Have a good idea? Capital is available

IMPROVING ENVIRONMENT: Peter Dorsey, left, president of The Business Development Company, and Robert Manning, chairman of Cherrystone Angel Group, see progress in R.I.’s ability to support startups. / PBN PHOTO/RUPERT WHITELEY
IMPROVING ENVIRONMENT: Peter Dorsey, left, president of The Business Development Company, and Robert Manning, chairman of Cherrystone Angel Group, see progress in R.I.’s ability to support startups. / PBN PHOTO/RUPERT WHITELEY

Much has changed since Cherrystone Angel Group in 2004 became the first angel investment vehicle to surface in Rhode Island, perhaps nothing so much as how prominent the entrepreneurial community has become in the region.
Robert Manning is chairman of Cherrystone Angel Group and has been a member since it was founded. Previously he was with Citibank and Citigroup for more than 25 years. As head of corporate finance for Citigroup in Japan, units under his supervision raised more than $50 billion in private market financing.
Peter Dorsey is executive director of Cherrystone Stone Angel Group and president of The Business Development Company, which provides capital to help companies grow in Rhode Island, southern Massachusetts and eastern Connecticut.

PBN: What exactly is an angel investor, and what is the benefit for an angel investor to joining a group such as Cherrystone?
MANNING: Very broadly speaking, angel investors are private investors investing most typically in early-stage companies. … Angels as a rule, [though] not always or exclusively, are members of angel groups. The purpose of the group is that it’s an organized place where companies who are looking for money can come and address a number of angels at one time. … It’s very labor intensive when you do it yourself, which is why people tend to migrate toward groups.

PBN: When do angels get involved in a startup?
MANNING: The angels typically get involved in what we call the “A” round of capital raising, which has a lot of nuance. Staging is hugely important. Companies typically go through a first stage of friends and family to build some of the initial stuff. Then they broaden out and begin to validate the sales and go for grant resources or early-stage government money. Then they get into a mode where they are going to start building out the company. That’s our sweet spot.

PBN: Cherrystone Angel investors collaboratively invest in the $250,000 to $500,000 range. Does every member invest in every deal?
MANNING: We use an individual participation model. Not everybody is in on every deal. … One of our members is usually the deal champion and is nominated to be a board member. They look after the investment on behalf of the Cherrystone guys. Individual investments in a single company typically range from $10,000 to $50,000, and most members opt to diversify their risk by participating in a larger number of investments at a lower individual amount. Based on interest and deal flow, each member on average is likely to contribute at least $20,000 to $25,000 a year to group investments.

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PBN: How has Cherrystone Angel Group grown since its inception?
DORSEY: We did our first deal in 2005, and some of the signs of the group’s maturity [include] the growth of our membership, which is now at 55 and with total investment activity, which is just over $9 million. A more significant sign is that as we’ve learned and gotten better, we’ve been in the position to lead some investments [and] put together syndication partners.

PBN: What are syndication partners?
MANNING: When Company X comes up, they typically will begin in-depth conversations with one angel group who likes it and agrees to be the lead. That group sort of sponsors the company around to other angel groups. That market is very active in New England. … The chairmen can pick up the phone and say, “This one looks like it’s a real deal and you guys should get involved.”

PBN: What does Rhode Island have going for it within the startup environment and for attracting angel investors?
DORSEY: I think there’s been a significant amount of progress in building the economic system to support early-stage startups, so I think you want to give credit to those kinds of things. I think the key to [that] is the system in creating mentoring resources so it’s not just about someone who has an idea and can raise capital but someone who has experience and can help mold it into something investable. An idea itself is not necessarily investable.
MANNING: There’s been a lot of dialogue lately about what’s going on in the early-stage company environment – is the economy locally growing jobs, is there a resource gap that’s preventing the economy from coming up? One of the questions that somewhat frequently comes up is people say there isn’t capital around for startup companies. There is money. There very much is capital available in the marketplace right now.

PBN: So what needs to happen to make more entrepreneurs aware of angel-investing capital and turn the conversation around?
MANNING: Some of the people who are saying [there’s no capital] are looking at the principle purpose of capital being job creation. That’s not what angel groups are about. Angel groups are about investing in companies to make a return on their capital. If it’s two guys with a great idea and they can sell it, we’re all for it. People who have a public-policy focus on creating jobs are probably encountering a significant lack of capital that is focused only on creating jobs. That’s a very different focus from the real capital markets.

PBN: Cherrystone so far has invested within the medical, business services, software, business products and manufacturing sectors, as well as within the consumer-products sector with Narragansett Brewery. What is Cherrystone focused on this year? Is there a target investment amount?
DORSEY: We made a total of nine investment rounds totaling $2.2 million [in 2012]. The nature of the beast in angel investing is that you have follow-on rounds in your existing portfolio. We’ll continue to allocate fresh capital to support those companies. At the same time we’ll look for new opportunities. There’s no shortage of deals flowing.

PBN: What types of deals resonate with your membership?
DORSEY: I think we’ve seen a number of deals in the medical area. In the last year-and-a-half to two years we’ve seen more activity there, and we’ve gotten excited about that as a group, [but] Cherrystone is not sector specific.
MANNING: One of the areas Cherrystone has been very active in is early-stage bio science. … There are three areas: early-stage drug development, early-stage diagnostics and medical devices.

PBN: Is the future of Rhode Island’s entrepreneurial environment solely in the bio-science industry?
MANNING: Oh no. I would say there’s a very active early-stage environment in tech, software, hardware and some engineered product. We think on the bio-science side, we’re going to start seeing more flow.

PBN: The Ocean State Angels emerged last year as an angel-investment group focused on connecting medical minds with capital investors. That doesn’t mean Cherrystone should lessen its medical-sector investments?
DORSEY: Not at all. Cherrystone is very excited to see Ocean State Angels being launched. We have members in both groups. … It allows you to raise more money in any given round and gives you more capacity to support a community as it moves forward.

PBN: Is there room then for more angel-investment groups here?
DORSEY: I would say yes, definitely. If you are a group and look at funding transactions, a common number is a quarter of a million [dollars]. If you look at a group’s funding request, they are looking to get half a million or a million. You can have two or three companies investing as a syndicate in the same deal. If there were more groups organized, I think that would be a good thing.

PBN: One of Cherrystone’s focuses is staying involved with companies in which it invests. How is this done practically?
DORSEY: We’ll have at least a board seat on the company [but] it’s more than just going to board meetings. It’s sitting with the management team and being available and trying to be an objective, outside source of information and experience. It isn’t like buying stock on the stock exchange and it just sits in your portfolio.

PBN: An example is your involvement with Betaspring, in which Cherrystone invested in 2011. Peter, you serve as a Betaspring mentor and advise how entrepreneurs should best approach capital investors. How do you want to be approached?
DORSEY: I would guess there are probably eight members of Cherrystone who participate as mentors with Betaspring. You want someone who is honestly objective about their plan and the risks that are inherent to it and really understand with clarity the problem that they are solving from the market’s perspective, not just their own.
MANNING: Our members have really helped companies that wouldn’t have access to talent at that level of experience, guys who have been there, seen it, and know how to solve commercial problems that these often-young entrepreneurs are facing. •

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