There’s been more than $96 million in venture capital invested in 62 deals in the Tampa-St. Petersburg-Clearwater metro area so far in 2018, and the year is shaping up as one of the best on record.
“When the dust settles 2018 will be the second-best year we’ve had,” ranking only behind 2017, said Speros Margetis, finance professor at University of Tampa. “I think dealmaking will continue to be vibrant in 2019.”
Margetis is one of three authors of the “State of the Tampa Bay MSA Entrepreneurial Ecosystem,” a report released in late November by UT’s John P. Lowth Entrepreneurship Center. The wide-ranging report examines factors that support entrepreneurial activity, as well as connections between dealmakers and deals locally.
A vibrant entrepreneurial ecosystem is vital for producing conditions that lead to new business growth, the study said.
Tampa Bay’s entrepreneurial ecosystem is “maturing,” Margetis told the St. Pete Catalyst. He’s built a proprietary data set on deal activity, including venture capital, private equity, mergers and acquisitions, and initial public offerings.
Early stage deals
One trend that stands out is the growth in seed feeding — the investments in very young companies, most often before they have revenue. Funding for those young companies is a vital part of the business life cycle.
“The earlier money coming in — the seed capital, the angel investors, the people writing checks typically between $50,000 to $1 million, maybe up to $2 million — those are the early-stage companies. The venture capitalists aren’t comfortable investing in that early of a stage. They’ve got a shorter time horizon and can’t wait for those companies to mature,” Margetis said.
Organizations such as Seedfunders in St. Petersburg, Florida Funders in Tampa and New World Angels, a statewide organization, are among the active seed-stage investors, backing companies that could become large enough to attract venture capital later on.
Those groups are getting over a hurdle that’s hurt some local tech companies, he said.
“A VC told me, out in California you don’t want to miss the next deal and in Florida, you are waiting for the next deal. That’s the difference in the mindset. In California, there are people who throw money in on every deal. They understand it, they can diversify and manage the risk. But here, everyone is sitting on the sidelines and waiting for the next good deal to come by,” Margetis said.
Local early-stage funders also are helping investors develop an appetite for risk in companies outside the real estate space.
“The biggest thing for Tampa Bay is to have more success stories and have that appetite for risk that you see in places like Miami,” Margetis said. “Once you see enough success stories, people will start to say, ‘I wish I would have gotten in on that deal.’”
The “death spot” is for companies that need $2 million to $5 million — an amount too large for most angel investors and seed funds, but too small for venture capital firms. Stonehenge Growth Equity in Tampa invests is at the top end of that range, while Florida Funders invests on the bottom end, Margetis said, but “that’s always going to be the difficult spot to get checks.”
Another trend that emerges from Margetis’ data is a dramatic drop in private equity investing and initial public offerings.
That’s because many venture capitalists would prefer to see the companies in which they have invested sold to a strategic buyer — another operating company in a similar line of business.
Margetis is encouraged to see merger and acquisition activity holding steady in 2018 compared to 2017.
“VC investors tell me that the best sales are to a strategic, in other words M&A activity, when an initial public offering would have been possible,” Margetis said. “They could have done an IPO, but Apple comes in and buys you, pays more than what you could have got in an IPO without having to go through the IPO process. That’s your dream position if you are a VC.”
The unknown factor that is holding back some investments is when the economy might falter.
“Everyone is whispering that a recession is in the pipeline. There’s debate on whether it’s going to be next year or the year following. No one can predict that with any accuracy. But because of that there tends to be a little less activity,” Margetis said. “The good venture capitalist will pick companies that can grow through the recession and they’re pretty good at identifying those companies. They’ll pay a premium to buy those companies … But the purchasers of those dry up, so M&A activity slows down and knowing that [venture capitalists] are a little more hesitant to invest.”
But recessions also can be good times to invest, he said. “They buy in at lower multiples, so return to investors can be good.”