Local Tech Firms Face Uphill Climb to Win Over InvestorsBreandan Kearney / Post and Courier
Andrea Marshall executive administratior with Charleston Angel Partners talks with client Dr.Gautam Ghatnekar with FirstString Research at his Flagship offce in Charleston. Dr. Gautam Ghatnekar sat before a crowd of Charleston business people recently and acknowledged that "it has not been that smooth sailing" since he launched FirstString Research nearly seven years ago.
Ghatnekar could've been talking about the scientific challenges associated with converting his peptide discovery into a safe, effective scar-preventing gel. But he wasn't.
Instead, the former veterinarian and Medical University of South Carolina post-doc was talking about something local tech entrepreneurs understand all too well: how tough it can be to raise money.
"I mean, you're asking people to bet on what you really believe in, and that's never going to be easy. You have to convince them to part with their hard-earned money to invest in your bright idea. It doesn't sound easy and it's not easy and it shouldn't be easy," Ghatnekar said. "Good ideas typically survive, but there's no guarantee of success, of course."
Ghatnekar recalled that, even as early potential investors were presented a patented technology licensed from MUSC, they saw "this ... young Indian kid" and said, "I'm not going to give you $100,000. What are you going to do with it?"
Since those early growing pains, the 34-year-old Mumbai native and his company have come a long way. FirstString has attracted several million dollars from investors and, despite executive changes and financial straits over the years, is running three advanced Phase II trials, which test efficacy.
In many ways, Ghatnekar's experience hunting for capital as a Charleston tech start-up is typical. FirstString's money has come from a variety of sources,including wealthy individuals, so-called angel investors who seek to get in early on promising young businesses, and government sources, both local and out-of-state.
He's talked with venture capitalists but never took their money. He's learned to recognize people who can bring value to his company and those who can't. And he's still adapting, pivoting and angling his company forward.
"It's a miracle of sorts that we are still in business," Ghatnekar said. "But somehow we've managed to stay afloat."
A few local companies, such as human resources software firm PeopleMatter, have been able to attract – and have relied heavily on – venture capital. Others, such as fast-growing health care software company Benefitfocus and biotech firm Immunologix, which made a tidy profit for its owners when it was sold last fall, have succeeded without so-called institutional money.
Shawn Jenkins, chief executive officer of Daniel Island-based Benefitfocus, said the dearth of capital was a hot topic in the Charleston tech community a dozen years ago when he co-founded his company. He said Benefitfocus doesn't need investor money now – Goldman Sachs bought out the early investors in 2007 – but that many of its smaller software peers do.
"I wouldn't say that's totally solved now," Jenkins said of the capital problem. "But it's definitely gotten better."In fact, Jenkins said both he and his company would consider investing in a promising local start-up.
Like the increase in talent, investment is another indication that the Charleston area tech sector is on the rise, if not in the same league as mature hubs such as Silicon Valley, Boston and Austin, Texas.
According to last year's National Venture Capital
Association Yearbook, between 1985 and 2010, South Carolina has ranked toward the top of the bottom third of states in terms of venture capital investment and number of deals. California is the clear leader, followed by Massachusetts and New York.
In 2010 and last year, 10 Palmetto State companies attracted $48.74 million in venture capital, with six software companies landing $38.74 million of that, said John Taylor, head of research at the NVCA. "The Southeast, certainly at the moment, is quieter compared with some of the other regions," he said.
Among the recent standouts are Charleston-based dermatology drug and device firm Innocutis, which scored a $6.5 million investment from Florida'sBallast Point Ventures, and PeopleMatter, which closed both a $7.2 million round led by Noro-Mosely Partners of Atlanta and a $14 million round led by Silicon Valley heavyweight Morgenthaler Ventures.
But such deals are exceptional, a fact that Andrea Marshall knows well. She is executive administrator of Charleston Angel Partners, a consortium of about 30 wealthy individuals. It receives "hundreds" of applications each year and invests – usually $100,000 to $200,000 – in only one or two companies, generally tech firms in the Carolinas, Marshall said. The group has put in $4.9 million over its almost eight years in operation. FirstString Research, which has received two rounds of funding, is one of its 10 portfolio companies.
Marshall said Charleston's tech companies, seeking that elusive "critical mass," contend with a version of "the chicken and the egg problem," wherein they have to grow up to gain market acceptance and investment but can't do that without early stage capital.
Even in the best of times, there's not enough money out there for all the promising companies, she said. Add in the recent macroeconomic conditions and Charleston's relative youth in software and biotech, and obtaining investment capital is no small feat.
"In late 2008 and most of 2009, I would say things were dark and scary," Marshall said. "Since that time, we're seeing a gradual re-engagement with early stage investment. ... Now the sun's just starting to peek out from behind the clouds."
Speaking at a November biotech conference in Charleston, venture capitalist Ed Snape said it's not a shortage of investment opportunities that's the problem in the Lowcountry.
"There are deals," said Snape, a senior adviser to the Nexus Group, which has a North Charleston office. "There's not enough money. There's not enough intelligent money."
But that gap could be closing. Taylor, with the venture capital industry group, said recurring interest from regional institutional investors, teaming with national investors, is a good sign. "That is an increasingly common model, and that is the way a lot of areas get going, frankly," he said.
Good people working at a community of good companies trumps distance from traditional venture capital centers, according to both Taylor and Blackbaud Senior Vice President Jana Eggers.
"What they really want is access to talent to make sure that you can grow enough and make sure that you're not stagnant there," said Eggers, who dealt extensively with venture capitalists in Europe before coming to work for Blackbaud in 2010.
Besides private angel, venture and corporate money, another source of start-up cash for Charleston tech companies is SC Launch, whose annual Industry Partnership Fund, $6 million of tax-credited contributions, has invested in the likes of FirstString Research and Immunologix. Recognizing the need, the South Carolina Research Authority, which helps administer SC Launch, is raising money for another fund that would provide follow-on capital.
Even more locally, the Charleston Digital Corridor is recruiting contributions for its own seed fund.
"Things might be coming together here. Feels like it anyway," said Ghatnekar of FirstString Research.But Charleston won't reach its aspirations overnight. It's a work in progress, just like Ghatnekar's business."Takes time and a lot of patience," he said.
A sampling of notable capital investments in Charleston technology firms:
1999: San Francisco's Hellman & Friedman and JMI Equity Fund of San Diego pumped $155 million into Daniel Island-based Blackbaud Inc. The firms took a controlling stake in the then-privately held software company, which sold shares to the public in 2004.
2007: Palo Alto, Calif.-based Technology Crossover Ventures bought a $60 million stake in Mount Pleasant-based Automated Trading Desk, which six months later was purchased by Citigroup for $680 million.
2009: Acadia Human Capital Solutions (later renamed PeopleMatter), got its first round of venture money when InterSouth Partners of Durham, N.C., along with C&B Capital of Atlanta put in $5 million.
2011: PeopleMatter landed $7.2 million in a round led by Atlanta-based Noro-Moseley Partners. Innocutis received a $6.5 million investment from Florida-based Ballast Point Ventures.
2012: PeopleMatter received $14 million in a funding round led by Menlo Park, Calif.-based Morgenthaler Ventures.