t ignore.

Venture Capital Cresting

2015 was a landmark year in venture capital, with a total of $59 billion deployed in 4,380 deals, yielding an average of $13.5 million per investment.   The investment total is the second highest mark of all time – trailing only the peak of $105 billion at the height of the dot-come bubble in 2000. The average investment level in 2015 did set a new high water mark, edging the $13.1 million per investment in Y2K.

However, a significant portion of the funding growth in 2015 was driven by an upswell of later stage investors like major financial institutions and corporate venture arms. Many of those firms helped create over 100 so-called unicorns – venture backed companies valued at $1 billion or more but not yet public.

The drastic increase in funding drove valuations to extreme heights – while exit events (acquisitions or IPOs) declined substantially in the latter half of the year. The imbalance reached a tipping point in the fourth quarter, with a sudden and drastic pullback in venture investments. Many in the venture world are now warning entrepreneurs that we have entered a new downcycle and that funding has suddenly gotten much tougher and valuations have returned to earth.

Here in South Carolina, that’s nothing new. Last year, South Carolina attracted $54 million in venture capital across only seven investment rounds.   Comparatively, Georgia attracted $836 million in 71 deals, while North Carolina attracted $676 million in 64 deals.  On a per capita basis, North Carolina and Georgia brought in seven and eight more venture capital than South Carolina’s $11 per person.

But all is not lost here at home. While we clearly have a long way to go to attract a level of venture capital commensurate with our growing ability to deploy it, we have also avoided the hype cycle that has negatively impacted investors and entrepreneurs in other markets – and therein lies opportunity.

The Halo Effect

On the angel investing front, the massive growth in venture capital funding had significant spillover effects. The 2015 Halo report from the Angel Resource Institute indicated that valuations for seed stage investments increased over 50 percent from 2014 to $4.6 million, while median round sizes jumped 67 percent from $510k to $850k. The report also showed that average angel round ownership remained in the 20-25 percent range and that angels continue to prefer investing close to home, with roughly 75 percent of investments remaining in the angels’ home region – consistent with our experiences here.

As with the venture capital data, the summary Halo report masks important distinctions. While valuation pressures have increased significantly in traditional hot spots for early stage capital, they have remained much more stable in markets like ours where risk capital is more scarce. Accordingly, angel investors in South Carolina who are planting the seeds for viable new ventures to take root here are able to enjoy much more attractive pricing for investments than in overheated markets elsewhere.

At the same time, with the progress of efforts like the South Carolina Angel Network and Palmetto Angel Fund – which now include over 200 investors across nine angel investor groups from Asheville to Greenville to the coast – our local angels are banding together to help fill larger angel rounds. That solidifying foundation will help more of our companies build the traction necessary to attract more venture capital.

Angel Credits Working

Another strong piece of evidence for an improving funding environment in South Carolina comes from the Secretary of State’s data on the 2015 angel investor tax credit. Last year, angel investors applied for $5.4 million in tax credits for $15.4 million of investments in qualified startup businesses – which for the first time exceeded the total available allocation of $5 million. The 2015 total was up 85 percent over 2014 when $2.9 million in credits were claimed by 92 investors for just $8.2 million in investments.

Collectively, those qualified businesses have created over 500 jobs at an average pay of roughly 2.5 times the state’s per capita income.   Clearly the credit is having the intended effect on capital – and job – formation.

We certainly have a long way to go to attract and deploy the levels of venture capital needed to fuel South Carolina’s future, but it’s a long game and we’re making progress. With a growing and more efficient angel market, an evolving entrepreneurial ecosystem and several promising exits on the horizon, we should expect to see more early stage capital supporting new ventures across the state.

We are excited to be part of that promising trend, and we invite interested investors to contact us to learn how to join the effo