Research Triangle Park may have trouble attracting venture capital.
The MoneyTree Report by PricewaterhouseCoopers and the National Venture Capital Association showed that 402 deals totaling approximately $4.3 billion were made in California during the third quarter of this year, whereas North Carolina had 11 deals, totaling just under $34 million. Despite its notability as a locus of innovation, research and development, a lack of major corporate success, higher risk aversion and an inconvenient location might be barring RTP from access to more venture capital.
“There was a time when there was venture capital here in North Carolina,” said Eric Toone, director of the Innovation and Entrepreneurship Initiative. “We had Intersouth [Partners]…we had Pappas [Ventures]…But remember, that venture capital has really undergone a retrenchment.”
Rik Vandevenne, a director at River Cities Capital Fund and Fuqua ’04, noted that the volume of venture funds that could be found 15 years ago simply is no longer available.
“A number of them have failed and aren’t around anymore,” he said. “At one point during the peak of the bubble, North Carolina got about 5 percent of every dollar invested into the IT industry, and today, that’s consistently less than 1 percent.”
Toone said that RTP has not become a hub of investment similar to places like Palo Alto, despite containing the necessary elements.
“Somehow, all of the ingredients should have been here in the Triangle, but somehow, it never became a sum of its parts,” Toone said. “I mean, you’ve got three great universities, Research Triangle Park, a spectacular place to live. Why did it never take off?”
‘Success begets success’
According to Robert Taber, senior advisor for global strategies at Duke’s Office of Licensing and Ventures, influx of venture capital has often been attributed to a positive feedback-loop that arises from major corporate success in a given area, something that RTP has historically lacked.
“There’s no question that success begets success,” noted Mitch Mumma, a general partner at Intersouth Partners and Trinity ’81. “In the long litany of venture-backed companies, all the way back from Intel [to] more recent ones like Google, Yahoo and Facebook, [it’s] very telling of a culture of entrepreneurship that principally exists in the Silicon Valley and, to a lesser extent, in Boston and New York City.”
Even in the scientific industrial companies on which RTP typically focuses, there has been a lack of major biotech names, said Taber.
“Take Genentech on the West Coast [for example],” Taber said. “I mean, half of the companies that were started out there were ex-Genentech guys. Same in Boston with Biogen. Here was a real success that people spun out and started other companies. And that hasn’t happened here. We’ve never had a big success.”
The lack of historically successful entrepreneurs in the area may also be deterring high-quality executives from RTP.
Art Pappas, founder and managing partner at Pappas Ventures, said that as the San Francisco and Palo Alto area generated many venture start-up companies, they were able to retain many of the executives that were successful from those companies, as well as those that failed. As a result, a natural ecosystem formed that fostered continued entrepreneurship in those locations.
“That continuum drew not only venture capital dollars, but also other entrepreneurs that had been successful while starting other companies and also had the wherewithal to invest in other start-ups,” Pappas said. “In California, the well known one is when Iber-Tech closed down in San Diego, the number of executives who came out of that and stayed and wanted to build companies was significant.”
Pappas noted that a high concentration of entrepreneurs and opportunities creates an environment that makes assuming risk safer.
“If...[my] company fails just as an early stage company might, then I have places that I can go…that further fosters and stimulates entrepreneurship,” he said. “It helps mitigate the risk that one takes to either move into that area or leave an existing company to start a new one.”
RTP’s lack of this entrepreneurial success may have, therefore, contributed to lower risk tolerance in the area, limiting the distribution of venture capital to North Carolina, said David Epstein, chair of the ophthalmology department. He believes Stanford University, as a comparative reference in the Palo Alto area, was a stronger entrepreneurial presence with less risk adversity than Duke.
“If Steve Jobs got fired in RTP, I don’t know whether he’d have started another company here,” Epstein said.
‘Out of the way’
Even the location of RTP may prove to be a deterrent for some venture capitalists, who are often limited in the geographic scope of their investments.
“Venture capitalists aren’t going to fly three time zones unless it’s something unbelievably special, because venture capitalists need their own networks,” Mumma said. “What venture capitalists do to help build value is the mentorship and the connections and all those things that come in addition to money, and particularly for early stage capitalists, [these things] are doable in a finite geography.”
Although investors in ventures still keep RTP on their radar, the location could be preventing the relationship between investor and entrepreneur from developing further, Taber said.
“Twenty years ago when I came here, our endowment was one of the biggest investors in venture, particularly biomedical ventures,” he said. “And they always said that we were going to set up an office in the Triangle, and they never did because it’s just out of the way.”
The range of flights offered through Raleigh/Durham International Airport may present a secondary deterrent to venture capital investment.
“RDU used to be a hub,” Epstein said. “You used to be able to fly non-stop everywhere, and that really has contracted. But that to me is proof that RTP has not been catalyzing growth [as it did] before.”
Despite its current lack of venture capital, the RTP area’s quality and increasing cost of living has begun to draw start-ups to North Carolina, Mumma said. Recently, the Research Triangle Foundation has created a strategic plan designed to stimulate entrepreneurial activity in the Park.
“There’s no question, I meet people every week who call and say, ‘I’m moving to the Raleigh-Durham area to start a company.’ [So I ask them], ‘Well, why are you doing that?’ And they say, ‘We want to live there. I don’t even know what I’m going to do there, but I want to live there,’” Mumma said. “Lots of those people come from the Silicon Valley, lots of the those people come from the northeast.”
Mumma noted that the best way to foster innovation in North Carolina is to simply continue making the area a great place to live, thereby attracting people here.
“Most of the entrepreneurs in our companies got out a map and decided where they wanted to live first, and then started their company, and so that’s the card that we have to play here,” he said.
Toone also stressed the need for greater collaboration and integration within the region by working with the University of North Carolina at Chapel Hill, North Carolina State University and North Carolina Central University, among others. He also suggested collaborating with schools further away, such as Wake Forest University and Virginia Polytechnic Institute and State University.
“If what we want to do is build out the region, I promise you—I promise you—that nothing I can do that constrained within the walls of Duke is going to move the needle,” Toone said. “Why can’t Wilmington be the country’s next San Diego?... That’s the scale we have to build this region from for this to be successful.”
Yet in addition to local cultivation, success requires global competition, noted Dr. Barry Myers, professor of biomedical engineering and executive-in-residence with Pappas Ventures.
“Underserved [capital] markets [such as North Carolina] tend to be over-valued when local interests interfere with competition,” Myers said. “Over-valuation is a leading cause of new venture failure. Accordingly, we work locally but engage globally to ensure robust competition and success.”
At Duke, entrepreneurship may likely become a growing presence under the auspices of the Innovation and Entrepreneurship Initiative, currently directed by Toone.
“The role of the university has always been to teach and to innovate,” said Lister Delgado, managing partner at IDEA Fund Partners. “Duke excels in innovation, but like other universities, is not designed to purse the commercialization of these innovations.”
Toone said he believes the University ‘s Innovation and Entrepreneurship Initiative exists in order to complete the latter half of that job.
“If the University is the engine of generating new ideas, ‘I and E’ is the transmission and drive train that gets torque to the rear wheels to move the whole thing down the road, that puts those ideas into action,” he said.
Bringing new ideas and innovations to market, however, is only half the story, said Toone.
“For a program like this to be really meaningful to a university, it has to be more than helping people build cell phone apps and things like that … it has to speak to a much larger audience and have a much greater purpose,” he said. “And I think that the way that we’ve construed it does.”