Law may help start-ups access critical capital
Things are looking up for angel investors in Connecticut.
New tax credits are likely to increase their ranks, say advocates for the incentives, which were part of the major jobs creation bill Gov. M. Jodi Rell recently signed into law.
"We are certainly going to try to build our angel group so that we have more members to invest more money in companies," explains Mary Anne Rooke, managing director of the Angel Investor Forum, a group of around 50 investors with "clusters" in New Haven, Stamford and Hartford. Last year the group funded ten businesses.
Start-ups often rely on funding from angel investors, who are wealthy individuals lending money to budding businesses.
"Venture capitalists like companies that have had angel involvement because those are the strongest companies," Rooke says.
Under the new state law, angel investors are eligible for personal income-tax credits equal to 25 percent of investments of at least $100,000 and no more than $250,000 in early-stage companies in sectors such as clean technology, information technology and bioscience. To qualify, an angel investor must have a net worth of more than $1 million or an annual income of more than $200,000, and cannot control more than 50 percent of the company receiving the investment.
Angels investors cannot be venture-capital companies, banks, trusts or insurance companies.
The new legislation provides additional seed money for new businesses.
Connecticut Innovations Inc. (CII), the quasi-public organization fostering high-tech growth in the state, will administer the tax credit.
The new incentives should make angel investors more visible.
Until this legislation, Rooke says, angel investing was "something under the radar and more of an informal process, and people didn't know who angels were."
Angel Investor Forum members, she says, are mainly current or retired executives, including many serial entrepreneurs, looking for start-up or early revenue companies with a solid business model and "an exit [sale or merger]" in three to five years. The group works closely with business incubators around the state and networks with other angel investor groups in other states, sometimes pooling resources to fund a company.
"Angel investors are so secretive," but now "You have to own up" if you want to collect the tax credit, says Mike Roer, president of the Entrepreneurship Forum.
Roer describes most angel investors as "middle-aged white men" who typically have "been through the entrepreneurial wars, started one or more businesses, cashed out and want to act as partner to up-and-coming entrepreneurs because they have been through the process."
Angels "put out feelers" to find investment opportunities, screen the ones they like best through a committee of members, then allow those making the cut to come in and pitch at a monthly meeting.
"I did a survey in 2006 that indicated there was least $3 million of angel investment in the state, which isn't a lot, so any good ideas to increase that amount are welcome," Roer says. "If you can create new business with a modest amount of money, that's a good investment [because it increases economic activity].
"We have a lot of capital in this state and a lot of very sharp young people, so if this new incentive makes it easier to obtain funding in Connecticut and keeps our sons and daughters and their talent in Connecticut, that's also a benefit."
Roer thinks the incentives are "a great first step," but believes much more needs to be done.
"Saying we've got this credit doesn't mean it's automatically going to happen," he says. "To really optimize the potential investment in Connecticut companies by private individuals, you need to encourage high-net-worth individuals to become angel investors, and to do that you need training and support.
"I think we need the state to provide some funding for that support," Roer adds. "Once we build up our population and culture of entrepreneurship and angel investing to critical mass, it can become self-sufficient. Once enough investments are made and receiving returns on investments, then that will attract more people to this market."
Over the years, Roer has seen many angel groups "come and go" in the state.
"You can't make money running an angel group in Connecticut but you can in New York and Boston, where the industry has matured to the point it will attract enough investors."
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