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Tracking Early Stage Investors

Jonathan Ortmans, President, Public Forum Institute

Jonathan OrtmansAccess to funding is often mentioned in meetings about how to enable high impact entrepreneurship. We are always reminded that bank lending to small businesses remains tight. Even loans subsidized by the Small Business Administration have dropped off in recent months. Venture capital was prominent historically for its role in financially catalyzing high-growth companies, but has over the years become less significant in spurring entrepreneurship. In recent years (1997-2007) even among those that made it to the Inc. 500 list of the fastest-growing private companies, less than one-in-five companies had venture investors. So what are angel investors up to this summer?

Syndication in angel investment is a hot topic of debate lately, even among angels themselves who discussed it in May at the 2010 Angel Capital Association's (ACA) annual Summit along with earlier exits, angel/VC co-investment and working with new early stage incubators and accelerators. According to the Angel Capital Education Foundation (ACEF), syndication is about more than just pooling funds. Angel groups make due diligence more manageable and enable education and coaching, which can attract many more potential investors into the angel capital market. The negative side is that some see syndication as having made many angels groups “cliquey” and has arguably decreased the variety of investments.

Angels have also been busy monitoring the financial reform bill, the Dodd-Frank Wall Street Reform and Consumer Protection Act. In July, Angels had reason to celebrate when it was passed by Congress and signed into law by the President with an important amendment intended to ensure a strong pool of angel capital and to better protect investors from fraud. Angels had been worried about language buried in the text of the legislation. Particularly, the bill previously raised the threshold at which angels qualify as "accredited investors" from $200,000 to $450,000 in annual income, and minimum assets would have increased from $1 million to $2.3 million. By some estimates, the changes would have eliminated about 60 percent of current angel investors from being able to invest in small businesses. The other worrisome provision would have given the SEC 120 days to determine whether or not it would review a filing, which represented an additional delay. If the SEC didn't undertake review within that timeframe, states would have been free to impose their own rules, which meant that entrepreneurs raising capital from multiple states had to follow different rules. With the amendment pushed by the Angel Capital Association and nine other organizations, the change in the accredited investor definition was reduced to minor change: the investor's personal residence can no longer be listed as an asset. The income and asset levels were not altered, and the 120-day waiting period was removed.

These legislative developments are welcome news for those trying to convince policymakers to consider the impact of new legislation on startups before acting. At the very least, they represent recognition of the important role that angels play to provide start-up capital for new businesses and ultimately to launch innovations and create jobs. Until recently, little was known about these maverick individuals. We hope that discussions on syndication and other new trends in angel investment continue, as well as on access to funding for growth entrepreneurs on Capitol Hill.

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Jonathan Ortmans is president of the Public Forum Institute, a non-partisan organization dedicated to fostering dialogue on important policy issues. In this capacity, he leads the Policy Dialogue on Entrepreneurship, focused on public policies to promote entrepreneurship in the U.S. and around the world. In addition, he serves as a senior fellow at the Kauffman Foundation.

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