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Venture capital scarce for companies surging beyond startup

Technology
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Early stage technology companies have few venture capital funding options in South Carolina.

“We call it a capital desert,” said Amy Salzhauer, an entrepreneur and former CEO of Boston-based Ignition Ventures.

South Carolina has long struggled to offer enough early and later-stage funding for startups, spurring entrepreneurs to pitch in other tech hubs, including Silicon Valley, Boston and New York.

Although more angel groups have launched in recent years to provide early stage seed dollars, and despite SCRA’s SC Launch program making $250,000 investments in S.C.-based startups, budding companies often fall short when trying to secure follow-on investments.

Salzhauer hopes to fill that funding gap for young tech companies in the Southeast. She recently launched Good Growth Capital, which is in the process of raising $20 million for investments. The Charleston venture capital firm’s fund managers expect to close on their financing round soon.

The firm plans to invest in companies throughout the Southeast, although Salzhauer expects up to half of the investments will go to startups outside of the region. Most investments will range from $250,000 to $2 million.

Salzhauer said she felt the time was right to launch the fund. The state needs more venture options to grow the tech sector, and she said she sees exciting investment opportunities in the region.

“The gap across the state is when companies are ready for that first institutional round of capital. ... We’re hoping to bridge that gap,” Salzhauer said. “It’s really something that’s needed.”

She will manage the fund along with John Osborne, the founder and executive director of The Harbor Entrepreneur Center and executive director of Charleston Angel Partners; and David Mendez, co-founder of Capital A Partners.

“The interesting part about our team is that we’re all operators,” Osborne said. “We’ve all started things, so we really understand the pain that it can take to distract a CEO’s focus from running the business to fundraising. Having this continuum of financing support in the ecosystem ... is the natural next evolution of how this ecosystem matures.”

The lack of venture capitalists and large-scale funds was noted as a major issue in the state’s updated Innovation Plan. The S.C. Commerce Department released the new plan earlier this year outlining challenges to growing South Carolina’s tech sector. Osborne sat on the committee that gave feedback for the report.

Osborne said Good Growth Capital will actively seek companies to apply for investments, as well as source deals from other investors and angel groups.

“The great part about having a committed capital fund ... is if a company meets our criteria, the process will go much faster given that the money is already there ready to go,” Osborne said.

Mendez said the fund will target companies that have secured some initial seed funding — possibly from family, friends or angel investors — and have reached a significant milestone, such as taken a product to market or hit revenue.

He said that is typically when startups need $500,000 to $2 million to continue testing their product in the marketplace and growing their teams.

“That’s really the stage and amount of dollars that we want to play in because that’s the big gap here,” Mendez said. “Most of these companies exhaust their seed or angel investors, and then really there’s a black hole, because really there’s no one in the state, and very few regionally, that can fund at that stage.”

Good Growth Capital will look to invest in tech-based businesses in the mobility, logistics, transportation, health care, information technology, medical devices, industrial technologies and software sectors.

Carolyne LaSala will join Good Growth as a venture partner. LaSala recently relocated to Charleston after spending 10 years running iTunes, iTunes Europe and the App Store for Apple.

She said she wanted to join the fund to connect startups with capital after seeing the momentum in Charleston’s tech scene.

‘Lack of organized funds’

Steve Parker Jr., CEO of Mount Pleasant-based Levelwing, a digital marketing and analytics services firm, said he sees a need in Charleston for more organization among investors and wealthy individuals interested in investing in early-stage companies.

“I don’t think there’s a lack of capital. I think there are plenty of ways of getting the capital. I think there’s a lack of organized funds,” he said. “Given the playground that we’re in here ... if you had four or five that were consistently active, that would be plenty, especially if they’re focused on early stage.”

Parker and three business associates — Wes Barton, Keith Hamlin and Jeff Adelson-Yan — launched a venture capital fund, Third Prime Capital, in January 2016 after five years of research and planning.

The group has since raised $32 million for the Third Prime Capital fund to focus on seed investments and Series A investments for startups. The fund’s four founders and partners contributed a combined $5 million to that amount.

Third Prime has offices in New York City and Mount Pleasant. Since launching, it has invested $10.8 million in 12 companies, including one in the Charleston region.

The firm invested $3 million in The New Primal, a North Charleston-based producer of soy-free, gluten-free, hormone-free beef jerky that is sold nationally at restaurants and in grocery and health food stores.

The fund has also invested in several software platforms geared toward loans, bookkeeping and real estate; a company that makes gambling machines; and a startup that produces machines to juice fruits and vegetables, among other companies.

“We’re really excited about younger companies where we can really dig in and help them achieve their goals and make decisions,” Parker said.

The four partners actively vet each company before investing. In addition to studying the company’s business model and financials, Parker said they look to see whether the founders are trying to disrupt an industry or solve a problem in the marketplace, and whether they are deeply passionate about doing so.

“We really want to make sure it’s someone who’s smart and intelligent about what they’re attacking, but also that they’re willing to run through a brick wall for it. ... We don’t have to agree with them on everything, but we have to believe they mean what they say and it’s not just a sales pitch,” Parker said.

Parker said entrepreneurs also need to prove out their business model before pitching.

“We have a lot of people who will come in and pitch, and they really haven’t proven what they’re attempting to do in any way whatsoever. ... We won’t invest in that,” he said.

Although the fund has invested in startups across the country and in Canada, Parker said the partners would like to increase their investments in Southeastern startups, particularly in Charleston. He said The New Primal founder and CEO Jason Burke got turned away twice from the fund before he got approved.

“Each time, Jason came back with thorough responses to each concern we had. ... I think it’s important for people raising money to understand: Just because someone tells you ‘no’ doesn’t mean that’s ‘no’ forever,” Parker said.  

Editor’s Note: A print version of this story incorrectly stated the amount of funding contributed by the partners of Third Prime Capital. The corrected version appears above.

Reach Liz Segrist at 843-849-3119.

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