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Tuesday, May 30, 2023

Bill Liked by Investors Seen as Having Little Chance

A proposal currently winding its way through Washington to offer a federal tax credit to angel investors is a little like Sara Lee nobody doesn’t like it. The Access to Capital for Entrepreneurs Act may give a welcome nudge to wealthy individuals who might be in a position to invest in early stage companies, the very startups that are considered to be the backbone of the economy. The proposal, to provide a 25 percent front end tax credit for investments up to a maximum of $250,000 per company and a total of $500,000 overall, would target the very businesses that are most in need of financial assistance because they are generally too new to qualify for loans and considered too small and too risky for most venture capitalist funds. Better yet, by structuring the incentive with a quarter million dollar maximum per company, investors would be encouraged to spread their money around, giving more startups a shot at financing. “This bill provides a really incredible incentive for business people to make the right kinds of investments,” said Bob Jason, a founding partner of the tax practice at Stubbs Alderton & Markiles LLP, a law firm with a long list of emerging growth company clients. “Most investors are incentivized by the promise of capital gains rates when they sell their investment. This incentive gives people a very strong 25 cents on the dollar benefit the moment they write their first check.” So why is this the third go-round for the bill after failing to pass twice before? In spite of their enthusiasm for the bill, most say the chances it will pass this time around are small. “In an environment where we’re running large budget deficits I think it’s generally difficult to implement even good policy that has the effect of reducing revenue, so I’m not terribly optimistic,” said Richard Morganstern, president of the Los Angeles Network of Tech Coast Angels. Angel investors, typically individuals with net worth high enough so that they’ve got money to spare even after they have invested in property, retirement funds and other stocks, may have investments in anywhere from a handful to several dozen companies at any given time. Most of the companies don’t make it, and the angels typically console themselves with those that do and the tax write-off they get from those that do not. “The reality is that for every home run that you hit with an angel investment, there is a long list of companies that don’t make it,” said John Dilts, founder of Maverick Angels and himself an angel investor in some 25 companies. And it’s the one or two that pay for the rest. So imagine that, if now you’re going to get a tax credit for investing in the first place. That really softens the blow when it comes to that ratio.” Few changes seen The Access to Capital act under discussion is not likely to materially change what they do, these investors say. But there are also some high net worth individuals who have eschewed these types of investments, and the added tax incentive may persuade them to join angel groups for the first time. There are also some angels who might be more willing to make investments they would otherwise pass up. “I don’t think it would change dramatically how or what I do,” said Richard Wolpert, an angel investor who figures he has transacted about 30 investments over the past 10 years and also advises venture capital firm Excel Partners. “But I think in a case where I’m on the fence, it would absolutely be a factor.” The added impetus the tax credit the Access to Capital bill is also timely, many believe. Over the past several years, venture capital firms that once funded early stage companies have moved up the food chain to more established companies with a product in the marketplace, a revenue stream and, sometimes, profits. Some have found themselves with war chests so large they have moved their investments to even more established companies. More investments In Southern California last year somewhat more than $3 billion was invested in 330 deals, up from $2.5 billion invested in 308 deals in 2005, according to data from PricewaterhouseCoopers’ MoneyTree Survey, which tracks venture investments quarterly. The numbers reflect the trend to invest more money in later stage, proven companies, said Randy Churchill, director of business development for Pricewaterhouse’s technology practice. “Some of the funds have made a permanent switch to a more private equity play to focus on more mature companies,” Churchill said. As these funds have moved upmarket, startups have seen some of their financing outlets evaporate. The Access to Capital bill, most agree, is tailor made for these now somewhat overlooked startups because of the funding levels it addresses and because it may persuade new investors to enter the arena. “The organized angel groups have gotten to be as tough on those early stage investments because of their high risk nature as the venture capitalists, so I don’t know that there’s much to save there,” said Joe Stubbs, a partner at Stubbs Alderton & Markiles who also sits on the boards of several technology-related associations. “But what can happen is, to the extent that there are these incentives to jump start those key investments at very early stages, the more people we can attract to that market, and the better off all of us will be.”

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