Monday, March 24, 2008

Angels, 103 of them, help launch music startup OurStage

By Christopher Calnan

Entrepreneur Ben Campbell got more than he bargained for when looking for capital to launch his online music company in 2006. Instead of one investor, he got 103 of them.

Campbell, CEO of Chelmsford-based OurStage Inc., enlisted Signature Capital LLC, an 11-year-old investment firm with operations in Florida and Portland, Maine, that acts as a placement agent for a syndicate of 300 individual angel investors across the country. And 103 of them ponied up nearly $13 million of a planned $15 million round of financing for OurStage, a free online service that enables musicians to post music online and allows users to rate the music.

Over the last several years, individual venture capital investments in tech companies have grown, which has created a capital gap that squeezed out many small tech startups. At the same time, a number of New England angel investors have stepped up to fill that gap, with 20 angel groups now operating here. Signature Capital has created a hybrid approach that borrows a little from both financing models.

For instance, Signature Capital operates without the kind of large investment pool, or fund, from which a typical VC firm and some angel groups draw money for investments. And, instead of collecting a 3 percent management fee based on the amount of the VC's fund and a portion of a portfolio company's profits, as is typical of VC firms, Signature charges a 9 percent commission on the amount it raises on behalf of its portfolio company and takes direct ownership of 10 percent of common stock. Angel investors vary in shape and size but most either have a VC-like fund or invest as individuals.

Campbell said dealing with 103 investors through Signature has been worth it to get the access to enough cash and guidance to launch OurStage. And while he lauds the unique approach, he acknowledges that it's a rarity in the world of tech financing.

"The investor makes out better with this model, as does the entrepreneur," he said. "But in the end, it's an anomaly."

Signature co-founder William Turner said most entrepreneurs are unhappy with conventional VC financing because it doesn't provide enough capital upfront and investors take too much ownership during multiple rounds of financing. Turner, a former COO for New Jersey-based payroll firm Automatic Data Processing, said Signature has invested in 15 companies and exited six, providing investors with a 25-times multiple on their investments.

"The traditional VC model, with the exception of a few firms, is broken," he said.

George McQuilken, the founder of the Portsmouth, N.H.-based eCoast Angel Network, said it's not new for investors or investment firms to charge a fee to raise money for entrepreneurs. Yet he said he's never heard of a funding model similar to Signature Capital's.

But McQuilken questioned the logistics of keeping more than 100 investors informed. "If they all called you wanting information," he said, "that would be tough for a (portfolio) company."

Turner answered by saying that portfolio companies conduct quarterly conference calls for investors and provide quarterly written updates, similar to the way a public company informs stockholders.

OurStage was spun out of Signature Capital portfolio company Helium Inc., an Andover company started in 2006 to publish original articles and blogs online, to mirror Helium's business model but with a focus on music.

Helium CEO Mark Ranalli said Signature provides its portfolio companies with the money they need upfront. Longtime angel investor Peter Schellenbach, an Illinois resident who has been investing through Signature for five years, also said the firm's model prevents later-stage investors from diluting the interest of early investors, commonly called a "cramdown."

Campbell is also wary of cramdowns. OurStage is the third tech company in which he's led operations. Previously, he was CEO of Boston-based BTS Partners Inc.

Campbell said Signature's model provides OurStage with a network of experienced executives. But it's Turner's activity in selecting managers and board members that fuels the portfolio companies past early stage to established businesses.

"It's a longer-term view," Campbell said. Turner "drives them to success with his personal involvement."