22 deals push N.C. to 6th spot nationally in VC funding

The pace of U.S. venture capital investments remained steady at $7.4 billion during the second quarter despite a wobbly stock market that has made it increasingly difficult for the financiers of new ideas to cash out of startups.

The amount of money spread across 990 deals in the April-June period was unchanged from the same time last year, according to figures released Saturday by the National Venture Capital Association, PricewaterhouseCoopers and Thomson Reuters.

North Carolina firms secured $211.2 million spread across 22 deals.

In Georgia, 18 firms landed $107 million in funding.

Two South Carolina investments totaled $12 million.

The second quarter for North Carolina was a sharp improvement from the first quarter when 13 deals generated $72 million.

The biggest deal in the quarter was the $44 million landed by SilkRoad Technology, a software-as-a-service firm based in Winston-Salem. Argos Therapeutics generated the largest deal in the Triangle with a $34.8 million investment.

Despite the SilkRoad deal, most deals (19) and most of the remaining $211 million in transactions were generated by firms across the Triangle.

"I was very happy to see the number of deals and the amount of investment despite the turbulence in the economy," said Laura Hoke of the PriceWaterhouseCoopers practice in Raleigh. "I'd love to say that this is a sustainable trend."

Biotech generated the most deals (7) and funding ($95 million). However, led by SilkRoad, the software sector produced five deals worth some $50 million. The software sector has lagged recently in North Carolina, often leading former PwC partner Jeff Barber to say it had "fallen off the map."

Mitch Mumma, one of the top veteran venture capitalists in the Southeast, called the quarter a "solid one" for the Triangle. "One hundred fifty seven million is a good number, and it was not dominated by one single transaction," he said, referring to two closings by mobile applications firm Motricity in 2007 that skewed numbers higher.

Mumma, a partner at Intersouth Partners in Durham, also liked the spread of deals across multiple categories. "Ten of the 19 tech-oriented deals were related to software," he said.

However, Mumma noted that only five of the deals were first round investments, indicating a possible lag in new ventures entering the market. Intersouth backed one of those, semiconductor firm Beeco. Intersouth also participated in four so-called follow-on rounds - deals where investors put more money into existing investments.

Given the state of the economy and the lack of "liqudity events" (stock offerings or mergers-and-acquisitions through which investors cash out of companies), Mumma said VC firms had little choice but to "support" their portfolio lineup.

Just five startups funded by venture capitalists have completed IPOs so far this year, and none of them made their stock market debut in the second quarter. It's the first time in 30 years that an entire quarter has passed without at least one IPO by a venture-backed startup.

To make matters worse, fewer buyers appear interested in acquiring startups. Through the first half of the year, the number of acquisitions involving startups backed by venture capitalists had dropped by 28 percent from last year, according to the National Venture Capital Association, a trade group.

The phenomenon is forcing venture capitalists to pour money into older startups for longer periods than they anticipated while also depriving them of a chance to realize a gain from their earlier investments.

Meanwhile, entrepreneurs trying to raise money for their first time are having a tougher time.

The number of first-time financings completed by venture capitalists usually rises from the first quarter to second quarter because of seasonal trends. But this year, the number of first-time financings fell for the first time since 2001 when venture capitalists were still sifting through the ruins of the dot-com bust.

The current conditions aren't as bad as 2001's devastation, but more venture capitalists are starting to worry, said Trevor Loy, managing partner with Flywheel Ventures.

"It's a measured concern at this point," he said Friday. "We view it as a cyclical phenomenon. Clearly, the longer it plays out, the more we would have strong concerns."

Loy and other venture capitalists think this is a prime time to be on the look out for promising startups that are being shunned because of the uncertain economy.

Since it typically takes at least five years for a startup to mature into an IPO candidate, its makes sense for a venture capitalist to try to negotiate an investment on favorable terms with cash-starved entrepreneurs now, said Michael Eisenberg, a general partner with Benchmark Capital.

"Investing when there is some despondency in the market means you can set yourself up for some good returns down the road," Eisenberg said.

Venture capitalists made their some of their biggest bets in the second quarter on Internet startups, which attracted $1.53 billion, up 49 percent from a year ago. The push to find alternative sources of energy - a crusade commonly called "clean tech" - elicited $883.6 million in venture capital investments, a 62 percent increase from last year.

Meanwhile, venture capital investments in the software sector fell 19 percent to $1.25 billion while biotechnology investments declined 14 percent to $1.08 billion.