story by Wesley Brown
Startup executives and venture capitalists are nearly unanimous in their glowing support of U.S. Sen. Mark Pryor’s recent proposal to give tax breaks to so-called angel investors who fund and provide equity for early stage companies.
The question remains, however, on whether or not the bipartisan bill has enough muscle to compete against the small mountain of similar proposals now before the Senate Finance Committee with the stated goal of "cutting taxes and creating new jobs."
Pryor, D-Ark., introduced Sen. Bill 256 in early February to encourage angel investors to invest in small companies that have potential for significant economic growth and job creation.
Sen. Bill 256, known as “The American Opportunity Act,” will provide a 25% federal income tax credit for investing in qualified small businesses, including companies in the advanced manufacturing, aerospace, biotechnology, clean energy and transportation sectors. Qualified small businesses can receive up to $2 million per year in tax credit-eligible cash equity investment, of which no more than $1 million can come from a single investor. The funding is estimated to stimulate $2 billion per year of new capital formation.
“American ingenuity will bring us out of our economic slump and help our nation regain a global competitive edge,” Pryor said in a February new release. “My legislation fosters this growth by ensuring entrepreneurs have the capital and opportunity to succeed.”
In late February, Pryor convened a business roundtable to discuss the legislation and other pertinent job creation issues.
Citing concerns about declining angel investments due to the recession, Pryor said tax incentives will lead to new growth and industries. In 2009, angel investments led to the creation of 250,000 new jobs, or about 5% of the new jobs created in the United States.
“Any action that helps bring more qualified investors into the startup ecosystem is a win for new businesses and our economy,” said Dave Knox, Chief Marketing Officer for Rockfish. “For early stage, high-growth start-ups, capital is a major barrier.”
Knox’s Rogers-based firm recently announced the launch of Rockfish Brand Ventures, a venture capital arm that will focus on the latest digital innovations in consumer Internet, mobile and retail, providing start-ups with both funding and domain-specific expertise in technology and marketing.
Knox said Pryor’s bill will especially aid startups that are outside of “traditional” venture capital towns such as San Francisco, New York or Boston.
“The important thing to remember is that the support needs to go beyond just financial,” said Knox. “The best investors are ones that bring capital to the table, along with experience, mentorship, advice and networking. If this measure can help bring more of those type of investors, it will be great for startups.”
Local Internet marketing executives, Wilson Kanaday and Jon Dodson, believe Pryor’s legislation would be especially important to startups in Arkansas, where the recession-wracked economy has put a damper on angel investing in local companies.
“We are getting (feedback) from a lot of angel investors that really don’t know if they are angel investors,” Dodson said of investors with up to $100,000 who tend to put their cash in traditionally brick-and-mortar ventures. “There are really no real engines to get them to invest in startups with a quick cash return.”
Kanaday, who is actively “blogging” and spreading the word online to get local momentum behind Pryor’s bill, said the tax credit is a definite “job creation” bill and could double the number of angel investors if passed.
“When you look at the stimulus money spent and see how many jobs were created — it comes to about a quarter of a million dollars per job,” Kanaday said. “That same investment in local startups would create 120 jobs.”
Kanaday explained that unlike the Internet technology boom, today’s angel investment startups don’t need huge amounts of cash infusion over long periods of time before becoming profitable.
“Look at Groupon,” Kanaday said of the "daily deals" startup which plans to go public later this year and has been conservatively valued at $25 billion. “It is a legitimate cash cow business. The difference is that in the 1990’s you had to have massive investments in equipment and infrastructure to get started. But angel investing is totally different — $500,000 is the new $5 million.”
Still, Kanaday and others supporters of Pryor’s proposal say the Arkansas senator’s bill can be improved, especially on the political end. In a recent interview, Seattle-based startup attorney Joe Wallin said he strongly supports Pryor’s bill because it comes at a great time to boost investment in the startup community.
“Sen. Pryor’s bill is a great idea,” said Wallin of Seattle-based Davis Wright and Tremaine. “If it passes, it would definitely help early-stage companies and startups in Silicon Valley and elsewhere.”
Still, Wallin said there are some changes he would suggest to Pryor. In a recent post at Startup Law Blog, an online site managed by the Seattle law firm, Wallin suggested a few changes to make the bill better.
“First, the way the bill is currently drafted companies will have to apply to participate in the program. There is an overall cap on the dollar amount of the tax credits available under the program per year, and the government is going to play a role in deciding which companies qualify, including taking into account geographic areas that have traditionally been underserved by angel and venture capital investment,” Wallin wrote on his blog. “I would change this to a per taxpayer limit, to avoid the government having to run an application and approval process that will undoubtedly be very political.”
Wallin also said that he would not limit the 25% tax break to only “accredited investors.”
“I would take this opportunity to define ‘accredited investor’ very broadly, and repeal the Dodd-Frank provisions which make it harder to qualify as an accredited investor,” the Seattle startup attorney said.
Meanwhile, the biggest obstacle for Pryor’s bill is competing against dozens of other rival “job creation” tax credit legislation now sitting in the Senate Finance Committee.
Dodson and Kanaday said once the budget impasse is resolved by late spring or early summer, then Pryor will be able to use his “moderate voice” in the Senate to gain momentum for the bill.
“Mark’s ability to be moderate makes his voice much louder,” Kanaday said.
He also added that the startup community across the U.S. will be solidly behind Pryor’s legislation, which has no organized opposition.
“The angel investment community is a very strong cult … and they have a ton of money,” he said.