A Report Card on the Boise Angel Alliance

I have been arguing for some time in this column (these blog posts are originally published as a column in the Idaho Statesman's Business Insider magazine)  that an important component of the ecosystem for entrepreneurship is the availability of risk capital.  I have also argued that using best practices, angel investments can produce nice returns to the angels in addition to helping entrepreneurs.

Here’s a report card of sorts on some of the Treasure Valley angel activity.

The Boise Angel Alliance was formed about 2003.  Unfortunately, we didn't keep any investment records in the early days.  But for the first five years there was relatively little activity.  As a result, a group of us formed a “fund” to try to stimulate more investment.  A fund is a limited liability company.  The members of the fund agree to contribute cash capital to the fund as investments are made.

Our thought in forming the fund was that it would result in making investments since the cash would be in the bank waiting to be invested.  A fund has the added advantage of spreading risk since each investor has a small piece of a number of investments.

We formed our first fund in the spring of 2007.  Members agreed to contribute up to $50,000 each.  We received commitments for $1,350,000 and began to invest. It took us five years to fully invest the first fund.  Last year we formed the second fund.  Coincidentally, we also received commitments for $1,350,000, so between the two funds up to $2,700,000 will be available to local entrepreneurs.

So what’s happened? 

We have invested a modest amount of money outside the valley with partner angel groups around the northwest, but this article is about the local impact.

The two funds have invested to date a total of $1,535,000 into 14 Treasure Valley companies. Now that is not a large amount of money per company (our largest investment is $160,000 and our smallest is $25,000).  But the money was generally invested early in the companies’ lives and helped the entrepreneurs move their companies to the next level.  We haven't kept track of how much capital the companies have raised since we made our investments, but it is tens of millions of dollars more.

How have the companies done?  All 14 are in business and continuing to execute their business plans.  Some are growing rapidly; some are struggling to find the right path forward. But today all are still in business. 

Collectively their Treasure Valley employment as of June 30, 2013 has increased by 146 positions since we made our investments in each.  If the positions average  $40,000 a year in salary, then that’s an annual impact of nearly $6 million in salary alone in our valley.  

How have the investors done?  It’s too soon to know as angel investments take years to mature.  One of our local companies and one of our non-local companies have been acquired.  One non-local company went bankrupt and we lost our investment.  However, we are starting to get a picture.

Investors in the first fund have received back nearly all of their capital.  Of the $1,350,000 of committed capital, the fund has returned all but about $50,000.  And the fund still holds about  $1 million of stock in portfolio companies at cost.  Those companies will be sold over the next few years and the proceeds distributed to the investors.  At this time it looks like the investors in the first fund will likely be quite happy with their returns.

So, thus far the angel funds have been good for the Treasure Valley economy, good for the entrepreneurs, and good for the investors.

Boise Angel Alliance Year in Review

The Boise Angel Alliance had the most active year in 2012 since we created our first angel fund in 2007.

There are many individual angels in the valley. So far as I am aware, there is only one formal angel organization, the Boise Angel Alliance. The purpose of the Alliance is to encourage the availability of capital for entrepreneurs.  It has created two funds, the Boise Angel Fund and the Treasure Valley Angel Fund.  The below data are drawn from the records of the two funds.

The Boise Angel Fund made its last angel investment in 2012, and is now fully committed. The new Treasure Valley Angel Fund was formed and as of this writing has $1.1 million of committed capital and continues to raise additional capital. 

We had our first successful “exit” in 2012. An exit is angel-speak for selling or otherwise disposing of an investment.  We invested $45,000 in a Spokane based company along side the angels there.  We were paid about $188,000 for our stock and have the potential for additional proceeds.  We have had one unsuccessful exit, a bankruptcy where we lost our entire $25,000 investment. 

In 2012 the funds invested $500,000 in five companies.  This is the most that has been invested in one year since the first fund came into being in 2006.  Simple math would suggest that the funds invested an average of $100,000 per deal. But that ignores the leadership of the funds. 

Once we commit an investment to a company, we then try to help raise additional capital. That additional capital may come from our own members, other groups in the Northwest with whom we have trusting relationships, and other angels that may study our efforts and decide to invest along side our investment. The total capital raised by those five companies in these rounds was $1,395,000 or about two dollars additional capital for every dollar invested by the funds. 

The five companies are:

CoreConcepts.  This is a local manufacturer and distributor of high performance outdoor clothing sold through specialty retailers.

MealTicket.  Meal Ticket enables food manufacturers to promote products directly to restaurants and other food service providers.

Sawtooth Ideas. Sawtooth provides an online marketplace where designers of woodworking plans can sell plans, along with innovative software that turns traditional two-dimensional plans into three-dimensional, dynamic plans.

Social GoodNetwork.  They enable consumers to shop on line and do good, by capturing referral commissions and allowing the shopper to designate a portion to charity.

VoxbrightTechnologies. Voxbright develops voice recognition software for cable television and Internet TV platforms.

The angels also provide mentoring and advice to the companies before and after the investment transaction.  One of our members serves as a director in four of the five companies.  Our collective membership of about fifty individuals is actively involved in promoting and assisting the companies wherever we can.  For example, I purchased and proudly wear clothes from Core Concepts.  My family and I shop on line through Social Good Network.

These companies will have an impact on our local economy.  At the time of our investments, they employed about 15 people.  Over time we expect that their employment will grow significantly.

Since 2007, our two funds have invested a total of $1,385,000.  Those companies have raised more than $19 million in the rounds in which we participated.  The Boise-based companies as December 31, 2012  had created about 110 new jobs.  

We recognize that these two funds can meet only a small portion of the demand for risk capital by our local entrepreneurs.  Many entrepreneurs were turned down.  Undoubtedly some of them were worthy of investment. We encourage others in a position to do so to consider investing a portion of their capital in valley entrepreneurs.  The Boise Angel Alliance stands ready to assist.  Both entrepreneurs seeking funding and those considering investing can learn more through Alliance website.

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Dr. Kevin Learned is on special assignment with the Division of Research and Economic Development at Boise State. He was the co-founder of Learned-Mahn, Inc., which he believes was the first commercial software company in Idaho.  He is past president of the Boise Angel Alliance and an investor in its funds, the Boise Angel Fund and the Treasure Valley Angel Fund.  He can be reached at kevinlearned@boisestate.edu, 208-426-3573

Where Do Jobs Come From?

We all know good-paying jobs are important to our economy, both locally and nationally.

Our legislative and congressional policymakers spend a good deal of time debating job creation policy. Each city in the Treasure Valley has an individual assigned to economic development. Our chambers of commerce work to improve the economy for our local companies.

But sometimes I fear all this effort, while well-intentioned, is under-informed on how jobs actually get created.

About 30 years ago, Professor David Birch of the Massachusetts Institute of Technology published groundbreaking research showing that about two-thirds of all net new jobs (jobs created minus jobs lost) between 1969 and 1976 were created by firms with 20 or fewer employees (David Birch, “Who Creates Jobs,” Public Interest, Fall 1981, pp. 3-14). This research led us to understand better the extremely important role of small business in the U.S. economy.

Now the Kauffman Foundation has published a surprising new study of job creation in the economy (Tim Kane, “The Importance of Startups in Job Creation and Job Destruction,” The Ewing Marion Kauffman Foundation, July 2010). Their research mined a new U.S. government dataset called the Business Dynamics Statistics, which includes age of company as well as employment data. Here’s what they found: “Startups aren’t everything when it comes to job growth. They’re the only thing.”

The data show that in all but seven years in the period from 1977 through 2005, existing firms on balance lost more jobs than they created.

Clearly employment didn’t drop in the other 22 years. So where did the job growth come from? It came from new companies.

How can this be? If you think about it, a startup by its very nature starts with zero jobs and with its first hire creates a job.

Over this 28-year period, startups created an average of 3 million jobs each year. But once started, some firms add jobs, others lose them. On balance, after the first year existing companies lose more jobs than they create. Of course, not all companies destroy more jobs than they create, but when summed together, existing firms stop growing, may lay off workers or even go out of business.

This has several public policy implications. Of course we should not ignore our existing businesses. Helping them grow is important. But I am intrigued about what we can do to encourage entrepreneurs to start businesses in our Valley. Here are several thoughts.

INVEST FINANCIAL RESOURCES

We should consider investing some of our economic development resources into support for entrepreneurs. Recruiting a company to come to the Valley may lead to good headlines, but may not lead over the long run to job growth. Some states have used tax policy, such as tax credits, for investing in new businesses to encourage capital.

FOSTER RESEARCH AND SUPPORT

Incubators, when combined with support such as that provided by the Boise State University TECenter in Nampa, can provide nurturing support for entrepreneurs.

Funding research programs in our universities produces new knowledge that can become the basis for a new business.

And joint public/private partnerships such as The Core in Meridian may provide a seed bed that will attract entrepreneurs and capital.

Kevin Learned is a counselor at the Idaho Small Business Development Committee, a member of the Boise Angel Fund and the finance committee of the Idaho Technology Council. Contact him at kevinlearned@boisestate.edu.