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Is Upstate ready to form an Angel Investment Group?

Is Upstate ready to form an Angel Investment Group?
By J B Holeman

Over the last few months, we have seen a lot of press about the emergence of early stage or start-up companies, right here in our back yard. In fact, there are a number of organizations actively encouraging them, such as SC Launch, NEXT, GSATC, New Carolina, Innoventure, and more. While it's great to encourage these entrepreneurs, all these companies need money to fuel their growth.

Raising money always poses a challenge, but for start-ups even more so. Start-ups by their very nature are risky investments, and investors try to avoid risk. The two most common forms of raised capital are debt and equity. However, because start-ups frequently don't have a track record, raising debt capital from banks and other lending institutions is particularly difficult. Therefore, the most common alternative for early stage funding is raised by selling shares of their company, or equity financing.

While equity financing varies widely, a common pattern for start-ups is that the first $0 to $500,000 (for the first year or so), comes from family and friends. After that, and until the company gains some traction (about two to three years and some revenue production), the company commonly seeks money from angels, either individuals or groups.

Once companies start to achieve further financial and operating success, they then approach bigger equity players such as venture capital and investment bankers to fund continued growth. These later players are the professionals, and their terms tend to be more demanding. However, they can provide the millions of dollars the company needs to really take off.

In our area, the problem is that there is no organized way for local start-ups to efficiently pursue funds beyond family and friends and before the big money. As a result, the very companies we have enthusiastically encouraged are left struggling for their lifeblood. One answer to this situation is to establish an Upstate Angel Group. There have been some earlier efforts to start such a group, but they have failed to get traction. The approach we are suggesting will be run by investors for investors. This framework creates a motivated group of like-minded individuals to foster small business development and seek a better return on investment.

In the past, one of the biggest pitfalls Angels make is accepting a start-up company's valuation that is unrealistically high (a fairly common situation). The problem occurs when the company grows (and we hope it will) and it needs to raise more capital. Now, the big boys step in, and they will not accept the initial unrealistic valuation. Therefore to obtain the needed growth capital, the company must devalue the price per share previously paid by the angel investors. Devaluation (also known as "cram down") is a fairly common adverse consequence to early stage investments. However, a proactive investment group should be able to mitigate that possibility significantly.

Another common pitfall of many angels, individuals or groups, is to give their money and encouragement, and then walk away, hoping for the best. The angels want the start-up to succeed, but commonly, they do very little to help it grow and prosper. Our approach will be to have one or more of the angel investors serve as champions, providing a real time link between the company and the angel group. Not only will the angels stay tuned to their investment, they will also be able to offer the start-up company access to their network of professional contacts. This may turn out to be more important than the money.

These last two points are just two of the many things a group must decide when organizing an angel group. However, the first thing is to determine if there is sufficient interest in the Upstate to form such a group. Tim Reed and I are trying to gauge that interest right now. We have set up two sessions at the Westin Hotel on Nov. 6 and 7.

We'll have a short cocktail session on the 6th to describe the Upstate's early stage funding activities to date. At a breakfast session on the 7th, we will have several Angel experts discuss Best Practices, the relationship between Angel investors and later stage investors, and the organizational experiences of the state's only successful angel group, the Charleston Angel Partners or CHAP.

We have invited over 300 accredited investors (financially successful individuals) to attend both sessions. We have surely missed some Upstate accredited investors, and if they will contact me directly, we can still add a few to the list. Following the two sessions, we will answer the question, "Is the Upstate ready to form an Angel Investment Group?"

J B Holeman has lived in Greenville since 1991 and is working to start an angel group in the Upstate. After working in senior executive positions with two large environmental companies, he started investing in early stage companies in 2002. He can be reached at JBHoleman@aol.com.