As Connecticut considers multiple proposals for tax credits benefiting “angel” investors in startup businesses, one such group was highly successful in evangelizing the concept to wealthy investors still woozy from the recession.
The Angel Investor Forum has just over 50 members across three clusters in Stamford, New Haven and Hartford, up by half from a year ago, according to Managing Director Mary Anne Rooke, who testified last month in support of a Connecticut General Assembly bill that would create a tax credit. She said the group”™s investments have created more than 80 jobs in Connecticut and another 50 jobs outside the state.
By comparison, the number of angel investors nationally dropped slightly to below 260,000 total, according to the Center for Venture Research at the University of New Hampshire. The UNH center added that angel investment dollars fell 8 percent nationally following a sharp contraction in 2008, but the number of business ventures receiving funding increased 3 percent. UNH does not break out data on a state level.
“These data indicate that while angels have not significantly decreased their investment activity, they are committing less dollars resulting from lower valuations and a cautious approach to investing,” said Jeffrey Sohl, director of the UNH Center for Venture Research. “Significant changes did occur in the critical seed and start-up stage investment landscape ”¦ This decrease in seed (and) start-up stage and first sequence investing is the unfortunate reality of a difficult economy, and little or no support for angels or the companies they invest in from the various legislative initiatives enacted to stimulate the economy.”
According to UNH, mergers and acquisitions represented just over half of “exits” resulting in a return on angels”™ investments, while bankruptcies accounted for 40 percent of the exits in 2009.
On average, angels generated returns of between 23 percent and 38 percent on deals resulting in a merger or initial public offering of stock, but the returns varied widely depending on the deal.
“We”™ve had two successful exits, two failures and many of the other businesses are growing ”“ certainly have survived the last couple of turbulent years,” Rooke said. “The cost to Connecticut for that has been zero dollars.”
Earlier this month, the state of Minnesota enacted a tax credit benefiting angel investors. As an example of the potential of tax credits on angel investment, Rooke cites Wisconsin, which saw angel investment activity quintuple after the creation of a tax credit in 2003.
“They now have 22 (angel) groups in the state of Wisconsin, which is quite tremendous,” Rooke said.
She estimates that in the process of vetting and investing in companies, her group”™s savvy businesspeople contribute about 15,000 hours annually of essentially free consulting to entrepreneurs seeking startup money.
“You”™re looking at translating that to like seven full-time, ”˜C-level”™ executives that are mentoring and providing their expertise etcetera to companies in Connecticut,” Rooke said. “And if we were to be able to do what Wisconsin did in implementing their tax credit, if we could multiply that times five, can you imagine ”“ 35 C-level executives mentoring and helping companies get started and growing in Connecticut.”
In the meantime, the angel syndicates themselves are getting ever more sophisticated.
“Angel capital investing has really taken on more of a formality than it had in the past,” said Joseph DeMartino, president of the Angel Investment Forum. “If you go back 10 years, it was really an informal movement of some people getting together and saying, ”˜Yes, we”™ll put some money on it.”™ Now it”™s really supplanted what was originally (the) territory of venture capitalists.”
