February 2011 Oregon Business Magazine

Link to story: http://www.oregonbusiness.com/articles/96-february-2011/4738-angel-fund-boosts-fortunes-economy

BY BEN JACKLET

In 2005, a group of 23 investors put $5,000 each into a modestpool with the goal of backing some of the most promising young companies in Oregon. Throughcollective intelligence and collaborative decision-making, they winnowed 50good companies down to three great ones: Clackamas-based pet supply wholesalerPet Appeal, Portland-based e-commerce software developer Monsoon andPortland-based health care billing specialist Clinicient.

Six years later, all three of those companies have created jobsfor Oregonand wealth for investors. The group that selected these three companies andnurtured them with early money also has grown — into the Oregon Angel Fund, anincreasingly powerful catalyst for finding, choosing and backing hot newbusinesses. Some of the best minds in the business community are involved inthe Oregon Angel Fund, and their results speak for themselves. Sinceestablishing the fund in 2007, the group has invested $7.7 million in 16companies. These portfolio companies have created a combined 443 jobs andcollectively earn $59.6 million in annual revenues. Although angel investmentstend to be risky bets, not one of the Angel Oregon companies has failed. Otherthan one business that was sold, every company in the portfolio grew throughthe economic doldrums of 2009 and 2010. Many have gone on to bring new moneyinto Oregon,with early angel investing spurring another $46 million in follow-oninvestments from other sources.

Howdid they do it?

Investor and entrepreneur Eric Pozzo was the nominated chairmanwho led the Angel Oregon selection and investment process in 2005 as avolunteer with the Oregon Entrepreneurial Network. “We did a lot of research,found the companies to present, went into a room, voted and signed a big checkto these individuals,” he recalls. “Everyone very much enjoyed it, and at theend of the process a lot of us wanted to do it year-round… We wanted to turn itfrom a small one-time pop to a well-organized machine that constantly cranksthrough deal flow and is very much investor driven.”

Pozzo’s ideas made sense to Eric Rosenfeld and his colleagues atCapybara Ventures. Rosenfeld had been wondering whether the traditional modelof investing —  “You surrender your money to a couple of smart people andthey decide how to invest it on your behalf” — was becoming obsolete. Ratherthan perpetuate that model Rosenfeld was eager to embrace the lessons of therise of Web 2.0, Google and Facebook: the “phenomenon of people wanting tocontribute and share, not just to consume, but to be a part of something, andshape it.”

With those ideals in mind, Rosenfeld and his partners developeda new model for participatory investing. Twenty investors with deep collectiveknowledge of markets, technologies and business operations would put $25,000each into an annual fund established as a limited liability corporation. Theywould pool their expertise as well as their money to research companies indepth, then vote on which ones to back, with a two-thirds majority required forthe money to flow. The two-thirds threshold would set high standards, the sizeof the group would widen its perspective and the one-year nature of the fundwould force decision-making. The entire fund would be invested each year, witha newly formed LLC replacing it in the following year. Entrepreneurs would be motivatedto apply because the money is already in the bank waiting for someone to takeit. Investors would be motivated to take due diligence seriously because it’stheir money on the line. Everyone would be motivated to bring new businessesinto the process, because the more companies that apply, the better the oddsthat one will succeed spectacularly. Individuals within the group would be morelikely to invest on their own knowing the company had earned the support of adiverse collection of accomplished businesspeople.

They didn’t find 20 investors that first year; they found 36.They signed on the Ater Wynne law firm, the Geffen Mesher accounting firm andOEN as sponsors and made four investments in 2007. The state got involved as anon-voting member the following year, contributing matching funds from theOregon Growth Account and treating them as a pure investment rather than thetypical ribbon-cutting-style economic development project. Word spread, and thepool of investors grew. Today about 80 investors are involved. Most have votingrights although a few invest passively. The 2011 fund will exceed $3.1 million,with more than $1.6 million raised from investors, matched by $1.5 million fromthe state’s Oregon Growth Account. The plan is to invest $400,000 to $750,000into four to five hot Oregoncompanies, selected for the talent of their teams and the quality of theirideas.

“We’re at a size now where someone in the room is going to knowabout any given market or technology that comes before us,” says Rosenfeld.“And if they don’t, chances are they will know someone who can help usunderstand it.”

The fund is managed by Pozzo, Rosenfeld, and Capybara associateShannon Heim, who organize meetings and negotiate terms with the companiesseeking funding. The investors range from retired executives with decades ofexperience to newcomers who have made millions in emerging web technologies.Among the more active members are Pixelworks co-founder Bob Greenberg, IntelCapital veteran Drew Smith, former Novas Software CEO Scott Sandler, Vesta CEODoug Fieldhouse and retired marketing executive Donna Blake.

Greenberg, who retiredfrom Pixelworks at age 44 in 2005, estimates he has invested about $250,000 inlocal companies since becoming involved in the angel fund. “I like the group, Ilike the process and I like the results,” he says.

Donna Blake retired from the corporate world in 1996 andswitched to investing in the stock market. It was a new challenge, but shemissed her work: “The planning, the excitement, the strategy sessions, themarketing campaigns. I missed it all.”

She heard about the Oregon Angel Fund from a friend and signedup immediately after sitting in on a meeting. She enjoyed the collectiveapproach and the fun atmosphere, but the real attraction for her was the work.“What’s exciting to me is learning about all of these business ideas,” shesays. “It’s such a wealth of exposure to so many industries. We’re vettingbusinesses starting with concepts I never would have thought existed.”

With a background in sales and marketing, Blake stayed away fromleading due diligence into the high-growth technology companies seekingfunding. But she is also an avid pilot who earned her license in her 20s, sowhen Seaport Airlines came before the group, “My hand shot up and I said, ‘Iwant to lead this team.’”

The group ended up investing $400,000 in Seaport in 2009following a thumbs-up recommendation from Blake and her team. Blake also movedoutside of the fund to invest as an individual. The company struggled findingbusiness commuters during the recession but found its way to profitability bysmartly tapping into the

market for essential air services for rural towns. Sinceexpanding its business plan with encouragement from angel investors, Seaporthas expanded to 120 scheduled flights a day in seven states, soon to be eight.Blake has been deeply involved with the expansion as a board member, flying to Memphis to help close the deal to move into the Tennessee market.

Blake has personally invested in other companies vetted by theangel fund, including the vacation rental business Second Porch; the e-commercebusiness The Clymb; and Celilo Group Media, the publisher of the popularChinook Book. She also plans to bring three friends into the fund this year asnew investors. “It’s a great diversification tool, and it’s fun,” she says.

Nick Wade agrees. He joined the Oregon angels last spring. After beingintroduced to Rosenfeld through mutual friends, he sat in on a meeting andimmediately saw the potential. “I walked up to Eric afterwards and said, ‘I’min,’” he says. “It was the vitality of the group that sold me.”

Wade, a former researcher at Intel with a lifelong interest ininvesting, appreciated the group’s methodical yet aggressive team approach.“It’s a risk investment,” he says. “But the thought and consideration that goesinto each investment is prudent and thorough… And it will lead naturally to amore diversified Oregoneconomy.”

It already has. Among the companies within the OAF portfolio arethe latest Oregonmedical devices firm to gain FDA approval (Bend-based Clear Catheter Systems),the fastest-growing private telecommunications business in the nation(Vancouver-based Clear Access) and an emerging player in the wide-open waveenergy industry (Corvallis-based Columbia Power Technologies).

Those are exactly the sorts of companies that could help improveOregon’slagging per capita income if they catch on and grow. And they all benefitedfrom investors who might not have heard about them had it not been for theOregon Angel Fund. “No way would I have considered investing in small companiesin Oregonwithout this structure set up,” says Sandler, the former Novas CEO.

People who get involved in the Oregon Angel Fund tend to getintensely involved. Many describe the group as a family — a large, boisterousfamily with strong opinions and lively debates, but also a prevailing sense ofcivility and decorum.

The fund’s investors meet eight or nine times per year and poreover between 80 and 100 business plans annually. They vote on which companiesthey want to present and organize due diligence teams led by volunteers withrelevant expertise to research the selected companies. Then at the next meetingthey entertain 12-minute pitches from top executives, followed by aquestion-and-answer session. The companies are excused from the room and thedue diligence teams present their initial findings along with a recommendationto hold off or to intensify research. The group votes on whether to delvedeeper.

Once the investors decide they want to learn more, they dig intoeverything they can find, posting their findings on a shared Angelsoft website.Investors read the reports and express their enthusiasm and concerns at thefollowing meeting before voting thumbs up or down on an investment dealnegotiated by the fund managers. “Sometimes it [fails] and there’s a sigh,”says Pozzo. “But when it happens there’s applause and we break open the bottlesof wine. Then we call the entrepreneur and tell them, ‘Good job, we got thethumbs up. Now let’s get this deal done.’”

The process does not end once the deal is signed. The investorwho leads the due diligence effort usually ends up with a seat on the company’sboard. The operating ethic is to mentor rather than meddle; the motto: “nosein, fingers out.” Individual angels move outside the group to add newinvestments to the pot. And with the entrepreneur’s permission, the groupshares its research with other outside investors to bring in new money.

These aren’t just feel-good processes. They’re designed forresults. Rob Wiltbank, an associate professor of strategic management atWillamette University who has written several research papers about angelinvesting, says most individual angel investments fail but a diversifiedportfolio of angel investments can produce average returns of $2.50 for eachdollar invested over five years. The catch is that about 10% of angelinvestments produce 80% to 90% of the returns. Wiltbank recommends investing in10-20 companies

to improve the odds of success.

Wiltbank says the Oregon Angel Fund’s strategy of poolingexpertise and refreshing the fund annually addresses the two most importantrules of angel investing: to invest widely but also carefully. “I’m veryfamiliar with the Oregon Angel Fund model and I’m a fan of it,” says Wiltbank.“The key is the people and the expertise they have.”

Rich Bader, a board member of the state’s Oregon Growth Account,is also a fan. “The processes that the Oregon Angel Fund has put together arevery sound,” he says. “We’re pleased with the quality of the investmentsthey’ve made and the level of due diligence.”

Since embracing the investor-driven, participatory model,Rosenfeld says he has no interest in going back. “It’s like a privatesector-driven stimulus with state support. It’s not coming from the halls ofgovernment. It’s coming from individual businesspeople who could be on theiryacht in the Caribbean or in Palm Springs butinstead are here in rainy Portlandspending their rainy afternoons with us. It’s a statement that people careabout Oregonand its economic future.”

The first company the Oregonangels voted to invest in was Lumencor, a California transplant that developed asophisticated light engine for bioanalysis. The husband-and-wife founders Steveand Claudia Jaffe reversed the prevailing migration pattern for growthcompanies by moving from Silicon Valley to Beaverton to build the company in December2006. They placed second in the 2007 Angel Oregon contest, landed $197,000 fromthe fund in September of that year, and set to work developing, manufacturingand marketing their products, with help from mentors such as Pixelworksco-founder Bob Greenberg and later DesignMedix CEO and biotech veteran LynnorStephenson.

They also tapped into a talented pool of optics experts from alocal community that has seen several big successes in that niche. It was notan easy time to launch an ambitious new business but the founders kept at it,and with time the product took hold. VP Claudia Jaffe says the company has beenliving off revenue since October 2009, and employs 15 people in Beaverton.

A more recent investment supported a similarly ambitious medicaldevices company called Clear Catheter Systems. Dr. Edward Boyle moved from Seattle to Bendin 2001. A cardiothoracic surgeon by training, Boyle teamed up with researchersfrom the Cleveland Clinic to develop a device that prevents blood in cathetersfrom clotting (these clots can lead to expensive and dangerous problems forpatients and sometimes death). The company’s product, PleuraFlow, received FDAapproval in December 2010.

The Oregon Angel Fund invested in Clear Catheter last year andplaced 40-year medical device industry veteran Jim Fee on the board after Feeled the due diligence team. Boyle says Fee’s experience proved a huge asset asthe company moved to hire the right sales executive to ramp up marketing afterFDA approval. “Jim was very involved in helping me draw up the job descriptionand recruit the right person. It was good to have him in the room, and I thinkit was good for the applicants to see him there too. We made the hire and he’sbeen doing great.”

Of course, angels do not give away their money and expertise forfree. Entrepreneurs must work hard to earn their support, often coming beforethe group multiple times before landing an investment. And the terms of thedeal don’t always please the recipients; at least one growing company, advancedfood processor Columbia Phyto Technology, recently turned down an OAFinvestment because the founders were uncomfortable with the terms. Otherentrepreneurs get put through the wringer repeatedly, revealing insider detailsabout their nascent companies, only to be voted down in the end.

But the process is challenging for several reasons. First ofall, the angels want to make sure they are investing in the best of the best.Secondly, they want to help the businesses that don’t make the grade to improvetheir plans and apply again. Giftango CEO David Nelsen, who has managed toexpand aggressively during the downturn thanks to angel support, describes theprocess as worth the effort. “It’s more than them just giving you money,” hesays. “It’s them taking you through a process that makes you a betterentrepreneur.”

OAF invested half a million dollars in Giftango in 2009, andoutside investors followed that up in 2010 by pouring in another $5 million.That money enabled the electronic gift cards company to expand into a newoffice near PGE Park in Portland and grow to 17 employees in time for theholiday rush season. Nelsen credits the Oregonangels with enabling that growth. “After having gone through that process withOAF, our series B round was pretty easy,” says Nelsen. “It made things easierfor us at the next level.”

Other local companies have enjoyed healthy success sincereceiving backing from OAF. Portland-based Jama Software, which received$400,000 from the fund in 2008, has grown from eight people to 20. “Theirrevenues have quadrupled since we started working with them,” says Drew Smith,who led the due diligence team and sits on Jama’s board.

Another rising star from the OAF portfolio is Portland-basedElemental Technologies, a video processing business led by some of Greenberg’sformer colleagues at Pixelworks. Elemental has raised $15 million and is aimingfor $10 million in revenue next year. “They’re off to the races, and it’s greatto see,” says Greenberg. He led the due diligence team for Elemental and serveson the company’s board.

Greenberg spent 20 years growing with InFocus and Pixelworksbefore delving into investing. He says he is more than happy to share hisexperience with the next generation of entrepreneurs. “We need people who havegone through the mill to nurture the next InFocus and the next Pixelworks,” hesays. “We need more of those successes in Oregon.”

It hasn’t been the best of times to launch an experimentin funding young companies.

Rosenfeld and Pozzo say the hardest year to convince investorsto stick with the fund was early 2009, when the stock market was crashing.Since then the group has added a number of younger entrepreneurs who have donewell with technology startups. Nearly all of the investors from 2010 elected tore-invest in 2011.

Those investors are also likely to be invited to participate inthe Portland Seed Fund, which launches this year, offering smaller amounts ofmoney ($25,000-$100,000) to startups. The new seed fund may compete for localinvestor resources, but it could also improve the supply of hungry youngcompanies with solid business plans. The Portland Development Commission hasinvested $500,000 in the seed fund, and the state has committed to investinganother half million if the fund can raise $2 million elsewhere.

With capital finally flowing again and the economy slowlyrecovering, other new opportunities for burgeoning businesses should follow.The thawing of credit, at least in the venture capital arena, has alreadybegun. Rosenfeld notes that with nearly $300 million in new investments, 2010was the best year for raising venture capital in Oregon since Capybara began trackinginvestments seven years ago. “The mood is better,” he says. “People have moreconfidence.”

He’s looking forward to afresh new crop of deals in 2011. “It’s one of the best feelings in the world,”he says, “when someone comes in with a business plan and you play a small roleas a financial catalyst in helping them achieve their dreams. You see them twoor three years later and they’ve got a team of great people and a beautifuloffice and happy customers. That’s what it’s all about.”

Businesses backed by the Oregon Angel Fund

Celilo Group Media

The Portland-based publisher of the Chinook Book, asustainability-themed coupon book founded in 1999.

Clear Access

A Vancouver-based telecommunications businessfounded in 2005, named the fastest-growing company in its sector by Inc.magazine.

Clear Catheter Systems

A Bend-based medical device company founded in2007.

The Clymb

A Portland-based outdoors/sports e-commerceretailer offering brand name deals to members.

Columbia PowerTechnologies

A Corvallis-based wave energy company founded inpartnership with Greenlight Energy Resources and Oregon State University in 2005.

Daverci

A medication management business that sold toKentucky-based Polycare in 2008.

Designmedix

A Portland-based developer of medications foundedin 2006 that combats the problem of drug resistance.

Elemental Technologies

A Portland-based video software company founded in2006.

Giftango

A Portland-based developer of electronic gift cardsthat raised $5 million in October 2010. Founded in 2005.

Jama Software

The Portland-based developer of the web-basedapplication Contour founded in 2006.

Lumencor

A Beaverton-based manufacturer of precise lightengines for life science applications founded in 2006.

RNA Networks

A Portland-based tech company specializing inmemory virtualization founded in 2006.

Revelation

A Portland-based software company that assistsmarketers with qualitative research founded in 2007.

Seaport Airlines

A Portland-based airline that began flights in2008, specializing in hassle-free travel and subsidized “essential airservice.”

Second Porch

A Portland-based software firm that connectstravelers with owners of vacation rentals. Founded in 2009.

Wicked Quick

A Portland-based designer of auto racing-themedapparel and accessories founded in 2003.

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