By Guest Contributor Paul Clark | Palmetto Angel Fund
The Palmetto Angel Fund brings the idea of mutual fund diversification to early-stage investing
Which group of people is more entrepreneurial: business owners or capital providers?
Easy answer, of course: People rarely accuse financiers of being innovative – and when they do it is usually for “innovations” that can contribute to bubbles and crises.
Undoubtedly this reputation for conservatism is partially deserved, and is supported by recent trends in how companies are funded. Banks have had to become significantly more risk-averse, reducing what they lend to early-stage businesses; private equity buyout funds continue to grow in size, with an estimated $900 billion of “overhang” funds raised but not deployed; and even venture capitalists have reduced their risk tolerance as they “de-risk” by moving to larger, later-stage companies with already-proven business plans.
There are, however, exceptions. A startup seeking capital does not need to look too hard, or too far beyond the Upstate, to find innovative capital providers. There are now more than 300 organized groups of angel investors across the country, including UCAN, which has now provided nearly $10 million to finance startups.
Crowdfunding – or online pre-sales for new products – has exploded over the last three years, and recent changes to regulatory restrictions on raising capital via the JOBS Act will soon allow companies to raise equity through approved crowdfunding platforms.
Other innovative capital sources are less well known. One particularly interesting novel approach is to apply the ability to raise capital through “general solicitation” – effectively, the public marketing of private investment funds and companies in the same way that other public funds (like mutual funds) are already permitted. One such Greenville-based fund now operating under the new rules is the Palmetto Angel Fund.
The Palmetto Angel Fund is a newly launched effort to attract more people into early-stage companies by bringing the idea of mutual fund diversification to early-stage investing. The fund will invest alongside angel investor groups in the South Carolina Angel Network in the same companies that these groups analyze, mentor and support. Fund investors get the benefit of the collective investment expertise of over 50 experienced investors and successful business people combined with a professionally-managed, cost-effective investment platform. It is structured like a venture capital fund, with investors committing a specified amount of capital to fund investments over a four-year period, but unlike most VC funds it is deliberately being marketed “publicly” to attract a wider range of investors.
Who cares? First, investors interested in early-stage companies. It has historically been time-consuming and difficult (if not impossible) to invest effectively in early-stage companies. If you wanted to buy Facebook shares while its value was growing from $0 to $15 billion (when Microsoft acquired its stake in 2007), unless you were exceptionally wealthy and well connected you were out of luck. For the approximately 120,000 “accredited” households in South Carolina (that is, those that meet certain minimum annual income or net worth thresholds), this fund allows access to our most exciting companies before they are public – and, hopefully, when they are generating the most value. Perhaps not the next Facebook, but potentially the next Selah Genomics, an investment made by UCAN in 2013 that was sold for up to $75 million two weeks ago. With a commitment of $25,000 or more, an investor can access a diversified portfolio of 15-20 early-stage investments, with the potential for an attractive return in a unique asset class in a less risky way than investing in a friend’s new venture or a distant, unknown crowdfunding candidate.
Second, entrepreneurs: Instead of having to raise money from multiple investor groups from a wide area, the best entrepreneurs in South Carolina can close their entire seed financing round from one source. Companies that are focused on executing their business plans, rather than constantly trying to scrape together more capital, have a much greater chance of succeeding – and of staying in South Carolina instead of disappearing to Silicon Valley.
Lastly, anyone with an interest in the Upstate’s prosperity: economic development agencies, state commerce departments, business service providers, banks hoping to support more mature companies, or anyone else interested in creating wealth and jobs. Having successful startups is crucial to the future prosperity of our state. Encouraging innovative capital is one way that South Carolina can emulate, or even surpass, the most dynamic areas of the country.
[break]
Paul Clark is a general partner of the Palmetto Angel Fund, a director of SCAN, and an angel investor excited to be emulating, in a small way, the entrepreneurialism of the many impressive startup companies around South Carolina. He can be reached at paul@scangelnetwork.com.
