Earlier this week, BIP Capital released its 2nd annual “State of Startups in the Southeast” report. You can download the 2018 report here and the 2017 report here. This report takes a unique look at the environment for startups raising capital in the SEC states of Florida, Georgia, Alabama, Tennessee, South Carolina, North Carolina, Kentucky, and Virginia. The focus of the report is on changes in valuations, investment velocity, deal size, and geographical activity. In my analysis of the report, I focus on what’s going on in Georgia, and the general trends towards the Southeast – mainly Georgia – competing with Silicon Valley, Boston, and NYC as startup innovation hubs.
Data supports the the common assumption that companies in the Innovation Hubs are raising significantly more capital at earlier stages in the company lifecycle. – In other words, investors in the valley, Boston, and NYC are betting more dollars earlier in the startup’s lifecycle than investors in the SE. This fact supports the general understanding that the south is a more conservative investment environment. We’re not ready to make big, early bets. Yet.
Funding in the Southeast has grown significantly since 2016, averaging 20.6% annual growth over the last two years (we are currently on pace for $6 billion this year). – When someone asks me what Atlanta is like as compared to Silicon Valley, NYC, Boston, and other places, my interpretation is this: Atlanta is a teenager. We’re smart, athletic, talented, but we’re young, and we don’t know what we don’t know yet. We don’t have the experience that San Francisco has for making massive bets and enjoying multi-billion dollar exits, but we’re moving in that direction. We’re growing up.
On average, a company with $1M in revenue is priced at $3.8M in the Southeast. That same business would be priced at $8.8M in one of the Innovation Hubs. That is a meaningful difference. – Simply put: go outside the southeast, and get a higher valuation earlier. This one also supports the theory that we’re still young, and we don’t have the experience (yet) to see the future value of certain companies, so we we value them lower than VC in CV, NYC, and Boston.
While the valuation may be the same, the company in the Southeast is a more mature company, with more revenue (more than twice as much, in fact). – Almost a repeat of the previous point, with a significant difference: traction. More traction (revenue) is required in the SE to get the same valuation as in SV.
As the IPO window has moved up market, more value is being created in the private markets. In order to access this value creation, people and institutions alike are investing through private equity, growth equity and venture capital. – If this observation doesn’t make sense to you, put it this way: Intel went public in 1971, raising $6.8 million ($23.50 per share). Today, Uber is valued at $72 Billion, and is still privately held. Airbnb is valued at $30 Billion and is still private. Investors need to invest. The IPO market has slowed tremendously and there are no more low cap IPOs, so that investor money is moving – has moved – to private equity investments.
60% of the 119 unicorns in the US are B2B – This fact should be no surprise, though I thought it would lean more towards B2B. It’s really hard to build a consumer focused business. Just ask Yik Yak.
With the high cost of living in traditional tech hubs, we expect talent to stay put in the Southeast rather than leave for the East and West Coasts. – Atlanta is full! But people keep on coming in because, compared to SFO, you can get a really nice 4/3 on half an acre for less than you can get a 2/1 bungalow on a postage stamp.
The impact of large funds on 2nd and 3rd tier innovation cities will increase in the coming year. – See previous point about VC moving more private. They’re also looking outside of the big 3 (SV, NYC, Boston) to invest in startups born in smaller markets.
Incubators and accelerators remain a crucial driver of the Southeast’s innovation ecosystem (1,703 investments). – How many new incubators have popped up in and around Atlanta? They will keep coming, because incubators offer new entrepreneurs ready access to experienced entrepreneurs, capital, customers, and future employees.
VCs are recognizing the greater value for their money by investing in the Southeast’s businesses. – Consistent with the valuations point above. VCs can invest in more mature startups with more traction and revenue at lower valuations than in SV.
Georgia’s top 3 industries for investment: SaaS, Biotech/Pharma, and Fintech
Unlike several other states that attract investors from other areas, 100% of the top VC firms investing in Georgia-based companies are based in the Peach State. – This is great!
Georgia’s top incubators are ATDC, Flashpoint, GT Venturelab, Techstars, Techsquare Labs. It’s interesting that all of these are in midtown and all but Techstars are literally at Georgia Tech. That’s what we call momentum. Action attracts more action.