Why Investors Should Take a Second Look at the Southeast’s Startup Environment
By Dan Drechsel, BIP Capital

When considering where to put their money, many investors naturally look to startups situated in the long-time “Innovation Hubs” of Boston, the San Francisco Bay Area, and New York City. Increasingly, however, there’s another U.S. region showing up on investors’ radar: the southeastern United States.
Surprised? The Southeast has been evolving into a regional powerhouse for some time for a number of reasons, such as the presence of top-notch universities — Georgia Tech, Vanderbilt University, Duke University, University of Virginia, University of North Carolina, and the University of Florida among them — that provide talent and research. There’s also significant indigenous capital as well as notable business incubators and accelerators like the Atlanta Technology Development Center (ATDC) and others. To this end, there have been countless successful and well-known exits over the last two decades in this part of the country, including Cardlytics, Checkfree, Cvent, Evolent Health, GreenSky, S1, Secureworks, Shipt, and many more.
Each year our firm publishes The State of StartupsSM in the Southeast report which delivers a comprehensive overview of the venture capital and startup ecosystem in the region. This year’s report took an in-depth look at startup activity throughout nine southeastern U.S. states over the five-and-a-half-year period from January 1, 2014 through June 30, 2019. The report is free and can be read online.
Report Focuses on Market Maturation
While last year’s research established that the Southeast is an attractive place to invest relative to the more well-known and capital-intensive Innovation Hubs of Boston, the San Francisco Bay Area, and New York City, with our 2019 report we set out to learn exactly how mature the Southeast’s venture ecosystem has become.
How did we do this? Macroeconomic trends tell us to expect increasing valuations. Nationally, the amount of dollars flowing into the private markets as a whole is on the rise, with more dollars than ever being invested in early and growth-stage companies. This means we can expect a “rising tide” across the country when it comes to deal dynamics and, in particular, increasing valuations. Using pre-money valuation as a proxy for maturity, we then examined how stable the pre-money valuation is in each region.
Against that yardstick, we found that the rate of maturation of the Southeast is exceeding that of the already mature Innovation Hubs. Our research indicates that there is more innovation and that more competitive early-stage deals are happening in the Southeast than ever before.
Breaking down Atlanta, Charlotte, Nashville, and the Research Triangle in comparison to Boston, the San Francisco Bay Area and New York City, Atlanta, and the Research Triangle are showing signs of maturity, while Charlotte and Nashville are still maturing at a rate far exceeding that of the Innovation Hubs.
Some other notable observations:
· The gap in revenue multiples between the Southeast and the Innovation Hubs is closing, with revenue multiples increasing at a faster pace in the Southeast.
· More capital is being deployed by Southeast investors than ever before, creating less opportunity for outside funds to invest in the region.
· The region still has room to grow in terms of attracting “category-defining” large rounds (over $80 million).
Overall, $28 billion has been invested in southeastern startups since 2014 over a total of 8,383 investments. Media was the top area at $5.01 billion, with Biotech/Pharma and SaaS the second and third top areas of investment at $5.00 billion and $4.60 billion, respectively.
Numbers on a State-by-State Basis
Following are some key observations on a number of southeastern states examined in this year’s report:
· Media companies remain number one in Florida for attracting investors, with $2.7 billion raised over the time period reviewed. However, $2.3 billion of that was raised by industry unicorn Magic Leap. Other industries also continue to attract sizable investments in the state.
· Georgia remains the Southeast’s SaaS innovation leader, with 349 deals totaling $1.7 billion among its 1,275 deals totaling $5.5 billion over the time period reviewed.
· Biotech/Pharma in Kentucky is the most popular category, bringing in 62 deals worth a total of $327 million since 2014.
· South Carolina is having a very good 2019, with the total invested dollars already higher than all of 2018.
· Healthcare IT continues to lead the pack in Tennessee, with 158 deals totaling $466 million over the five-and-a-half-year period.
· 2019 is shaping up to be another strong year for SaaS investments in Virginia, with deals and dollars on track to equal 2018.
What the Future Holds
Conclusions were also drawn from this year’s report in regard to what investors can likely expect to see in the coming months and years:
· Without government intervention to make going public more favorable, continued growth in the amount of capital being raised and invested in the private markets is expected.
· As capital supply increases, the demand to put that capital to work will outpace the growth in the number of quality startups to invest in. This will create higher valuations and larger rounds of capital.
Our 2019 The State of StartupsSM in the Southeast report confirms that the Southeast remains a great environment for both investors and entrepreneurs in the early stages of building a business. The bottom line: Don’t overlook the region.
Multiple data sources were used to create this year’s report, including interviews with key players at multiple funds, interviews with entrepreneurs, and independent third-party data.
About the Author: Dan Drechsel is senior VP at venture capital firm BIP Capital, where he oversees the firm’s investments in SaaS, FinTech, and Dev Tools/Architecture. Drechsel has been involved throughout his career in growing and operating private equity and venture-funded innovation companies, including S1 and Global Energy Decisions. He has held numerous executive-level sales, marketing, and engineering positions at enterprise software, financial technology, and tech-enabled services companies, including SAP, ADP, and Dun & Bradstreet, both in the United States and internationally. He is also an executive lecturer in Marketing at Mercer University’s Stetson School of Business and Economics. Drechsel holds a bachelor’s degree in Industrial Management from Georgia Tech and an M.B.A from Mercer University.

