VentureSouth members set new personal bests last year in new companies receiving investment (11) and total investment rounds completed (36), and came close for total capital invested ($10.7 million). Most importantly, it was a record for distributions returned to investors ($20 million) too.
We thought it might be fun to take you “behind the headlines” to learn more about what we got up to last year.
New companies vs. follow-on rounds
While we are always looking for new companies to invest in, supporting existing portfolio companies with follow-on investments is a critical part of being a good early stage investor. Last year we invested slightly more of our total invested dollars (56%) into existing portfolio companies compared to new ones.
Follow-on rounds continue long after the initial investment. In 2021, two-thirds of the follow-on rounds we participated in represented our third or later investment into the respective company. Three rounds were our fifth round of participation, while two more were our seventh and eighth respectively. The bottom line — VentureSouth portfolio companies that perform well can expect to receive ongoing investment from our members and other investors.
Investments by deal type
We also invest in different round structures. Our 2021 deals were split 20–12–4 between priced equity rounds, convertible note rounds, and SAFE rounds respectively.
The split gets more telling when you separate new investments from those into existing portfolio companies. Most (83%) of the new rounds we participated in were priced equity rounds, while our follow-on rounds were more equally split (42% equity, 46% convertible notes, and the remainder SAFEs). We have a strong preference for priced equity rounds when we first invest in a company, but support our companies in whatever follow-on structures they feel are appropriate.
Investments by location
Most VentureSouth angel investors (and portfolio companies) are based in the Carolinas. However, last year we launched VentureSouth Virginia, our first local investor group outside of the Carolinas. We were also active investing outside of the Carolinas, with 20% of our total invested dollars in 2021 going to companies in other parts of the Southeast; about one-third of those dollars went to Virginia-based companies as we grew our efforts there.
Speaking of launching new groups, in late 2021 we formalized our existing members, fund investors, and portfolio teams in North Carolina’s Triangle region into VentureSouth Triangle. 2021 saw 40% of our total invested dollars go to Triangle-based companies, demonstrating our active involvement in one of the Southeast’s leading entrepreneurial hubs.
Investment by valuation
One advantage to investing in the Southeast is the lower company valuations we see compared to those more typical in Silicon Valley or the Northeast. While we are willing to invest in follow-on rounds at higher valuations, we maintain a disciplined approach to pricing, especially when adding new companies to the portfolio. Excluding one investment outside of our usual investment criteria, the weighted average post-money valuation on our 2021 equity investments into new portfolio companies was around $11M. This is a touch higher than in previous years, but still far lower than comparable deals in other markets.
Returns by tax status
Investing at reasonable valuations is the first step in generating good returns; dealing with capital gains taxes is, hopefully, the last step!
Current tax policy offers valuable allowances that help investors to benefit from gains, and therefore incentivizes more investment in early stage companies.
Head over to our guide here for more background on angel investing tax treatments. For our record-breaking proceeds in 2021, about half of the proceeds will benefit from Section 1202 of the tax code, which offers a full federal capital gains tax exclusion for qualified small business stock (QSBS) held for at least five years.
Another ~17% of our gains qualified for Section 1045, which allows investors to rollover proceeds from QSBS held for fewer than five years into other qualifying investments. A significant proportion of these proceeds will go right back into supporting the next round of entrepreneurs in early 2022.
The rest were primarily long-term capital gains, with only a small minority of “other” (short term gains, interest income, and return of capital) treatments.
A bonus note
Lastly, for a bonus tidbit on how our 2020 investments did in 2021. One metric early-stage investors use is TVPI — total value to paid-in capital — which compares the book value of investments (based on any later equity raises) with the amount of capital invested. The TVPI of all the investments we made in 2020 is about 1.5, which demonstrates the strong fundraising and operational momentum we are seeing in our portfolio.