Monday, November 21, 2005

Finance

Angel fund closes at $10M

By Efrain Viscarolasaga

In June 2004, James Geshwiler, managing director of CommonAngels, set three goals for his group: Create a new fund of $10 million, grow the membership by 25 people and add a second managing director. This week, all three goals were met.

CommonAngels told Mass High Tech that it had closed its second fund, this one for $10.675 million; had welcomed Chris Sheehan, founder of consulting firm Newburyport Partners in Newburyport as the group's second managing director; and had signed on a 26th new member.

The new fund has already invested in eight portfolio companies, five of which are new to CommonAngels.

The names of two of those newly funded companies have come to the surface: Carbonite Inc. of Boston, a maker of a new PC backup system for consumers, and CableNetTV Inc. of Wellesley, which has developed a video-sharing application for the Internet.

Carbonite, which received $500,000 from Common-Angels in addition to $1.5 million executives raised from other private sources, was spawned by David Friend, a local entrepreneur and angel investor himself who has co-founded five companies, including Sonexis Inc. of Tewksbury.

Friend, who has dealt with numerous VCs and angel groups over the years and has worked with CommonAngels before, though he is not a member, feels the angel fund model is a benefit to investors because it provides a middle ground for participation.

"It gives guys like me a chance to participate in the fund without going to all the meetings," he said. "I may invest in a company and then may go to do another project and will not have time for all the meetings and even the detailed due diligence. It gives me a chance to piggyback on others in the group, and still be involved."

While CommonAngels briefly considered raising a larger fund, possibly as much as $25 million, the group decided $10 million was an appropriate amount.

"It's the right size for investing in the kinds of companies we want to invest in," said Geshwiler. "We also want to work with complementary organizations, rather than being out in the market alone."

Angel fund, or small VC? While the fund size will allow the group to stick with early-stage companies, the establishment of a fund with a specified dollar amount sounds similar to a VC structure, rather than that of an angel group. It is a semantic argument not lost on Geshwiler.

"I'm not exactly sure of the exact definition of a VC," he said. "It keeps changing." The Angel Capital Association, of which Geshwiler and CommonAngels are members, defines an angel group as an organization where individual investors drive the decision-making process. In the case of CommonAngels' new fund, investors put money in along with the fund, keeping each investor directly involved.

The structure is fairly uncommon in the angel investment community, but not unheard of. Hub Angels Investment Group LLC in Cambridge has a similar fund structure, but in smaller amounts. That firm has had two funds, one for $2.5 million and the other $2.75 million, and is poised to announce its third fund next month, topping out at $5 million, according to Charlie Cameron, managing director.

However, because angel investing is growing at a substantial rate, both in numbers of deals and in the amount of individual deals, the need for new business models is growing. In fact, in 2004 total angel investments in the United States edged out total VC investments, $22 billion to $20 billion.

Several angel groups in the area have fundamentally different capital structures. For example, Angel Healthcare Investors LLC in Newton incorporates each deal it does, creating a limited liability corporation composed of individual investors, said Geoff Maletta, director of Angel Healthcare Investors.

That system makes the investment process clean and gives individual investors direct contact with the companies in which they invest, he said.

"Typically, the historic model is the member-driven model where investors find the companies, write their own checks and manage the process themselves," said Maletta. "I think it is evolving on the management side, where groups are becoming more professional and more organized."

A more organized and sophisticated angel group means the investors have more time and energy to spend in search of potential portfolio companies. This access for new companies is significant in the so-called "capital gap," where the amount of funds needed falls below what traditional, big-fund VCs need to put into a company to make such a transaction worthwhile, said Geshwiler. The result is more opportunities for early-stage companies that fit into the profile.

"The whole structure is changing and becoming more like a VC," said Cameron. "The models are evolving a lot and we've all kind of moved up stream a bit. We are seeing more organized companies with management teams and patents filed (than we used to)."

And that has proven to be a good thing.

"This year is definitely a pickup over last year," said Geshwiler. "We've had a healthy, solid flow of companies coming in."

That flow is not only reflective of CommonAngels' fund strategy, but is also representative of a strong market, he said.