Note: This article is the third in a series of interviews highlighting the work of interesting small funds.
James Hart is an experienced business owner and executive with deep expertise in the management consulting industry. He is the Executive Director of Appalachian Investors Alliance, a non-profit which works to address imbalances in know-how and technical support that cause locally-minded investors in smaller, mid-American cities to become frustrated by and disaffected with higher-risk seed- and early-stage equity investing.
James, thank you for participating. When was the fund established, and is this the first fund you have managed?
Appalachian Investors Alliance (AIA) provides fund administration and technical support on a fractional service basis. AIA provides services for funds that cannot maintain the staff required to operate a regular venture fund staff. Our most mature fund started investing in 2014; we currently manage and support 12 funds with 6 more at various stages of the formation process.
Do you have a thesis or focus on any particular type of founder, company or industry? Are there particular types of startup companies you steer away from?
Our thesis is to be opportunistic in working with quality entrepreneurs. We don’t impose an investing strategy with respect to industry focus, deal stage, geography…other than to say that most of our deals are early stage and locally sourced. Over the last two years we’ve invested in 27 different industry verticals that range from hospitality to advanced materials. What we steer away from are long lead-time investments, such as in drug discovery, that are better suited to specialist investors.
Tell me a little bit about your fund size, stages you focus on, and your typical check sizes when investing in early stage companies?
Our typical “micro” funds are capitalized from $500K – $3 million. Our largest fund has raised about $20 million. Individual funds make angel-sized investments from $50K-$150K per deal; however, member investors can—and often do—make personal investments alongside their fund’s investment. These we call “sidecars”, and often we’ll see another $100-$150K come in on a local deal. If the deal generates interest from several funds in our Alliance, we manage a syndication that can take down $400K-$500K of an offering, on average.
What would you say are the main things that differentiate you from other similarly-sized VC funds?
We support what our regional market has to offer, which is a mix of high-growth and Main Street businesses that need debt, equity and revenue share financing. And we are flexible in offering deal terms that suit the types of businesses we want to see grow and stay in our Heartland economy. We provide debt, equity and revenue share financing to match the specific needs of individual portfolio companies. We look for current income opportunities as well as high growth prospects.
Tell me a bit about yourself; what makes you good at what you do?
Starting, building and exiting a high-growth business prepared me for the strategic elements of this work. But even though I knew business as an entrepreneur, learning to be an effective angel investor was a whole new experience—"more art than science,” as they say. Angel investing was something I had to learn through experience.
Tell me a little bit about your LPs?
A mix of both. Predominantly, they are individuals, but we also have several institutions with a focus on economic development and university foundations that participate in our funds.
Do you lead rounds or do you tend to follow other leads? Do you have a preference and, if so, why?
It depends on the deal stage. We do pre-revenue deals and will set terms. We can syndicate and lead a Seed round within our AIA network. We typically follow a lead VC investor on a Series A or later. We view our job as validating good local and regional opportunities and creating early investment structures that eliminate friction for later investors. So, we like leading as early backers, and are happy to participate later to fill out a round using a larger fund’s term sheet.
Regarding board seats, investors that provide the majority of outside capital to a company should represent the investors’ interests. If our participation accomplishes that goal, then we will take a voting director’s seat. If we are minority investors, we’ll often want to receive non-voting observer rights.
Would you consider your fund an especially “active” or “value-added” investor?
We are extremely active. We work with portfolio companies to craft strategy, prepare fundraising packages, make strategic customer and next round fund introductions.
Are there some portfolio companies you are especially proud to be working with or simply would like to highlight?
Sure, a couple for starters: In 2019, Integra Life Sciences Holdings Corp., acquired Arkis Biosciences Inc., an AIA-backed Knoxville, Tennessee-based company that offers a portfolio of neurosurgical devices. The Arkis medical device portfolio includes the CerebroFlo external ventricular drainage catheter with Endexo technology, a permanent additive that helps reduce the potential for catheter obstruction due to the formation of thrombus. Following the successful acquisition, investment returns to AIA investors exceeded our fund members’ 25% internal rate of return (IRR) target.
Also, PureCycle Technologies, which located its first plant in Ironton, OH, and went public earlier this year via SPAC (NASDAQ: PCT). PureCycle is commercializing a unique, patented solvent-based purification recycling technology for restoring waste polypropylene into virgin-like resin. This process, developed by Procter & Gamble, is more cost-efficient and environmentally sustainable than the traditional manufacturing process of producing virgin polypropylene, utilizing approximately 75% less energy. AIA investors participated with seed- and venture-stage investments in PureCycle.
What are the most important ways you would say the investing world changed during your time as an early stage investor? Looking ahead in the area of early stage investing, what are you most excited about? What keeps you up at night?
Angels and other early-stage investors have moved up market to later stage deals. It’s a “more grief than gross” problem at the earliest stages of a company’s life and the work required to lower risk and increase valuation against the next round has increased. This is due in part to increased volume of both entrepreneurs and capital looking for an opportunity.
If you could give entrepreneurs one piece of advice about working with you or your fund, what would it be?
Treat investors like you treat your customers. Know who they are thematically and how they like to invest with respect to industry and risk. Don’t waste your first interaction with capital learning how they invest.