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Funding Startup Companies Jumpstart Economy

Funding Startup Companies Can Help Get the Economy Moving Again

Wanted: More Jobs

I don’t have a fancy degree from an Ivy League school, and I’m not formally trained in economics. So you won’t see me on the President’s economic advisory team, or lecturing on the philosophical differences between the Keynesian and Austrian economic theories.

Instead, I grew up watching my father start a manufacturing firm and build it into a successful, multimillion-dollar business. I followed in those footsteps by helping two technology startups grow from infancy to a spot on the Inc. 500 list and eventually sell for more than $100 million.

What I’ve learned through these experiences is that innovative startups are the engine of the American economy. Startups breathe life into slow growth industries (think Starbucks, Crocs and Netflix). Startups create new products and new markets (think salesforce.com, Google and Twitter). And startups solve complex scientific and engineering challenges to create life-changing products (think Intel, Amgen and TiVo).

Naturally, as innovative startups grow they create jobs — and lots of them. An eye-opening study by the Kauffman Foundation brings that into sharp focus. The study showed that startups are responsible for all net job growth in the U.S. since 1977.

Think about that for a minute. In aggregate, older more established firms do not create jobs (at least not in the U.S.). Job growth at one company is matched or exceeded by a decline at another. In essence individual companies are trading market share, but the market itself is growing slowly or not at all. When you add in technological advances to improve employee productivity, outsourcing to offshore locations, or simply eliminating positions to meet a lower level of demand, it is not surprising that established firms do not drive job growth.

Not all startups are equal

Any entrepreneur with the guts to launch a new startup deserves enormous respect, but not all startups are created equal when it comes to job creation. Startups in slow-growth markets such as restaurants, retail and other consumer services suffer from the same challenges as more established firms. Namely, a new growth company takes market share from an established player, so any new jobs created are eventually met with job cuts at other companies.

Similarly, startups in cyclical industries such as transportation, hotels, construction, real estate, etc., will not create sustained job growth. In good economic times, these companies will boom — and just as quickly go bust when the economic winds change.

While there are exceptions to these broad generalizations (note Starbucks and Crocs), sustainable job growth usually comes from scalable, innovative startups. These are the startups that venture capitalists and angel investors target. And these are the startups that will create new markets and lead the U.S. out of this economic slowdown.

Angel and venture capital investing

The startups noted earlier all share one common trait: they were funded by angel and/or venture capital. It is safe to say that without that capital, these companies would not have reached their respective heights.

Venture capital (VC) as a distinct asset class has existed since the ’60s, reaching its high point during the dot-com boom of the late ’90s and early 20000s. With such a long history, venture capital remains a relatively small segment of the capital markets. According to a report by HIS Global Insight, in 2009, new venture investments totaled $18 billion. Since 1970, only $474 billion has been invested in 27,000-plus companies. By comparison:

    The U.S. Treasury Department will issue more than $1.1 trillion in debt this year to cover the budget deficit.

    The junk bond market is greater than $600 billion in size.

    The wars in Iraq and Afghanistan cost more than $170 billion in 2010 alone.

But venture-backed companies have an outsized impact on GDP and employment. VC-backed companies produced more than $2.9 trillion in revenue in 2009, representing more than 21 percent of total U.S. gross domestic product. More importantly, 12.1 million people are employed at venture-backed companies, representing more than 11 percent of total private sector employment.

These numbers clearly show that innovative startups create economic growth and sustainable employment.

An alternative plan

That’s why I get viscerally angry watching the economic ignorance of our federal and state governments. Politicians pay lip service to wanting to create jobs, then spend tax dollars on big corporate giveaways, old industry subsidies, and pet projects that have little impact on actual job growth.

And when our government finally recognizes the need to create jobs and support small businesses, they create programs that will do neither.

A simple (and most likely profitable) plan that will have a fast and tangible impact on jobs is to create a federal “matching fund” for any angel group or venture capital firm to access. The matching fund would automatically invest a matching amount in any innovative startup that receives investment from the VC/angel group. Funds should be made available only for seed and early-stage investments. Extra incentives should be given to promote investment in regions of the country with low levels of VC investment and/or high levels of unemployment.

Under this plan, capital will be invested in companies with the highest potential for job and economic growth, and the fund will most likely turn a profit when all is said and done.

But don’t hold your breath waiting for innovative economic solutions to materialize in Washington. Instead, allocate some of your portfolio to angel/venture investing, then find a local angel group and get involved. You will be rewarded by working with some of the best and brightest entrepreneurs, while helping get the American economy growing again. And with any luck, you will make some money along the way.

angel statue

New Angel Investment Group Targets Women Entrepreneurs

A new angel investment group called the Catalyst Committee is gearing up to invest in local startup companies that focus on consumer goods such as apparel, high-end furniture and cosmetics. Heading up the new committee is Dee Riddell Harris, president of the Arizona Angels, a group of private investors that has been funding startup, technology-based companies in Arizona for nearly a decade.

“The Arizona Angels have rejected a number of applications from women entrepreneurs over the years because their ideas weren’t technology based or have a patent behind them,” Harris says. “So the point of the Catalyst Committee is to be supportive of entrepreneurs, particularly women, who have good ideas, as well as businesses that are not tech-based.”

Harris started building the framework for the Catalyst Committee about nine months ago. The group met for the first time in November 2008 and now has 35 potential women investors from around the state. During the kickoff meeting, the founders of three local startups talked to the group to provide an idea of the type of companies that could eventually apply for funding. High-end fashion designer Debra Davenport talked about the fashion industry in Phoenix, her couture collection, which she launched in November 2007 during Phoenix Fashion Week, and her hopes of one day raising $1.7 million that would allow her to participate in fashion shows around the world. She also showed a number of garments from her couture collection.

“Being able to participate in key fashion shows in Los Angeles, Miami, New York, Paris, Milan and London is a fashion designer’s primary marketing tool,” Davenport says. “But it’s not cheap. It can run anywhere from $30,000 to $100,000 per show when you figure in pattern making, fabrication, manufacturing and all the specialized notions, materials and threads that have to be brought in from places like Paris and Italy.”

Last year, Davenport was able to show her luxury collection during the Mercedes-Benz Fashion Week in Los Angeles. It’s the second largest and most prestigious fashion week in the United States next to New York Fashion Week. Davenport was also the first and only designer to show from Arizona, according to IMG, the production company that puts on the show. Now, Davenport was invited to show her fall collection during the most recent New York Fashion Week.

“I’m hoping that with the significant achievements we’ve been able to accomplish over the last 15 months, we will catch the eye of some savvy investment people who think this is a winning proposition,” Davenport says.

She is planning to launch her first signature fragrance later this year or in early 2010. She also plans to expand her design offerings to shoes, handbags and china patterns. The 50-year-old fashion designer has already completed designs for china patterns, shoes and luxury handbags that will be manufactured in Italy.

Kathie Zeider, senior vice president of Legacy Bank and a member of the Catalyst Committee, says there are many worthwhile businesses in Arizona like Davenport’s that serve women, or are women owned, and poised for high growth of $5 million to $50 million.

“We’re in a service and tech economy, so for Arizona to grow and prosper we need to nurture both sides of the economy,” Zeider says. “Kudos to Dee Harris for seeing this gap in the Arizona marketplace and developing an initiative to fill this need.”

Committee member Connie Jungbluth also believes early-stage investors are critical to the state’s economic vitality. “It’s important to infuse capital into early-stage companies in our community, especially in this economy,” she says. “Women are also big consumers, so overlooking businesses that serve them is not a good idea.”

The Catalyst Committee is still in search of investors to join the group. Its goal is to have 100 investors and to help one local startup company a month. Investors must meet state and federal accreditation standards. Individual investors need an annual income of $200,000 for the current year and the past two years. Couples require an annual income of $300,000 for the current year and last two years. A net worth of $1 million is also acceptable in lieu of the income standard.

Entrepreneurs can submit their applications and business plans to the Catalyst Committee via the Arizona Angels Web site. Harris says entrepreneurs seeking angel investment need to be well prepared when applying for funding; they need a strong business plan with important information aimed at investors.

“Angels are extremely interested in the management team that gives credibility to the firm, so oftentimes they read the first paragraph of a business plan, then skip straight to the management team because it’s so important,” he says. “They also want to know about the company’s marketing and sales strategy and whether the company has some type of competitive advantage.”

www.arizona-angels.org