Investing in South Carolina

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It wasn’t too long ago that many South Carolina entrepreneurs seeking venture capital money faced a significant hurdle: their location.

In decades past, much of the nation’s VC funding came from San Francisco, Los Angeles, Boston, and New York, meaning entrepreneurs in or near those locales had a leg up on competitors in other parts of the nation. Fledgling Palmetto State businesses suffered as a result.

“When I first came to South Carolina 15 years ago, it was a capital desert. It was very difficult for startups to access capital,” said David Mendez, managing partner of Good Growth Capital, a Charleston venture capital firm. “But it’s gotten easier for companies in the state to raise money since then.

“As more investors have become familiar with what’s going on in Greenville, Columbia, and Charleston, it’s become easier to raise funds,” he added.

The change was brought about by several factors, including:

· The democratization of venture capital, which lowered the barrier of entry and increased opportunities for entrepreneurs and investors;

· Increased willingness by venture capitalists to look beyond traditional markets in California and the Northeast; and

· The rise in remote work, spurred by the Covid pandemic and technology advances, which led to investment executives and entrepreneurs moving from major cities to smaller, less expensive locales such as Charleston and Greenville.

“Ten years ago, there were fewer sources of financing for South Carolina entrepreneurs, and you could struggle to find financing, but today it’s a more mature market,” said Paul Newsom, a professor of finance at USC-Aiken and the Aiken market leader for VentureSouth, a Greenville-based VC firm.

“Over the past 10 years, the market for early-stage venture capital has matured in South Carolina, and companies are no longer forced to go to the San Francisco area or Boston or Austin to find capital,” he added.

Some VC firms operating out of South Carolina even concentrate on investing in Palmetto State companies.

Greenville-headquartered firm Founderville manages a $6.6 million venture capital fund focused on Upstate B2B software businesses. Among companies in its portfolio are health care-data management company Rymedi, site selection software maker Strata Platforms, and application developer Inveterate, all of which are based in Greenville.

Founderville cofounder Shay Houser, who was involved in several startups before moving into venture capital, said his company is committed to strengthening the Upstate business environment.

“This is about Greenville, it’s about the Upstate, and it’s really about how can we do something different here,” he said on the Noob School podcast last year. “We love the tourism, we love the manufacturing, but there has to be more. There has to be technology to build a long-term ecosystem just for startups.”

Today, there are hundreds of companies in the state – many in the Lowcountry and Upstate serving the tech, biotech, and defense sectors – that have received outside investment from angel investors, venture capital companies, or private equity firms. That money has come from both in-state VC firms and those based in other parts of the country.

Some startups have been recipients of relatively small amounts, such as Charleston’s VayuClear Inc., which earlier this year received $200,000 from SC Launch, the investment arm of the South Carolina Research Authority.

Others have gotten much more, including Zylo Therapeutics Inc. of Greenville, which in the past few years has successfully raised nearly $10 million in venture capital, and The Nuclear Company, a Kentucky company which recently opened primary engineering and construction offices in Columbia after securing more than $50 million in funding.

What is venture capital?

Venture capital is sometimes used as a catchall term for different types of private capital infusions. These can include:

· Angel investors, who are typically the earliest investors, committing funding for companies just starting out, or even those still in the conceptual stage. Angel investors can also provide mentorship.

· Venture capital investors, who allocate money to companies with a proven revenue stream and growth potential. VC funds can offer guidance, too.

· Private equity investors, who seek out more mature businesses. Private equity investors may look for companies with a proven track record but in need of a cash infusion or with a founder who is ready to step aside. They often take an active role in managing and bolstering company operations.

What all of the above have in common is that they involve trading capital to a startup or business founder in exchange for an equity stake, typically between 10 and 30 percent. Funding recipients use the money to scale up operations, become profitable, or expand, depending on where they are in the business life cycle.

Funding for venture capital firms comes from a capital raising, which can take a few months to more than a year to close. Money is raised from investors, which can be individuals or institutions such as pension funds and college endowments. The minimum to join a capital fund typically ranges from $100,000 to many millions of dollars, depending on the fund.

Investors or those managing investors’ money seek out companies that will bring them a return commensurate with the risk. Money is often dispersed among many startups to spread out risk.

VentureSouth has invested a total of more than $85 million in more than 100 Southeastern companies. These include Charleston-based AmplifiedAg, which provides technology solutions for indoor agriculture; Greenville-headquartered Darby, a healthcare technology startup; and CADchat of Columbia, a meeting software company.

Charleston Angel Partners caters to medical and technology businesses seeking between $100,000 and $2 million. It states that it “provides early money – but not first money – to high growth companies.” Charleston Angel Partners, made up of accredited investors, many from the Lowcountry, has put money in startups from around the country.

Private equity firm Azalea Capital of Greenville invests in companies in the agriculture, food and beverage, pet, engineered products, industrial services, and niche manufacturing areas. It looks for more mature companies, those with at least $10 million in annual revenue.

Ideally, the companies investors put money into will go public or be sold at a higher price, usually over a three- to 10-year period.

Of course, the younger the company, the riskier the investment, which is why early-stage investing tends to have the greatest potential return.

Angel investors putting money in at the seed or pre-seed stage shoot for a return that can be as much as 100 times or more of their original investment. Consider the Silicon Valley executive who wrote the founders of Google a check for $100,000 in 1998 and made an estimated $1.7 billion for his trouble.

But for every Google and Tesla, there are hundreds of startups that never make it. One estimate suggested that four out of five early-stage VC ventures fail, according to Forbes.

“About half the companies we invest in don’t make it, and we lose everything,” said Newsom, of VentureSouth. “It’s those that do make it where we make up for that.”

And it’s not always smooth sailing for those receiving funding, either, as there have been instances of company founders being fired after a venture capital firm came onboard. Take Travis Kalanick, the co-founder of Uber, who stepped down as CEO in 2017 after a group of major investors demanded his resignation following reports of questionable leadership.

Investing in more mature companies can be less risky, and can also realize significant returns. The U.S. Private Equity Index, which tracks the performance of the private equity market, last year showed a 10-year return of more than 15 percent annually, according to Cambridge Associates LLC.

A recent high-profile example of a private equity firm in action is Sycamore Partners, which in March said it would purchase Walgreens’ holding company and take the retailer private. Walgreens has struggled in recent years, and Sycamore could be looking to turn the company around by improving its financial condition and then taking it public again in a few years.

Just as some investment companies focus on specific investment stages, there are firms that specialize in industries. These include Ranger Aerospace of Greenville, which seeks out investments in the aviation sector, and Charleston’s Healthcare Venture Partners, which invests in the healthcare and life sciences segments.

The changing face of venture capital

Prior to World War II, most large-scale private equity investment came from wealthy individuals or families, such as J.P. Morgan, the Rockefellers, and the Vanderbilts. But the industry began to change with the creation of the American Research and Development Corp., or ARD, a private equity firm started in 1946.

ARD was begun to encourage private sector investments in businesses run by U.S. servicemembers returning from World War II. It gained notice as the first private equity investment firm that took money from sources other than wealthy families.

Over the decades, venture capital funding has grown. Corporate giants Apple, Intel, and Microsoft were among companies that received venture capital funding in the 1970s and 1980s, and VC has mushroomed significantly in the ensuing decades.

U.S. venture capital firms closed 13,608 deals worth $170.6 billion in 2023, according to the National Venture Capital Association.

Venture capital investing took a little longer to get going in South Carolina, but it has gained traction in the past decade. In 2023, the VC firms closed deals worth $137 million in South Carolina, according to BIP Ventures of Atlanta. Between 2018 and 2023, more than $1.8 billion in deals were closed in the state.

And during the second half of 2024, a total of $140 million went to six Lowcountry companies to fund growth and expansion, said Ernest Andrade, director of Charleston Digital.

These were QuicksortRx, which has developed software to help save money on pharmacy procurements; Gigpro, a hospitality focused staffing app; Scout, which is developing a toolkit for building scalable artificial intelligence; Churnkey, which provides customer-retention solutions; Case Status, which developed a client-engagement platform for law firms; and Gnosis, a supply chain platform focused on shipping containers.

“We’re seeing no shortage of capital flowing into companies that are generating revenue,” Andrade said. “Those that are executing with revenue and year-over-year gains are able to attract capital.”

This is especially true in the private equity market, which seeks out established companies, which don’t have the risk that comes with investing in still-unproven startups, said Ben Wallace, a partner with Azalea Capital, the Greenville private equity firm.

“We’re investing in companies that have already proven themselves in the market, typically with a good positive cash flow of, say, $2 million a year,” he said. “That verdict is already in and the company has already proven itself.

“The question is can we help a company become more efficient or expand,” he added.

Among companies Azalea has invested in is Low Falls Nursery, a 39-year-old operation located just east of the tiny Calhoun County community of Lone Star. Azaela bought into the nursery in 2024 and has been working to build up its inventory and add acreage, company President Trey Shirer said.

Azalea’s invested in Low Falls to help the company, which specializes in growing ornamental trees and shrubs for landscaping in the Southeastern U.S., expand its operations.

“The nursery was about depleted, so they had to start over and build it back up,” he said. “And with a nursery it takes a long while for trees to start producing and bringing money back in.”

Azalea began a quarter century ago when non-tech firms had a harder time securing funding.

“Back then, there was a lot of money being raised in the tech sector,” Wallace said. “If you had a domain name and an idea, you could raise capital. But if you had a manufacturing company, particularly in the Southeast, there weren’t a lot of companies out there to work with.”

The region’s venture capital market has grown over the past decade, but it remains underserved, he added.

“There are many companies in our state that have attracted private capital,” Wallace said. “But there’s still plenty of opportunity out there.”

The rise of remote work, spurred by advances in technology that enable executives to work from just about anywhere, has led to VC firms being more willing to not only look for opportunities in smaller cities around the country but also encouraged venture capitalists to set up shop in areas that are less crowded and less expensive, including South Carolina.

There are advantages and disadvantages to venture capitalists operating out of the Palmetto State rather than technology hubs such as Silicon Valley or the Boston area, according to Mendez, of Good Growth Capital.

Downsides include having to fly to get in front of institutional investors and high-net-worth individuals, many of whom live in the Northeast and on the West Coast, which requires significant travel.

“On the other hand, South Carolina is a nice place to live, we don’t have high operating expenses being here, and we do have investors who like to come here, whether they already live here or are visiting,” Mendez said.

“We’re not in one of the hubs, so we’re not like everybody else, and that sets us apart,” he added.