Clearly, the startups in which they’re investing are generating interest.  So what’s happening with the tax credits that many states have been providing to encourage startups and job growth and that have drawn a lot of investors to their startups?  It appears that many governors are questioning the real benefit of credits that range from 15 percent on investments to Hawaii’s whopping 100%.  It seems that all they care about is an immediate return on their investment with no risk.  But I would argue that perhaps their expectations for job creation are a bit off base.  For example, Minnesota’s program gave angels a 25% tax credit on their investments.  In 2010, during the first six months of the program, angels invested $28 million in 67 startups, but those businesses only created 47 new jobs.  Six months!  What do they expect?  Any entrepreneur who knows anything is not going to run out and hire a bunch of people in the first six months when they’re trying to figure out if they gauged their market correctly and their financial metrics are on target.  Investing in startups for job creation is a long-term investment that has the potential to pay off in hundreds, if not thousands, of new jobs.  So why are state governments shooting themselves in the foot by eliminating the credit?

 

Now, I’m not claiming that angels won’t invest without tax credits, but their absence does change the ROI model and angels will look elsewhere if they can find a better investment.

 

And speaking of looking elsewhere,  let’s get back to AngelList, which is one of many sites that purport to connect angels with startups to make deals happen with or without tax credits.  One of the big problems angels have is finding great deal flow; one of the big problems entrepreneurs have is finding an investor who is willing to take the huge risk of a startup or seed stage investment.  So AngelList sounds like a match made in heaven.  But wait.  How many of you have sat through a presentation for a timeshare investment [I’m embarrassed to say I have—once, in Hawaii, of course] only to have some person with a microphone yell out every few minutes something like “Judge so-and-so just purchased Lot 23,” in an effort to generate excitement and make you feel compelled to invest because if a judge would—hey—it must be a good investment!  This tactic is all about hyping the deal. That’s the approach that AngelList takes, putting peer pressure on investors so they feel they might miss out on the next Facebook if they don’t invest.  For some angels, this tactic might work, but for many of the most successful angels, John Doerr and Fred Wilson come to mind, this tactic won’t work because really successful angel investors know how to find extraordinary ventures BEFORE the matching sites begin generating heat for an investment.  And, they would never consider investing in a venture before they had spent a long time in face-to-face discussions with the founders. They know how to pick winners, and they don’t need a match site to find the best, or a tax credit to incentivize them for that matter.

 

Bottom line.  Eliminating tax credits for angel investment in startups may stop some angels who need that kind of incentive to tip their decision to invest; and sites like AngelList will still be a place where entrepreneurs get noticed and investors who like hyped deals will hang out. But investors like Bryce Roberts (O’Reilly AlphaTech Ventures, QATV, avoid hype like the plague.  “I tend to be interested in ideas and companies that most investors aren’t, so heat is generally a false signal for me. “  Investors like Bryce Roberts look where no one else is looking, and that sounds like very smart strategy to me.