by Chris Langford, Partner
Charlotte’s Got A Lot. That’s the slogan that the city has used for some time to describe why people should move to or visit Charlotte. I moved to Charlotte eleven and a half years ago and I must say that the slogan feels both accurate and aspirational at the same time. On one hand, the city is the number two banking center in the United Sates, is home to eight Fortune 500 companies, has one of the fastest growing populations and is rapidly distinguishing itself in the culinary and brewing arts. It is less than two hours to the mountains and approximately three hours to the beach with ample outdoor activities available within the city and its suburbs. Finally, its hub airport makes it amazingly simple to get anywhere in the U.S. or around the world without the need to travel or connect.
The cranes that adorn the Uptown (what most cities would call “downtown”) sky, the substantial revitalization projects of the surrounding hip neighborhoods of the city and the endless droves of new home communities that are being built ring-by-ring in the suburbs reinforce that Charlotte is bursting at the seams with growth. However, anyone who has spent considerable time in Charlotte knows that it is a city that is still evolving and building modern infrastructure and culture. As a city built on banking, retail, health care and industrials, it has (not surprisingly) struggled to attract both a risk-taking and an artistic and creative class. When compared to other cities in the South, it hasn’t the music scene of Austin, Nashville or New Orleans nor the art galleries of Charleston or Asheville. It is neither steeped in old southern Americana like Charleston and Savannah or Latin culture like Tampa or Miami. It is a new American city, the kind that has for more than a decade attracted young, educated families to the region on the prospects of well-paying corporate jobs and a relatively low cost of living as opposed to one that has patronized musicians, artists and the creative class that IDEA Fund supports: bold founders.
In our previous blog posts related to geographies of focus, we have touted the equation of Ingredients + Outcomes — Competition as a formula to determine where to focus our efforts. When applied to Charlotte, you’ll likely see a city that is more of a stretch than others we have identified. Its workforce isn’t as obviously technical as other cities in America and its entrepreneurial community is not steeped in significant, economy-shaping exit events. But as a resident who has lived through the change in culture that has transpired as more people and companies have chosen to call Charlotte home, I believe that Charlotte has many reasons to be optimistic.
The Right Stuff?
The first element of our equation poses the question: are the right ingredients in place to create significant venture outcomes? Much like our analysis of the city itself, the answer is split. The city is well-educated with 44% of residents over 25 in age having a bachelor’s degree or higher. Compared to other U.S. cities of similar size (between 2–3 million population), Charlotte ranks below only emerging secondary cities Austin, Denver, Raleigh/Durham and Portland. So, there is talent, but is it the right kind of talent to launch startups?
According to CBRE’s 2020 study on Tech Talent in North America, Charlotte ranks 27th in terms of technical talent ahead of markets such as South Florida, Nashville and Pittsburgh which have been labeled up and coming ecosystems. That said, it is substantially behind premier secondary venture systems like Washington DC, Atlanta, Raleigh/Durham, Denver and Austin. In Charlotte, this technical human capital is often attracted to lucrative opportunities with major employers of the region such as Bank of America, Wells Fargo, Lowe’s, and Honeywell as opposed to mid-sized or emerging technology companies. It is the kind of talent that, when the time is right, can help a company scale but may or may not have what it takes to launch it in the first place.
New business formation is middle of the pack when compared to similar sized cities. Per Pitchbook data, 579 new businesses were formed between 2015–2020 in the city which ranks it 6th out of 12 in its peer city rank. That puts Charlotte on par with cities like Portland and Tampa but more than 2x below Denver and Austin. However, the most telling stat when it comes to business formation is the percentage that received venture (whether angel, accelerator or true VC) funding. In this category, Charlotte ranked DEAD LAST among all cities with 2 million or more residents with only approximately 10% of new businesses formed in that time period receiving funding. This means one of two things: either the businesses being formed are not venture-backable or there is a massive gap between the talent of the city and supporting capital. Having spent more than a decade here, the latter seems to ring true but the spread between talent and capital will only be revealed when funding becomes more prevalent.
You Get What You Give
Despite this “funding desert”, several companies have broken out in the region. Depending on how you define the term unicorn (i.e., do you hold to the idea that unicorns are all privately held, capital-backed companies with private valuations in excess of $1B or is some pace of scale necessary to achieve this status), Charlotte is home to three unicorns in Red Ventures, AvidXchange and Tresata. Many of these “startups” are more than 20 years old, funded primarily through bootstrapping and only received external capital once they achieved growth company status. On their heels (and more closely resembling a high growth startup) is Passport which has raised more than $125M in total funding from major investors such as Bain and Grotech. Beyond that is a collection of companies which have raised early-stage funding but struggled to attract the capital necessary to scale exponentially. That said, there is reason to be optimistic as several up-and-coming startups have gone through Y-Combinator in recent years (Lucid Drones, Cloosiv and Atomized) and others have attracted strong Seed and Series A investments from national firms (Carewell and Rent Ready).
Compounding the issue of funding is the limited success in returning capital from startups in the region. LendingTree was an early shining example having started in 1996 and quickly risen to public company in 2000 prior to the original dot com bubble bursting. Since then, there have been some solid exits but without enough wealth creation to seed the angel funding flywheel necessary to provide patronage to the next wave of entrepreneurs. Notable exits include Precision Lender’s $510M acquisition by Q2, TradeKing’s $275M acquisition by Ally Financial, MapAnything’s $225M acquisition by Saleforce and Health Credit Service’s $190M acquisition by Ally Financial. Each of these acquisitions show the potential to create value within the region but also signal the lack of risk capital conviction to push them to scale to $1B+ disruptor.
The Vast, Blue Ocean
After reading the above, perhaps the question you are asking yourself is: why are you optimistic about the venture ecosystem of Charlotte? I’m optimistic for IDEA Fund Partners to participate in Charlotte’s venture market because it is a blue ocean.
In their classic book, Blue Ocean Strategy, Chan Kim & Renée Mauborgne coined the terms ‘red ocean’ and ‘blue ocean’ to describe the market universe. In red oceans, industry boundaries are defined and accepted, and the competitive rules of the game are known. Here, companies try to outperform their rivals to grab a greater share of existing demand. As the market space gets crowded, profits and growth are reduced. Products become commodities, leading to cutthroat or ‘bloody’ competition. Hence the term red oceans.
In blue oceans, demand is created rather than fought over. There is ample opportunity for growth that is both profitable and rapid. In blue oceans, competition is irrelevant because the rules of the game are waiting to be set. A blue ocean is an analogy to describe the wider, deeper potential to be found in unexplored market space. A blue ocean is vast, deep, and powerful in terms of profitable growth.
On the ingredients side, the rapidly growing population of young and educated talent is hungry for a modern city that supports entrepreneurs with true risk capital and connections into the broader national ecosystem. Companies like AvidXChange, Red Ventures and Passport have created a management layer that has lived through and thrived in a hyper-scale phase of company building and, upon exit, will produce some of the wealth necessary for those managers to launch their own ventures. From the competition side, the number of local, early-stage capital providers in Charlotte can be counted on one hand (Carolina’s Fintech Ventures, TFX Capital and Charlotte Angel Fund come to mind). Although the historical lack of funding support previously described does not appear to be on the cusp of being solved, the influx of people to the region from higher-risk cities and industries may turn that tide. Engagement with angel and mentor groups has never been higher in the city and, with their support, this next generation of entrepreneurs can grow their ideas into institutionally fundable businesses.
If you compare Charlotte to its peer cities in terms of growth, population and educated workforce, it seems inevitable that a significantly more developed startup ecosystem will emerge. IDEA Fund Partners is here to play to a central role in that development and fund the truly bold founders of Charlotte.