Jul 14, 2023
Inside the growing funding challenge faced by Charlotte startups
Charlotte startups are facing a growing capital crunch. Investor pullback is national concern, and entrepreneurs are implementing a more conservative growth strategy as a result.That means more startups are focused on profitability and sustainability.
Rising interest rates, a potential recession and the debt ceiling crisis have all contributed to the challenging environment. The Silicon Valley Bank failure in March also shook up venture investing.
Dan Roselli, co-founder of Charlotte-based accelerator RevTech Labs, said the impact of the volatile economy was more isolated to later-stage companies in the fourth quarter of last year. That soon trickled down to early-stage companies, which are finding even smaller rounds of funding to be less accessible.
“I’d say the No. 1 reason that people are not funding startups is when there’s uncertainty, people hoard capital and cash,” Roselli said. “So, a lot of these macroeconomic factors that we hear about, and we think are kind of existential to the startup community, really do impact the startup community because it impacts investor mindset.”
While funding is tighter, that doesn’t mean capital has stopped flowing. North Carolina moved up to No. 10 in the U.S. for venture capital in 2022, with companies in the state raising more than $4 billion in 269 deals, according to an annual report by the Council for Entrepreneurial Development in Durham.
That was largely driven by the Triangle area, which raised nearly $3.6 billion and closed 182 deals last year. The Charlotte region, which is known as a top financial technology — or fintech — hub, followed with more than $295 million raised for 39 deals, the CED report shows.
The Triad area was raised just over $262 million for 23 deals.
Roselli said early-stage founders are just now starting to feel the pain point of a slower growth track focused on revenue.
Alan Blakeborough, co-founder of Greenville, South Carolina-based Tax Titans and an alumnus of the RevTech Labs accelerator, said that, as investors struggle with raising funds, his company has been forced to grow more organically. That’s caused the startup, which was founded in April 2022, to lay off three people from what was then an eight-member team. Blakeborough said Tax Titans had plans to hire 20, but it currently can’t afford to do so.
“The activities that they would have been doing depended on having that extra capital in order to pay them,” Blakeborough said of the employees who were let go. “And from our standpoint, features that we would want to offer to our customers, we have to wait until we generate more money to be able to pay for the stuff internally as opposed to having an external source to borrow money from.”
Blakeborough said his startup is now restricted to closing deals and growing only within Georgia and the Carolinas. Tax Titans, which has an office in Charlotte, has successfully launched its platform, but he says the company is looking to raise enough capital to go nationwide.
Tax Titans has raised about $540,000 of a $3 million goal. The majority of those funds came from RevTech Labs and other angel investors. That’s where the company’s funding has stopped.
“Until we grow organically without the capital infusion of venture capital folks, it’ll be slow growth instead of fast growth,” Blakeborough said.
Nedra Barr, CEO and founder at Fort Scott, Kansas-based Onboard Xi and another graduate of RevTech Labs, said her company is starting to rise above funding challenges. Onboard Xi has experienced difficulties with a slowdown in angel investing. “The pre-seed funds for startups and the angels that were always there are not there right now,” Barr said. “They slowed way down. And this creates a challenging environment for everyone because we don’t know which are the ones that are really out there still lending. You have to really work harder to find the ones that are out there investing.”
Onboard Xi, founded in 2021, is working toward its first fundraising goal of $1 million to back its product launch later this year. It has secured about $730,000. The insurance-tech startup is in a better position to speak with organizations and angels but has noticed that more seasoned companies have wider access to funding.
“If you’re a company that has already gone through product market fit and is maybe in your A, B or C round, then you’ll probably be fine,” she said. “It may still be a little harder to find it, but those companies seem to still be OK. For me, it feels like the pre-seeded startups — the true startup market — have just kind of gone away.”
Barr said Onboard Xi is focusing on bringing on the right investors and being diligent in its growth plans. There have been several successful funding rounds locally this year.
Following are a few examples, along with how they sealed the deals. CivicEye takes a gradual approach to growthKhristian Gutierrez, founder and CEO of Charlotte-based CivicEye, said he recognized last year was the first time in several years that displaying adept burn-rate control and a clear path to profitability seemed vital for startups of all stages to gain investments. He says 2022 “marked the end of the days of ‘growth at any costs.’”
CivicEye, launched in 2022, is a public-safety software startup with a goal of modernizing law enforcement and prosecution agencies’ old-fashioned data infrastructure. It closed on $12.4 million in Series A funding in July of last year.
The company used the capital to expand its operations and meet growing demand for its platform. Gutierrez said his company raised the funds by focusing on building sales and implementing a more gradual approach to growth. He says teaming with local and state government agencies with defined budgets was helpful.“It also helps that we’re a government technology business, which categorically shines in recessionary environments,” he said.
Lucem Health sharpens its story in pitch after pitch Davidson-based Lucem Health, a health-tech startup providing clinical artificial intelligence technology and solutions, closed on $7.7 million in Series A funding in May. Even after a successful raise, Sean Cassidy, CEO and co-founder, said he has recognized the funding environment has been a struggle for startups entering their growth stage.
“Venture investors seem to be preserving capital to support their existing investments and have raised the bar on their willingness to invest in ‘seed to Series A’ companies,” he said. “They don’t just want momentum; they want demonstrated product-market fit and an indication that the go-to-market strategy will scale.”
Cassidy said “luck” played a major role in how Lucem Health closed its latest funding round.“We were very fortunate to get strong support from our existing investors, who have witnessed our progress firsthand and believe in our team,” he said. “We were also fortunate to secure a significant investment from a new strategic investor.”
The startup landed the renowned Minnesota-based Mayo Clinic as a leading investor in its latest round. Cassidy said founders experiencing doubt when searching for capital just have to keep pushing.
“Network, pitch, learn, adjust, repeat. I spoke to more than 50 venture capitalists during this last funding round,” he said. “Those conversations helped sharpen our strategy and the way we told the story.”
Lucem is using the capital to advance deployment of its platform and grow its solution portfolio and footprint. Cassidy said the funds will also be used to help the company afford its largest expense — labor. In 2021 and the first half of 2022, the company was affected financially by the market demand for technology-related labor.
2ULaundry finds a partner outside the Queen CityDan D’Aquisto, co-founder at Charlotte-based 2ULaundry, said the local startup community is improving, with several angel investors here hungry for deals. However, he believes there is still a limited pool of investors in Charlotte, which forces some local startups to search elsewhere for investors.
“The Charlotte ecosystem is still in its sort of premature stage,” he said. “It’s growing every single day, and it’s incredibly exciting to see. But that makes it challenging. The network is only as strong as the size that it is, and we’re still in a pretty small environment.”
2ULaundry, a valet laundry and dry-cleaning pickup service founded in 2016, closed on $20 million in Series B funding in December. D’Aquisto said the funding round took place during tough economic times.
He credits gaining strategic investors for its success. 2ULaundry secured Atlanta-based Level 5 Capital Partners, a private equity firm founded in 2009, as its leading investor. It took the company more than two years to establish that relationship. “That allowed them to understand how we thought about growing our business, how we executed, and how we built our team,” D’Aquisto said.
He said it’s also critical for founders to focus on building a profitable business rather than being reliant on capital. For investors to trust startups amid the current economy, they would need to see if companies have product-market fit and the right success metrics, he added.
“It’s a numbers game. You’re going to hear no 100 times before you hear your first yes,” D’Aquisto said. “So, you have to be persistent. You have to be OK with being told no.”