Appalachian Angels: Growing High-Tech Businesses in Western North Carolina

by Fred D. Baldwin

David McConville's Asheville company, Elumenati, develops content, software, and production technology for "immersive displays," planetarium-like perspectives on hard-to-visualize subjects such as astrophysics and the behavior of molecules.

Elumenati is the kind of high-tech company western North Carolina's regional economic development commission, AdvantageWest Economic Development Group, hoped to encourage when it created the Blue Ridge Entrepreneurial Council (BREC). BREC describes itself as "a nurturing organization for entrepreneurs . . . that focuses on education, networking and mentoring, communications, and capital formation." It also helps make the assets of Appalachian North Carolina more visible, not just to outsiders but also to talented people who live and work there.

BREC specializes in nurturing the kind of entrepreneurs who cheerfully and un-self-consciously call themselves "geeks"—that is, those who have ideas for technology-based enterprises but whose initial working capital may be mostly intellectual. When these firms appear ready to put serious financial capital to good use, BREC will introduce their principals to potential investors in the Blue Ridge Angel Investors Network (BRAIN). BRAIN members are a select group of investors who not only put their own money on the line but also invest substantial amounts of their time in coaching entrepreneurs whose firms seem poised for growth.

In the world of finance, the term "angel" investor has a specific meaning—it's someone who is willing and able to accept a big financial risk by supplying early-stage capital, hoping to reap big rewards if the business succeeds. Consider, for example, a software designer with an idea that just might become a major money maker. At first, this would-be entrepreneur gets seed money by tapping into "the three F's"—founders, family, and friends. Now suppose the idea makes it through the proof-of-concept stage, still looking good. For actual product development and marketing, the entrepreneur needs much more money, but the new venture is still too risky to qualify for a bank loan. That's where an "angel" may enter the picture.

North Carolina encourages angel investment by providing tax credits for investments in high-tech firms generating less than $5 million in annual revenue. Angels are responsible for their own due diligence—asking tough questions and insisting on clear answers. With good judgment, a measure of luck, and perhaps the angel's own active involvement in guiding the fledgling firm, after five years or so the startup company can be sold to a larger firm or, more rarely, arrange for its stock to be traded on a national exchange like the NASDAQ. When all goes well, the angel investors stand to multiply their money five, ten, or even fifteen times over. When things go badly, they may lose every penny.

Reversing "Double Brain-Drain"

BREC was created in late 2002 with the help of an Appalachian Regional Commission (ARC) grant. BRAIN came into being the following March. "We were asked as a board to put on another hat," says David Reeves, an AdvantageWest board member for eight years and one of BREC's early advocates, "and to think not only as an economic development office but also as an entrepreneurial office. I ask, 'How're you going to turn this science project into a revenue stream?' That's the gist of what we're all about."

One Asheville entrepreneur who was deeply involved in the creation of BREC and BRAIN is Bill Ward. Ward is a founding principal of BUILDERadius, a small software firm that enables municipalities to track construction-related issues like building permits. He says western North Carolina suffers from a "double brain-drain." "We lose our brightest young people," Ward says. "And many bright young people come here to college and want to stay, but they can't do it."

During the year or so before BREC's formation, Ward and other Asheville-area entrepreneurs became impressed by the work of Jim Roberts, a consultant then working in Charlotte, North Carolina. Earlier, during the Internet boom of the 1990s, Roberts had helped one of his clients develop a network of high-tech entrepreneurs as a source of potential customers for online services. In 2002, Ward and his associates recruited Roberts to create a similar network for western North Carolina, so Roberts became BREC's first executive director.

No one needs to be convinced that Appalachian North Carolina is a great place to visit and a great place to live. (People who begin retirement in Florida and then decide to move to western North Carolina are common enough to have picked up a local nickname: "half-backs," as in "halfway back" to wherever they came from.) The challenge for area economic planners is to provide convincing evidence that the area is also a terrific place for developing the kind of businesses offering high-paying jobs to bright, creative people.

BREC was quickly successful in tapping early-stage investment capital. In 2002, all across Appalachian North Carolina, the dollar value of investments qualifying for the state's tax credit for investments in high-tech enterprises reached a grand total of exactly zero. During 2006, BREC assisted companies in raising more than $6 million in early-stage development capital.

Much, but not all, of that capital came from participants in BRAIN. BRAIN is not a fund. It's a membership group of local investors—many of them former corporate executives—who come together four times a year to hear pitches from entrepreneurs. Members cooperate in due diligence and sharing information, but each investor makes his or her own decisions on whether or not to put money at risk.

Ward mentions that he warns would-be investors in his own firm that they should invest only money they can afford to lose—not amounts that would keep them awake at night. He'll take a few evening calls, he says, but then adds: "If you're awake at 2:00 A.M. worrying about your investment, I don't want to hear from you then. You can give me your 9:00 P.M. money. Don't invest the 2:00 A.M. money."

Until 2007, BRAIN functioned fairly informally. In a typical quarter, between 15 and 20 entrepreneurs submitted draft business plans for consideration. Roberts filtered out not only weak ideas, but also ideas for "lifestyle" businesses; i.e., businesses that seemed likely to support only the entrepreneur and perhaps a few other employees. Plans that made it through this first screen went to a nine-member advisory board, which mobilized an impressive array of business talent to encourage what board member David Kemper describes as "ideas with legs."

In February 2007, AdvantageWest Economic Development Group announced plans to transform BRAIN into an independent corporation founded by AdvantageWest. Only investors with the financial resources to take risks will be eligible for membership. And BRAIN members must be willing to offer assets other than money, including track records in managing or building successful companies, willingness to coach entrepreneurs, and the ability to dedicate significant time and effort to BRAIN activities.

More than Money

Not all entrepreneurs want the kind of large-scale expansion BRAIN helps promote, but even "lifestyle" businesses can benefit from other kinds of help from BREC. For example, husband-and-wife team Tim Gallaugher and Tara Holden run eGlobal Design, a small software company. Its revenues have grown 60 percent a year for three years, and the number of employees has grown from two (themselves) to eight. Roberts helped them find a CEO to manage the business's growth, and they call BREC's help in making contacts "invaluable."

Trevor Lohrbeer of Lab Escape, a three-year-old startup with five employees, expects to be making a pitch for angel capital during 2007. (Lohrbeer is also a co-founder of a local support group for techies called "Meet the Geeks.") His software produces visual displays of highly complex quantitative data. It's used by firms in the United States and in three foreign countries, which makes it what Lohrbeer calls a "micro-multinational." He also used BREC to help find a CEO.

"Working for a big company is a job," Lohrbeer says. "Working in a startup is a ride. Sometimes it's a roller-coaster ride. The CEO [that's right for a new company] is probably somebody who sold their own company a few years ago and is now playing on a golf course with 70-year-old guys. BREC and BRAIN are the way to find those people."

Tom Dempsey, founder of Sylvan Sport, which will target the outdoor camping market, expects sales to reach $3 million in his first full year of operation. Dempsey, who previously founded and sold two successful businesses, became the only entrepreneur to turn down money offered by BRAIN angels. He accepted instead an acquisition offer from another area firm with a complementary product line. Nevertheless, he credits networking help from BREC with reducing by about six months the time it took him to find expansion capital. Dempsey began working with still another AdvantageWest Economic Development Group program in early 2007. The Blue Ridge Industrial Council is helping his company complete licensing arrangements for the manufacture of components for his outdoor products and find industrial space for his assembly operation.

Although still new, BREC and BRAIN have inspired at least one Appalachian imitator. Dave Lawrence, director of the East Tennessee State University Innovation Laboratory, a business incubator in Johnson City, led in the creation of the Tri-Cities Regional Angel Investor Network in 2005. By mid 2006 that initiative had produced a major success—almost $1 million raised for a new bio-tech venture. "We've learned a lot from Jim [Roberts] and what he did with BREC and BRAIN," Lawrence says. "We see him as a strong role model."

BREC and BRAIN changed leadership in 2006, and the plans of its leaders remain ambitious. Mike Fulenwider, a successful entrepreneur, now serves as BREC's chair. Kemper, who had assisted BRAIN as a consultant, currently manages day-to-day operations. In late February 2007 AdvantageWest CEO Dale Carroll and Kemper announced that AdvantageWest will build on the successful BREC and BRAIN pilots to implement a "Certified Entrepreneurial Community" program.

All those involved, including western North Carolina's high-tech entrepreneurs—geeks, if you will—predict the growth of a thriving information technology industry in this part of Appalachia. All mention the area's natural beauty, good schools, and a determination to use those assets to attract, support, and retain talent. But some warn that over-reliance on tourism for economic growth can be as risky as over-reliance on coal or timber. By contrast, they see human creativity as an inexhaustible natural resource.

The most important thing that BREC and BRAIN have done for us," Kemper sums up, "is to adjust our vision. We don't have to be what other people perceive us to be. [In addition to] being a tourist destination, this is a place to be if you want to be a success in business. It's cool to be an entrepreneur here.

Fred D. Baldwin is a freelance writer based in Carlisle, Pennsylvania.

March 2007