Angel Investing and Job Creation

As you know, I chair the Public Policy Committee of the Angel Capital Association (http://www.angelcapitalassociation.org/). In that regard, I’ve spent a bunch of time in Washington, DC, meeting with legislators and executive branch people. I thought it would be useful to post a simplified version of the story we tell.

It still surprises me, being so immersed in Angel Investing, that there is so little understanding of what we do. Many confuse what we do with banking. Others confuse us with venture capitalists. And yet others confuse us with friends and family. The ACA Public Policy agenda, when stripped to its essence, is comprised of the following four items:

1) Educational. Angel investing (and therefore angel investors) are the wellspring of our economy; we are the true job creators. We are not Wall Street; we are Main Street. We invest our own money (not other peoples’ money) in virtually every community in the country to start high-growth, high-potential startups that transform the economy to the 21st Century. We do this knowing that (statistically) over half will fail and we will lose our money. When we back the winner, we plow the returns back into more startups. We are not looking for government protection. But encouragement will make a difference in the rate and amount we invest in these high-growth companies.

2) Do no harm. Sometimes there are unintended consequences of legislative actions. One good example of this were several provisions in the original draft of the Dodd-Frank Financial Reform act that would have eliminated over 70% of the eligible angels and made Reg D filings difficult or impossible. This would have severely hampered Angel Investing and curbed the companies we support. We take aggressive, but prudent, actions to ensure that such actions are understood and not taken.

2) Cap Gains. Reauthorizing the Section 1202 zero capital gains for Qualified Small Business, first through the extenders bill (making it retroactive to 1/1/12) and in place till the Congress has time to make it permanent. We need some structural changes (e.g. 2 year rather than 5 year holding period; LLCs as well as C corps; and changing the roll-over period to 1 year from 60 days) that we will work with staff to explain. And.. this needs to be permanent so that we can use it as an incentive; we look at lots of companies and the timing can’t be accurately predicted, so our members (and all angel investors) need to be able to plan on this or they won’t use it. When angels get an exit, they re-invest their proceeds in new deals; this is the flywheel upon which angel investing is based. If a substantial proportion of the proceeds are absorbed by taxes, the entire asset class looks much less attractive. And remember that Angels (unlike VCs who invest other people’s money and only make a return when they invest) don’t have to invest in these deals.

3) Angel Tax Credit. Other countries and lots of states have enacted an angel tax credit that has spurred investment in high-growth startups. Typically this is 25% in the year of investment. Zach has some wonderful data from WI. These tax credits do a great job in stimulating new investment.

More will follow.