Startups slower to follow where angels tread
After overhauling a relatively new tax credit last year, Connecticut appears to find itself in an unaccustomed place ”“ too many angel investment dollars seeking too few deals.
Since Connecticut cut a threshold under which startup angel investors can take tax credits, investments are up six-fold, according to Connecticut Innovations, which administers the tax credit program.
At the same time, the state has registered only an incremental increase in the number of startups qualifying angel investors to take the tax credit, an odd scenario given startups”™ ongoing complaints about being able to access capital at the earliest stages of formation.
Under Gov. Dannel P. Malloy”™s jobs bill that passed last fall, Connecticut changed the minimum investment threshold from $100,000 to $25,000 to encourage investment and attract additional investors to businesses that are prequalified to generate the tax credit. The tax credit equals 25 percent of the cash investment, up to $250,000. To qualify, businesses must have less than $1 million in annual revenue and fewer than 25 employees, three-quarters of them in Connecticut.
To date, program administrator Connecticut Innovations Inc. has revealed 40 companies that have qualified to generate tax credits for their angel investors, just 14 of them in Fairfield County. As of press deadline, the newest was TotalHousehold Inc., a Bethel startup cofounded by hedge fund consultant Jeffrey LaCava aiming to raise $600,000, running a website for people to vet residential contractors and products.
By contrast, since last November nearly 85 angel investors have applied to participate in the program, leading to $8.6 million in angel investments across 23 companies. In the preceding six months, just 13 angels applied and nine companies received a total of $2.4 million.
Minnesota, whose angel tax credit features a minimum investment of just $10,000, has fared even better with more than 110 companies getting angel investments under its program last year and 820 angels having made investments over two years in 2010 and 2011.
Malloy and his administration have repeatedly stressed efforts to simplify the process by which companies can access state aid and to turn around quickly on applications. The five-page application for a business to qualify as generating the angel investment tax credit includes a number of additional documents ”“ but several of those are presumably files a sophisticated startup would already have on hand such as a business plan, descriptions of products and services, and an income tax return.
Angel investment is only one rung on a ladder leading to a larger seed-stage funding deal under which a company begins tailoring a product to a specific market opportunity. Connecticut Innovations oversees the Eli Whitney seed-stage fund, which in June was considering investments in ReadyDock Inc., a West Hartford spinout developing a tablet docking station for physician offices; Queralt Inc., a North Haven company developing a cloud-based, sensor tracking system; and Grey Wall Software L.L.C., a New Haven startup whose Veoci system targets emergency communications.
In time, perhaps one of them will reach the scale of Alexion Pharmaceuticals Inc., which is receiving $51 million in state assistance to hire more than 200 employees and expand into a new headquarters in New Haven.
“Fast-growing companies like Alexion are true engines of economic growth,” Malloy said. “They attract investments, spur production and jobs in other industries and improve our overall economy.”