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Angels to the Rescue?

Posted by: Amy Barrett on July 30, 2008

It’s hardly news that it’s always been tough for startups to obtain financing. But a shift in venture capital investing in recent years has made it particularly difficult for seed stage companies looking for backers. That’s why the role of angel investors has become more important than ever.

A report from the National Governors Association earlier this year put it this way:

Angel capital fills an important funding “space” once occupied by venture capital. Venture capitalists used to invest in early stage ventures but have shifted their investments toward more mature-and therefore less risky-businesses.

That's why states are looking for ways to cultivate that ecosystem of early stage investors. The NGA report runs through a list of options on how to do this-everything from seminars to educate potential angel investors on how to do deals to tax incentives to promote angel funding. Using state dollars to promote angel investing can be a dicey call, however, since there aren't a lot of studies on whether the state money results in a big economic gain.

Now of course it's likely many of these efforts will be busts. After all, if a state doesn't have the right resources, like a strong base of universities to spark commercial spin-offs, it's hard to see how tax credits for angels are going to fix that problem.

Still, with the economy slumping and worries that new business formation could be slowing, it makes sense to look at ways to expand access to capital for startups. Let's hope that some of these bear fruit-and new sources of funding.

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