Angel investors and entrepreneurs are not Wall Street bankers.  This distinction is obvious to you and me, but apparently not to Washington. The new Senate Financial Reform Bill, which is likely to be voted on this week, lumps the two together as one group. If allowed to pass in its current form, this bill will destroy the way in which our society helps entrepreneurs turn their crazy innovative ideas into viable job creating businesses.

Angel investors are individuals that invest in early stage businesses that often consist of not much more than a folding table, a couple of computers and lofty aspirations. However, it is these early stage investors that often invest in companies five years or younger and help get high growth business off the ground.  Apple, Google, Facebook and a thousand other high growth businesses you have never heard of, all got their start because angel investors took a risk along side entrepreneurs.

It is these types of business that lead in both innovation and job creation.  In fact a recent Kauffman foundation study found that between 1980 and 2005 every single net new job created in the United States came from a company 5 years old or less.  It  is clear that one of the keys to job creation in our country is to ensure that early stage entrepreneurs have access to capital.  This is why many of our political leaders and candidates are trying to craft policies that support angel investors.  In fact, gubernatorial candidate Tom Corbett is proposing an angel tax credit for Pennsylvania angel investors.

With such clear understanding that entrepreneurs and angel investing are critical to economic growth and job creation, you would think our leaders in Washington would be doing everything possible to promote this type of bottom up economic development.  Unfortunately, we are seeing another example of top down Washington economic policy.

In its current state, Senator Dodd’s Financial Reform Bill would make two sweeping changes to the way in which angel investors and entrepreneurs can operate.  First, the bill would redefine who would be qualified to be an angel investor.  Currently individuals with either $1 million in investable assets or $250,000 in income qualify as accredited investors.  The new bill would change this to individuals with $2.3 million in assets or $450,000 in income.  According to the Kauffman Foundation, this would eliminate 77% of accredited investors.  This single handedly would reduce the amount of capital available to early stage businesses and stunt our much needed job creation.

In addition, the new bill would require any company attempting to raise angel investment to seek SEC approval, which would take up to 4 months.  As an active angel investor myself, I can say with certain that companies in this stage can rarely wait four months for funding. They will simply be forced to close up shop. Yet again this is another example of government bureaucracies getting in the way of the thriving entrepreneurs that this country needs to unleash, not restrict.

Angel investors and entrepreneurs had absolutely nothing to do with the financial meltdown of 2008, and no one believes they pose a systemic risk, so why are they being lumped together with Wall Street Bankers?  Proponents of the bill say that Washington is trying to protect people from risky investments.

Yes, angel investing is risky, and starting a business from scratch is even more risky.  However, it is this calculated risk taking that has allowed the United States to be the most innovative society in the world and has provided us a standard of living the world has never seen before.  If Washington insists on completely eliminating risk from the marketplace they will also eliminate entrepreneurship and innovation and this, in turn, will eliminate job creation in the process.

As a society we need to be looking for ways to increase capital to early stage businesses.  We need to be trying to find ways to lower the bureaucratic burdens place on our entrepreneurs.  The Financial Reform Bill goes against both of these principals, and punishes us all by restricting our entrepreneurial spirit as a society.

Steve Welch

Entrepreneur & Angel Investor

Author of “We are all Born Entrepreneurs”

Let’s simplify this issue. Jobs come from economic growth. Economic growth comes from increased productivity. Increased productivity comes from innovation. Since jobs come from innovation, the real question is how do we stimulate innovation? Once this becomes our focus, the argument becomes much clearer.

Reading the front pages of the business sections, you would think that GE and Exxon run our economy. While these large organizations certainly play an important role, the U.S. Census Bureau clearly indicates that the bulk of new jobs are created by firms with less than 20 employees. From 1990 to 2003, small firms (fewer than 20 employees) accounted for 79.5% of new net jobs.

Not only are small businesses generating jobs at an amazing rate, they are a powerful source of innovation and patent activity. Small firms’ patents tend to be more significant than the patents of large firms, outperforming them in a number of key metrics, including growth, citation impact, patent originality and patent generality. The metrics have been validated and shown to correlate with increases in sales, profits, stock prices, inventor awards and other positive outcomes. This suggests that, in general, patents of small firms are likely to be more technologically significant than those of large firms. This fact is even more remarkable when R&D budgets are taken into account. Small high-tech businesses generate five times more patents per R&D dollar than large businesses.

In order to rejuvenate our regional and national economy, it is critical that we nurture, attract and maintain innovative small companies. This can be accomplished by creating an environment that encourages calculated risk taking and provides economic incentives that will attract innovators. If you were going to start a business, would you pick Pennsylvania who has a combined tax rate approaching 50% and capital gains of 15%, or Ireland who has a tax rate of 12.5%, or Singapore who has 0% capital gains?

This is why excessive government spending does not create jobs, and in the long run, will destroy them. The government is piling on debt, and it cannot spend what it does not collect from taxpayers – unless it borrows money. Right now it is doing just that off the backs of our children and grandchildren. At some point this needs to be paid back which means higher taxes, further leading to a downward economic spiral.

While the national tax rates are a macro issue that can only be addressed by Congress, I believe there are a number of things we can do locally to ensure that our region is competitive in this global environment.

1) It is critical that we nurture, recruit and maintain the best talent. We arguably have the best university system in the world right here in southeast Pennsylvania. We need to create economic incentives that reward people for staying in our region and creating jobs. One idea by Bob Adelson of Osage Ventures is tax incentives for excess properties that could be used to provide low-cost housing for individuals starting companies in the region. Another idea is to utilize student loan reductions to provide motivation for young entrepreneurs to start their companies in Pennsylvania.

2) We must develop partnerships with other regions from Tel Aviv to Singapore that ensure we are the landing ground for technology companies, while at the same time provide our small business community access to global markets.

3) We need to ensure that there are ample investment dollars accessible to small businesses and technology start-ups. Singapore has a proven model that allows Angel Investors to double their capital by providing matched state funds to companies creating jobs in the country.

4) We need to incentivize our local universities and colleges to spin off job-creating companies. Studies show that local colleges and universities receive over $940 million in funding for research and development from the local, state and federal governments. It is vital that these funds target job-creation strategies, such as technology-transfer out of the universities and into private industries.

These are only a few suggestions on how we can create a regional economic development plan, and individuals from both sides of the aisle have many more. Over the coming months, we will provide more details on these and other ideas. Regardless of party, we can all agree that we need policies that will support innovative, job-creating companies to build a brighter future for our region and our nation.