The U.S. Economy Needs a Host of Angel Investors

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To be sure, angel investing cooled off somewhat with the downturn in the economy. Last year, some 259,480 angels invested $17.6 billion in 57,225 entrepreneurial ventures, according to the University of New Hampshire's Center for Venture Research. The number of ventures held steady, compared to the previous year. Funding levels were down 8.3% percent but that's a heartening number when you consider that the recent downturn in the U.S. was the worst since the 1930s.

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.

angel communities abound in the U.S.

The U.S. needs a greater number of successful angels to reinvest money and entrepreneurial talent in new ideas and new companies, not fewer. Angels have a knack for backing the types of companies that create additional jobs. And the angel community has been growing. Typically angels have hooked up with entrepreneurs through ad-hoc social networks—friendships created with other entrepreneurs over the years, perhaps at the country club or local philanthropic events. Since the late 1990s, however, there has been a proliferation of formal angel groups that screen investments and pool money on local or regional levels.

"You would be hard-pressed to find a major metropolitan area without a good, robust angel community," says Susan Preston, general partner for the CalCEF Clean Energy Angel Fund, as well as CalCEF Clean Energy Angel Network.

The anti-angel section of the Dodd bill constitutes a step in the wrong direction. Left alone, the pool of angel investors will likely grow. Angel investing has moved from the fringes of entrepreneurial society to the mainstream over the past two decades or so. For angels, the high-risk endeavor is social, fun, competitive, and potentially lucrative. What's not to like from an entrepreneurial point of view?

Even more could be done. For instance, many immigrants are well-educated in such tech-related subjects as math, engineering, and the sciences. Less appreciated is how many of these well-educated immigrants are attracted to entrepreneurial enterprises and later become angel investors themselves. That's why moves to make it easier for educated immigrants to stay permanently in the U.S. may not only provide a short-term job-creating boost, but also increase the startup financing funding pool over the long term.

With an unemployment rate at 9.7% and an increasingly competitive global economy, America needs its angels more than ever.

Farrell is contributing economics editor for BusinessWeek. You can also hear him on American Public Media's nationally syndicated finance program, Marketplace Money, as well as on public radio's business program Marketplace. His Sound Money column appears on BusinessWeek.com.

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