US Job Recovery Needs the Help of Angels

As we’ve written before, large corporations, especially the kind that have been first in line for bailouts, are not the economy’s main source of new job creation. Instead, start ups  and entrepreneurial companies contribute most to adding new jobs in the sectors of the US economy where there are growing markets and emerging opportunities.

These young businesses will also have to be a leading force in any recovery that actually includes increased employment… unlike the current “recovery.” That being the case, the best way to lay the foundation for job growth is through investment in new businesses, often accomplished through angel investors.

According to BusinessWeek:

“These are mostly entrepreneurs and former entrepreneurs who invest in bootstrap companies too young and raw to attract attention and money from professional venture capitalists. Unlike venture capitalists that manage funds of money raised largely from such institutional investors as pension funds, angels risk their own money. Angels are in the vanguard of financing entrepreneurship and innovation and when an investment pays off, venture capitalists come in to further build up the company. Angels fund real companies. They don’t create collateralized debt obligations. (Some would argue that those complex financial instruments were the handiwork of the angels’ opposite numbers.)

“A number of well-known companies got their start with angel money. An Intel executive and shareholder put $91,000 in seed money into fledgling Apple. A dozen angels invested $1.2 million into after founder Jeff Bezos was turned down by venture funds. Perhaps the most famous angel stake in recent years was the $100,000 that Sun Microsystems founder Andrew Bechtolsheim invested in Google. The money let founders Larry Page and Sergey Brin move out of their Stanford University dorm rooms and market their search engine product. Many of Google’s newly minted millionaires are now trying their hands at angel investing. ‘It’s entrepreneurs looking to play with house money, make some more money, and help out other entrepreneurs,’ says Gary Smaby, a Minneapolis-based venture capitalist and sometime angel.”

But before you begin to feel warm and fuzzy inside, and optimistic about job growth… consider the latest problem. Unsurprisingly, lawmakers are finding ways to torpedo this key source of new employment. Senator Dodd’s (D-CT) new financial reform bill, the one being debated now, would make it much harder for angel investors and entrepreneurs to come together.

Again, from BusinessWeek:

“A bigger problem is that a section of the reform bill from Senator Chris Dodd (D.-Conn.) has three provisions that, taken altogether, could dampen angel investing far more than the Great Recession did. Currently, fledgling companies can raise money from accredited investors—high-net-worth individuals—without regulatory approval. The Dodd bill would require money-raising startups to register with the SEC, which would get 120 days to review the filing. The wealth and income baselines for angels would also double. The bill proposes revoking the rule that allows angels to follow federal regulations, rather than various state rules, in funding companies.”

The bill would make it mandatory for even small start-ups to register with the SEC before being able to get any seed money. In the fast-paced life of a cash-strapped start up, four months of unnecessary administration and paperwork is unlikely to offer any sort of competitive advantage. In fact, it’s possible that that kind of hold up could decide the success or failure of a budding new business. If government regulation manages to creep into stifling the entrepreneurial American spirit we’re bound to see a number of unintended consequences.

To read more you can visit BusinessWeek’s coverage of why the U.S. economy needs a host of angel investors.


Rocky Vega,
The Daily Reckoning