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Angel investors say cash begets cash when considering startup investment

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“If more angel-level investments are happening, it’s easier to get venture capital here. Venture capital wants to come in once the companies know what they’re doing.” — John Osborne, Charleston Angel Partners director

By Liz Segrist
lsegrist@scbiznews.com
Published Nov. 23, 2015
From the Nov. 16, 2015, print edition

An increase in early stage seed and angel investments could propel more Charleston startups to be acquired or go public, which would attract further venture capital to the region, according to several investors.

Bobby Ocampo — a partner at Washington, D.C.-based Revolution Ventures, which is AOL co-founder Steve Case’s venture capital firm — said more progressive angel groups willing to assume the risk of investing in tech-focused startups in Charleston would help those companies grow to a stage that attracts venture capital.

Ocampo was part of Revolution’s Rise of the Rest tour that traveled to Charleston in May to visit companies and invested $100,000 in Bidr during a pitch competition.

Educating entrepreneurs on the art of the pitch

Lowcountry Angel Network managing director Josh Silverman said part of the problem with funding pitches is entrepreneurs not knowing when to do so or lacking scalable ideas.

About 45 entrepreneurs apply to pitch to the group each month; that pool gets whittled down to three presenters.

“The market is currently flooded with opportunities. Everyone and their grandma thinks they have a startup worth investing in,” Silverman said. “Good ideas are getting crowded out by mediocre ideas, which makes it kind of difficult sometimes for really terrific ideas to get the visibility they need.”

Silverman said part of the group’s role is to educate entrepreneurs on when to reach out to angels — often when a startup is nearing or recently reached revenue. He said capital seekers often do not know when or how to pitch for financing.

“You can’t just have a dollar and a dream. You need a business with an executable plan and a strong management team. You can’t just be smart and have a good personality. People can see through that today,” Silverman said. “It’s not like it was even five years ago. ... Investors have become much more formal and diligent in key metrics they want, and if you don’t have them, it’s not going to happen.”

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“It would be good for the ecosystem to see a company like PureCars, Zubie, PeopleMatter or BoomTown sell for $500 million and then have those people start new companies or invest and spur entrepreneurship forward,” Ocampo said. “The ecosystem in Charleston will then take care of itself. More and more investors will come, and more companies will get founded. We would like to see more volume. Success begets success.”

John Osborne, co-founder of The Harbor Entrepreneur Center and newly elected director of Charleston Angel Partners, said too few Charleston investors are accustomed to investing in tech and software startups.

Many are more comfortable investing in real estate, hospitality or bioscience, which is part of the region’s tech financing struggles, said Osborne, who will continue running The Harbor Accelerator program.

As the new head of Charleston Angel Partners, Osborne said he wants to improve the group’s visibility in the community, expand the number of investors from 45 to around 100 and refocus its investments on scalable tech startups.

Andrea Marshall, who was the previous director for more than eight years, said she remembers when the recession hit and investors were uneasy about parting with any funding, much less for angel investments, which are inherently riskier. If the startup fails, the angels do not get a return on their investment.

“The overall sense of nervousness and uncertainty in the market really made it difficult to do meaningful investments,” said Marshall, who will step down Jan. 1 to become the innovation director for Roper St. Francis’ Clinical Biotechnology Research Institute.

Since 2007, under Marshall’s lead, the angel group grew from about 20 investors to 45. It has invested more than $8 million in 15 companies, including two successful exits — when a startup goes public or is acquired — in 2013 with Columbia-based Unitrends and N.C.-based Advanced Liquid Logic.

Though more deals are happening in Charleston, Marshall said she sees gaps in the funding pipeline, particularly in the early stage funding needed to jump-start a company, and the later-stage venture capital needed to scale businesses.

Osborne said investing in startups will generate more successful exits in Charleston, resulting in more investors and companies coming to the Southeast market.

The Charleston region had a few such deals in recent weeks. Booz Allen Hamilton acquired Sparc, a Daniel Island-based software firm with 270 employees, and Alabama-based Raycom Media acquired 130-employee PureCars, a Charleston-based digital advertising platform for the automotive industry. Both companies will maintain their Charleston operations.

Osborne said more angel funding would help companies prove whether their ideas are marketable and scalable.

“If more angel-level investments are happening, it’s easier to get venture capital here,” Osborne said. “Venture capital wants to come in once the companies know what they’re doing. ... In my mind, in 18 to 24 months, there will be a lot more venture activity as a result of a more active angel scene.”

Angel Capital Group CEO Eric Dobson said angel investors are slowly taking note from venture capital firms to become more professional at their due diligence and provide enough capital to get companies to the next level.

Dobson said angel investor groups have not done this very well traditionally, creating a “stop-and-go” situation for companies that get an influx of cash and then stall as they wait for the next round.

“If there is not enough capital in the market, it puts a lot of companies at risk,” Dobson said. “If a great company can’t get the capital they need, they will start to grow and then stop growing as they wait for funding to get to that next milestone. A slow drip of capital can be the death of a great company.”

Expanding angel groups

The Lowcountry Angel Network restructured in May to collaborate with other angels, such as in Nashville, Tenn., and Greenville. This enables the Charleston group of 25 investors to do larger investments than if it acted solo, managing director Josh Silverman said.

The angel group, which launched in February, recently teamed up with other members of the S.C. Angel Network to invest $250,000 in PharmRight, a Daniel Island-based health care technology company that developed an at-home medication dispenser.

“A slow drip of capital can be the death of a great company.”
— Eric Dobson, CEO of Angel Capital Group

Dobson’s Angel Capital Group also shifted toward a syndicate model this year. If a good idea comes through during a pitch, angels from around the country invest in it together.

The group’s locations have expanded from Denver, Knoxville and Nashville, Tenn., Charleston, Fort Lauderdale, Fla., and Kansas City, Mo., to include Ashley, Ky., and Florence, Ala. The group plans to add Phoenix, St. Louis and other Kentucky cities by the end of the year. Each group has about 20 investors in it.

“Inside every angel, there are two fundamental perspectives: They want to make money, and they want to invest in their communities,” Dobson said.

On the road for capital

Most Charleston-based tech firms that have secured venture capital — such as PeopleMatter, BoomTown, Zubie, Good Done Great and PokitDok — have gone beyond S.C. borders to do so.

Venture capital-heavy areas like Boston, Silicon Valley and New York City have more funds for later-stage companies that are trying to scale, though competition is tighter with more companies vying for the financing.

David Mendez, managing partner of Capital A Partners, said that pitching to out-of-state investors is a feasible model for many area startups but that a local fund would propel Charleston’s tech sector.

“As startups are successful and grow, local investors benefit from that success. If companies go elsewhere for funding ... someone else is benefiting financially,” Mendez said. “The other concern is, and we saw this with Proterra (which relocated its headquarters from Greenville to Silicon Valley), is that venture capital firms will want to relocate them.”

Mendez said the region still lacks a true venture capital-level investment fund that “takes the companies that have been seed- and angel-funded to the next level.”

Capital A Partners has invested in 12 companies, including four Charleston businesses, since 2013. Mendez has been working to raise a $25 million fund, which would enable investments of $250,000 to $1.5 million. He declined to say how much has been raised so far.

Trying to secure funding from nonlocal sources also costs startup CEOs time, Dobson said.

“You used to be able to raise a year’s worth of capital. You can’t do that anymore. Every six months you need more, and CEOs often spend all their time raising money, not running their company. ... We’re pushing for greater organization of angel capital across the country to make this whole process dramatically more efficient,” Dobson said.

Osborne agreed, saying availability and speed of funding are needed for scalable ideas if Charleston wants to grow its startup sector successfully.

“Companies at this stage could live or die based on waiting for funding. Speed is important. A quick ‘yes’ or ‘no’ is important,” Osborne said. “As a startup CEO, you have to think, ‘Am I going to have $500,000 to spend or not? Do I need to spend my time and energy on finding money or on executing my plans?’”

Reach staff writer Liz Segrist at 843-849-3119 or @lizsegrist on Twitter.

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