Cranston native Paul Conforti is the president and co-founder of Finale Desserterie & Bakery, a four-location dessert-focused restaurant chain based in Boston. But the Harvard Business School MBA graduate couldn’t have gotten where he and his business are today without the help of angel investors. He has raised more than $5 million in equity and debt capital from angels to support the company’s growth (Another location is scheduled to open in Boston early next year.)
Last week, Conforti took part in a forum at the Brown Forum for Enterprise entitled “How to Find and Attract Angel Investors.” He also answered a few questions for Providence Business News about his experience with angel investors.
PBN: When I think of angel investing, I think of it being tied to a startup business that offers some high-tech or Web-based product or service, not a restaurant. What made you go this routine in obtaining capital?
CONFORTI: I didn’t have many options for financing this business when I started it 11 years ago. The concept of a dessert-only restaurant was new to the industry, and the industry is notorious for having new concepts fail. So traditional bank financing was not an option. I did not have my own capital to invest. And the venture capitalists in the restaurant industry only fund concepts that are proven and ready for roll-out. So my only option was angel investors. At the time, I was also surrounded by classmates who were seeking angel and venture-capital financing for their high-tech and Web-based businesses. I felt like my business, while different in many respects, had just as much potential as their businesses. So I decided to pursue angel financing. It’s certainly more difficult to obtain angel financing for a non-tech business. Angels are predominantly successful/retired entrepreneurs and executives. They like to invest in what they know and understand, and most of these folks know and understand tech because that’s how they made their own money. In the early days of Finale, I found that I would get one “yes” for every nine “no” answers from prospective investors. Typically the “yes” investor had a personal introduction/reference/connection to me. So they were backing me as much as they were backing the business. Some of the investors also had a personal passion for food or the restaurant industry. I would say that first batch of investors all believed in the long-term vision for Finale, but also understood that this was a very risky investment.
PBN: You’ve now managed multiple rounds of angel funding in the 11 years since the business opened. What has changed in the process over the years?
CONFORTI: Well, in the beginning people were investing in me, and in an idea that was very thoroughly described in a business plan. But once the first restaurant opened, new investors were investing in past performance of the business as well. In some respects, it was easier to raise money on just an idea, because I could debate the merits of the idea without having anything concrete to substantiate or refute my assertions other than my research. But with an actual going concern, I had to rely a lot on my results to convince investors to participate. In the restaurant industry, having at least one location up and running allows prospective investors to understand the concept – the food quality and presentation, the atmosphere, the service style, the overall experience. With Finale, that has been very helpful because the concept is unique. In general, over the last decade angel investors have become much more sophisticated. Especially as groups of angels have come together (such as Cherrystone Angel Group here in Providence), they have become much more structured in their evaluation of angel opportunities. This provided me with greater access to larger groups of prospective investors. But it also changed the dynamics of raising money from having one-on-one meetings with interested individuals to instead having to make PowerPoint presentations to rooms full of investors, and then being subjected to detailed due-diligence processes.
PBN: Is wooing angel investors made more difficult in the current economic environment?
CONFORTI: Yes, certainly, it’s more difficult. With all of the risk inherent in our financial system right now, I believe angels are being very cautious. I had one recent potential investor tell me he was going to sit on the sidelines for six months and watch how things all shake out before he does any new angel investing. There are always two sides of the coin, though. I had another one of my existing investors tell me that he’s got most of his assets liquid right now, and with the stock market being so volatile, he was actually more inclined to make a few “bets” on startups and see what happens. I would think that Warren Buffett’s recent comments on investing in American equities would apply to angel investing as well: If you’ve got a company with good fundamentals/prospects, and you’ve got a chance to invest now at a very favorable valuation, why not? In my experience, however, in times like this it’s more difficult for entrepreneurs to raise money. My response to overcome this fact is to focus on the fundamentals of the business, and make the opportunity so compelling that prospective investors have to take a serious look. In our case, we have focused on reducing our expenses as much as possible in the face of declining revenues. And then I tell my team members that we’ve got to focus on our guest experience. Every guest, every day, has to leave having had “a sensational dessert experience.” Happy guests translate into happy investors eventually.
PBN: What is the difference between venture capitalism and angel investing?
CONFORTI: There are lots of differences between VCs and angels. But first, the big similarity – both are looking to make a very high return on their capital because of the risk they are accepting and because of the high failure-to-success ratio in their portfolio, and they are both definitely looking to cash out with a profit. In terms of the differences, angels provide smaller amounts of capital than VCs, and the angel is providing their own capital, whereas the VC is typically managing someone else’s capital. Angels are also much more patient. They come in at an early stage – sometimes right at inception – and they understand that it may take a long time to reach an exit event. VCs, on the other hand, have specific timeframes and rates of return in mind. They are accountable to their own investors/limited partners, and therefore have less patience. Angels may also make investment decisions based more on “emotion,” whereas VCs make a more objective investment decision. However, angels still expect for there to be an exit event of some sort – an IPO or [merger and acquisition] transaction. Angels just have a greater amount of tolerance for the length of the process. And, in my opinion, angels derive a greater amount of personal joy in helping the entrepreneur face challenges and build the business. VCs also want to help, but they do so more out of necessity or desire to get to the exit.
PBN: What advice would you give small business owners – high or low tech – in attracting angel investors? I assume that avenue is not for every company.
CONFORTI: The biggest piece of advice I can give is to network. My angels come from all of my various networks – family, friends, business, college, grad school, etc. I have stories of how some of my angels came to invest in Finale, and it’s almost comical how much of a role luck and timing play in putting the two of us together. But you’ve got to be out there talking about your business in order to attract angels. In terms of successfully raising capital from angels, the keys are having (a) a well-thought-out plan, (b) a concise and interest-grabbing presentation, (c) a champion within the group (for organized groups or groups of friends), (d) a focus on angels who are inclined to invest in your industry, (e) folks on your team (investors, advisers, employees) with experience, and (f) the right combination of people, opportunity, context and deal that make your investment opportunity a compelling one. Raising money from angels isn’t right for every business or every situation, for sure. The entrepreneur is giving up equity ownership, and typically also giving up some degree of control. But my experience with angel investing has been a good one. Now it’s my job to try to make sure my angels feel their experience with Finale has also been a good one.
Additional information on Finale Desserterie & Bakery is available at www.finaledessert.com.
