Connecticut’s angel investment tax credit appears to be working as new figures show increased funding for start-up companies. Less encouraging, venture capital investments, the next stage of funding required for a company to grow, declined statewide last year. WNPR’s Sujata Srinivasan reports.
Two years ago, the state created a 25 percent tax credit on angel investments. At the end of last year, the minimum investment threshold to qualify for that tax credit was lowered to $25,000. From last November to January of this year, as many as 27 angels invested almost $3 million in start-ups across the state. Entrepreneur David Cook, CEO of Queralt, a software development firm in North Haven, recently raised $325,000 in angel money.
“It definitely would have been much harder to raise that money without the incentives from the angel investment tax credit and the change in the limit.”
Not all angels operate alone: the Angel Investor Forum in East Hartford has grown its membership in the last two years. Managing Director Mary Anne Rooke says members – mostly retired high-networth individuals – are also increasing the size of their investments, and she believes the growth is spurred by the tax credit.
“People are becoming aware of the angel tax credit and so that plays into their decision. If I can put $25,000 into the company, then I will get the angel tax credit.”
Start-ups require angel funding to get to the product and revenue stage, at which point they become attractive to venture capitalists, or VCs. Rooke says because of the recent economic downturn, companies have taken more time to grow, and it can take as long as seven years for angels to realize returns. The Angel Investor Forum has invested almost $ 5 million since 2005. But only one company has met their expected returns so far. That means VCs – who are increasingly looking to invest in companies with at least $20 million in sales – have fewer companies to choose from, says Liddy Karter, managing director of Enhanced Capital Partners in Old Lyme.
“The growth of early-stage deals will create companies in the future that will be investable by venture capitals. Venture capitalists come in after the angels and so they need a pool of concentrated investable companies. Connecticut hasn’t built that in the past, we’re just building it now. And we need to continue to do so.”
This could be one of the reasons why VC investments in Connecticut fell last year, according to a national survey. The industry is also seeing lower returns on its deals than in the past, so investors are more selective. Smaller, newer VCs have struggled to raise capital during the recession, but established VCs and private equity firms are sitting on a pile of cash. Ironwood Capital in Avon launched two funds with $83 million raised from the insurance industry – through its partner Advantage Capital. Victor Budnik, managing director of Ironwood, says almost $18 million of that money was invested last year.
“Our main fund began investing in 2011 and we’ve already done about 13 transactions. And many of them were very early stage which means that hopefully we’re laying the groundwork for additional investments in 2012 and 2013 as these companies grow and need capital to support that.”
Because private capital is having difficulty in finding investment opportunities here, the state is also stepping in. Under the jobs bill passed by lawmakers last year, Connecticut Innovations will increase its investment capital to $250 million by year 2017. This amount will include matching funds from CI’s investment returns with additional capital coming from VCs around the world, says president Peter Longo.
“We really need the venture capitalists to come back strong in Connecticut because of the amount of money and their ability to write, you know, a $5 million check where the angels are writing maybe a $50,000 check. We have a pretty good network of VCs that we work with – few of our companies in the coming months are going to be closing pretty substantial venture capital rounds which will help this data look much better next year.”
CI has as much as $30 million to invest in VC deals per year for the next five years. But are there enough viable new companies in Connecticut to absorb all this money?
“Well our goal would be to deploy the full $30 million, but it does take some time to find opportunities to deploy that capital into. One of the things we’re trying to do is pull other technology companies in other locations that would relocate to Connecticut to help us increase the flow of companies here in Connecticut. We’ve successfully relocated 16 companies from other places to Connecticut over the past three years. We’ve about six companies that will be coming to Connecticut from other places.”
While Connecticut is hoping to create start-ups that will attract VC funding in the future, not all states were happy with the outcome of tax breaks to angel investors. Some, including Colorado and Michigan, chose to end the program last year. Steven Lanza, an economist at the University of Connecticut, says states must be prepared to wait longer for paybacks.
“I think that those states, as all states are right now, are under incredible budget pressures. But in many ways, what may be penny wise might be pound-foolish.”
Lanza says the tax credit will help attract capital from angel investors. This could create successful companies in Connecticut that attract VC investments down the road. But he says state lawmakers must – at some point – revisit the program and ensure accountability through cost-benefit analysis.
For WNPR, I’m Sujata Srinivasan.