By Neil Cotiaux
“Nothing ventured, nothing gained” may be a shopworn adage, but it’s entirely applicable to the founding, growth, and regional impact of the Upstate Carolina Angel Network — now known as VentureSouth — during the past 10 years.
Launched in the dark days of 2008 just before the markets crashed, the private-equity network was founded by Greenville businessmen J.B. Holeman and Tim Reed, who saw a significant funding gap facing early-stage companies and decided to fill it.
Holeman and Reed brought in Matt Dunbar, a chemical engineer and management consultant, to serve as managing director of the new operation, and the three began building an infrastructure of accredited member-investors across the Upstate who possessed diverse professional experience.
“The group was formed just before the financial crisis, not as a result of it,” Dunbar said recently. “However, the fact that we didn’t have a legacy portfolio of companies that might have failed during the crisis gave us some time to figure out our model, and while investments were slow early on given all the uncertainty in the economy, the fact that some people were looking for alternatives to the public markets … helped us find a critical mass of investors that enabled us to survive early on.”
Investments started slowly and picked up in 2010. In 2014, Charlie Banks and Paul Clark joined Dunbar as managing directors and the trio launched the South Carolina Angel Network, which incorporated the original Upstate network and some newer chapters elsewhere. The combined group then rebranded as VentureSouth in 2016.
Now, 10 years after the recessionary meltdown and in a climate of robust economic growth, the angel network — 12 affiliates across both Carolinas — continues to infuse companies with sorely needed capital out of its new headquarters at Greenville’s McAlister Square.
During its life, the network has attracted more than 400 past and present members and currently works with 270 participants, Dunbar said during a conversation at the new offices.
To date, he said, members have invested more than $28 million in 61 young companies, with about 60 percent of the dollars deployed in South Carolina. Those five dozen companies also attracted $350 million from other sources and have employed more than 1,000 people.
In 2017, VentureSouth invested a record $4.5 million in 20 firms across South Carolina, North Carolina, Georgia, Florida, and Tennessee, Dunbar said, and closed its second investment fund after committing more than $3 million in member capital.
VentureSouth’s “sweet spot” is an investment of $250,000 to $750,000 in an early-stage company possessing strong leadership, some initial revenue, and a business model that can scale up quickly, Dunbar said.
The goal, he explained, is to generate a 50 percent annualized rate of return over three to five years, leading to a strategic exit.
Dunbar said he is less concerned about profitability during scale-up.
“We want all the available cash flow invested in growth,” he said.
Because of the risks inherent in early-stage firms, VentureSouth’s three principals typically ask for a preferred equity stake before committing to a deal.
“We want to own a significant minority piece of the business,” generally from 20 percent to 30 percent, Dunbar said, with other investors serving as co-owners.
While member investors are generally “industry agnostic,” he said, the network’s “three big buckets of interest” are technology and software, life sciences, and industrial and energy firms. A variety of companies within these market segments present capital-efficient, high-growth potential, the principals believe.
Capital, contacts spur growth
For Atlas Organics, a vertically integrated composting business founded in 2015 and based in Spartanburg County, continued investment by the angel group may make it easier to do business with municipalities.
Working with local angel affiliates, “VentureSouth has contributed over $1 million dollars in total across the [funding] rounds,” said Joseph McMillin, the company’s chief executive officer.
Atlas Organics’ goal is to “build a comprehensive organics recycling platform” alongside municipal partners in the Carolinas and elsewhere, processing both food waste and yard waste in leased space at public landfills and processing it into high-quality compost sold into the agricultural, landscaping, and home-gardening markets.
Atlas received its first funding from VentureSouth when it struck a deal to lease 9 acres at Greenville County’s Twin Chimneys landfill. It also operates a pilot processing facility in Chattanooga, Tenn., and on May 14 opened a facility at a landfill in Durham, N.C., that the city says will reduce its carbon footprint.
The company also intends to grow its food-waste collection service across the seven markets it now serves: grocery, hospitality, industrial, corporate, health care, educational, and residential.
“VentureSouth definitely has a pretty rigorous process,” McMillin said, including requiring a company to make an initial pitch to a small group of angels, share a detailed dossier as part of due diligence, and — if invited back — go before a much larger group to make a final pitch. ”It allowed us to really know different investors,” he added.
“VentureSouth has really been professional, open, and transparent with their process,” said Justin Rothwell, CEO of Raleigh, N.C.-based ProAxion, which is using proceeds from the fund to build a market for its Tactix system, a new “internet of things” plug-and-play predictive-maintenance technology that allows industry to anticipate equipment failures, avoid downtime and expenses, and maintain productivity.
“We did kind of a quick screening call” with VentureSouth before visiting Greenville, Rothwell said, but soon after “did a two-week tour of South Carolina … pitching their individual groups.”
While angel funding is important, Rothwell said, “having access to customers is honestly our No. 1 priority every day” and more of that could occur given the manufacturing contacts embedded within the Upstate angel network.
Dunbar is optimistic about the group’s prospects over the next 10 years.
At VentureSouth, the pace of strategic exits is now expected to accelerate due to the age and maturity of the 98 funding rounds remaining in the group’s portfolio, Dunbar said.
“The market is very active and multiples are good,” he said.
According to a 2016 study of 245 angel groups nationally, the overall cash-on-cash multiple stood at 2.5 times a member’s initial investment, on investments held an average of 4.5 years.
“We’re swinging for the fences,” Dunbar said of working on behalf of angels, “but you can hit the ball out of the park.”
VentureSouth – by the numbers
12 affiliates across the Carolinas
>400 past and present members
270 current participants
$28M invested in 61 companies
~60% of dollars deployed in South Carolina
$250K-$750K VentureSouth’s investment “sweet spot” in an early-stage company
20-30% The typical preferred equity stake from VentureSouth’s three principals prior to committing to a deal