House bill stokes tech startups - Westfair Communications

Technology startups are singing “hallelujah” after the U.S. House of Representatives passed a bill to benefit additional “angel” investors who support such companies at the earliest stages.

But other small companies fear a federal-funding purgatory if the Small Business Investment Expansion Act gives venture-capital-backed startups access to federal programs, as promised.

After passing the bill by a vote of 325-72, the bill was sent to the Senate where it is under consideration by the U.S. Senate Committee on Small Business and Entrepreneurship, whose members include Connecticut Sen. Joe Lieberman.

Two components of the bill are attracting attention:

”¢ a proposed federal office of angel investment to make investments and build a national database of wealthy individuals who support startups in their earliest stages; and

”¢ the lifting of existing restrictions on venture-backed companies from participating in various U.S. Small Business Administration (SBA) funding programs.

Both components have drawn the opposition of the Bush administration. The Executive Office of Management and Budget issued a statement in late September, hinting it might support a policy of small businesses being eligible for federal funding even if they accept a noncontrolling investment from a deep-pocketed entity. But the office stated the current bill must be amended to ensure that ownership and control stay with the entrepreneur.

In a bill amendment, the House agreed to apply a “bright-line” standard for majority stock ownership to determine whether venture capital firms are affiliated with a company.

This current definition of a small business is intended to prevent large businesses from abusing federal small-business programs by misrepresenting divisions or subsidiaries as independent small businesses.

With regard to committing federal dollars to boosting venture capital investment, the Executive Office of Management and Budget flatly stated it does not support providing capital to wealthy individuals to support investments.

The Congressional Budget Office estimates that the total bill”™s implementation would cost $102 million between 2008 and 2012, with the Angel Investment Program accounting for $57 million of that amount.

Angel investments are considered an important source of capital for entrepreneurs, giving them seed money to develop technology and business plans that subsequently attract expansion investments from venture capitalists.

In the first six months of 2007, angel investments were down 6 percent nationally from the first half of 2006 to $11.9 billion, according to the Center for Venture Research at the University of New Hampshire; 24,000 entrepreneurs received funding, down 2 percent.

The number of angel investors swelled 8 percent, however, to 140,000 who have active investments.

Increasingly, angel investors are pooling their funds in syndicates in order to back bigger projects. The Old Saybrook-based Angel Investor Forum only accredits investors who have a net worth of more than $1 million, or $200,000 in income in each of the past two years.

Under the proposed bill, angel investment syndicates that accepted federal funding would be required to repay the Small Business Administration for any investments that earn a profit, calculated according to the SBA”™s share of capital provided. The SBA”™s share of the profits would be plowed back into the program.

Liddy Karter, executive director of the Old Saybrook-based Angel Investor Forum and a board member of the Angel Capital Association, declined comment on the legislation except to say that ACA is examining the bill closely and will soon issue a formal statement on the bill.

Even as venture capitalists cheer the proposed bill, they are fighting changes to the carried-interest tax rate that they say would have an unintentional chill on venture investing.

“There is a gross misconception that venture-backed companies have hit the jackpot and are not in need of government programs established for small businesses,” said Marc Heesen, president of the National Venture Capital Association, in a written statement. “Nothing can be further from the truth ”¦ Venture capitalists do not fund basic research and development. Without government support, these innovations will never get to the point where a venture capitalist can take it further.”