When I testified in Annapolis to support the proposed Angel Investor Tax Credit, my panel was asked a not wholly unexpected question: Why should a bunch of investors get a tax credit when they voluntarily back high-risk companies with the hope of receiving tremendous profits?
The operative word is “hope.” Startup failure hovers around 80 to 85 percent. As a board member of the Baltimore Angels, when my colleagues and I recruit people to join and ask them to put their money behind local startups, we also warn them to be ready to lose that money.
The Kauffman Foundation estimates that angel investors are responsible for up to 90 percent of early-stage startup funding not obtained from friends or family. Our risk helps payrolls, inventory and equipment materialize. We don’t just open up our checkbooks, we open up our networks, our time, and our years of experience in specialized fields. We are betting on our region and the companies we want to keep in it, and we know talent when we see it.
Take Allovue and Citelighter, two Baltimore companies that have consistently impressed local investors and secured multiple rounds of funding from the Baltimore Angels. Both Jess Gartner and Saad Alam, Allovue’s and Citelighter’s respective CEOs, have been noted in Forbes. Their individual company trajectories model all the potential of this region. If Allovue and Citelighter (and more like them) stay in Maryland, they have the possibility of becoming as important to the local economy as Under Armour.
And that’s the biggest problem — they have good reason not to stay. Securing the funding that fuels their continued growth is challenging in Maryland. For a startup CEO, there is no breathing room between the day job of keeping their company afloat and taking meetings that may or may not yield investments. The normal course of any startup includes two to four investment raises, which are not unlike the grind of two to four political campaigns.
Like trick-or-treating on steroids, Maryland entrepreneurs have to pitch multiple investing groups, often across state lines, if they want funding that is competitive with modest Silicon Valley standards. Right now, our state simply does not have enough active angel investors to meet their needs. If the entrepreneurs followed the bootstrapping advice that has kept them competitive, they should move to cities where raising $1 million takes six weeks, not six months, just so they can get back to work.
Every Maryland resident stands to lose if angel investment doesn’t increase. We don’t want the next Facebook to start in Baltimore but move somewhere else for lack of funding. Want Baltimore to have more jobs, more talent, more people buying houses and paying taxes? Support the startup ecosystem by giving angels an incentive to open their wallets. Want fewer vacant houses and storefronts and less suburban flight when the kids approach school age? Help fund the start-ups with this tax credit.
Even if 80 to 85 percent of the companies fail, in their short burst of being, they will have signed contracts with local vendors, taken prospective clients out to lunch at area restaurants, unpacked a U-Haul in front of downtown rowhouses, and pictured what life might be like if they really put down roots. All it takes is a handful of fundraising success stories before innovators from across the country flock to where it worked for someone else. Given that the median age of a startup employee is in her mid 20s to early 30s, you want her meeting her spouse, buying her home and renting her office here, and not some other promising city.
This type of tax credit has worked in other states. In Minnesota, the 2013 Angel Tax Credit certified 193 businesses, 128 of which received investments totaling more than $50.6 million. During the first month alone of the Kentucky Angel Tax Credit, 40 angel investors announced plans to invest $2.8 million in 12 Kentucky companies. According to the Small Business Institute Journal, 29 states have implemented similar legislation, and of those 29 states, 22 have displayed an increase in entrepreneurial activity within the first two years of the program.
The proposed Angel Investor Tax Credit will profit the state of Maryland more than its investors. The passage of Senate Bill 584 will encourage more prospective angels to become active, and with their money on the table specifically for Maryland based companies, our state can keep and recruit the strongest startup contenders.
Kelly Keenan Trumpbour, founder of See Jane Invest, is an investor dedicated to educating women who want to fund women-owned companies. She is a board member of the Baltimore Angels, a Maryland-based investment group. Her email is firstname.lastname@example.org.