Should States Support Angel Networks With Public Dollars?

Angel networks are often seen as an effective way to make sense of hodgepodge of individual investors, institutional funds and investment groups that make up the early-stage capital industry. Though many regions suffer from a lack of early-stage capital, this problem is often exacerbated by insufficient knowledge among entrepreneurs about local angel investors and groups and vice versa. Angel networks can fill this void by facilitating communication between local investors and entrepreneurs, thereby increasing the number of opportunities available to both. Several states provide financial support for angel networks, including Wisconsin (Wisconsin Angel Network)http://www.wisconsinangelnetwork.com/ , Pennsylvania (Pennsylvania Angel Network) http://www.paangelnetwork.com/ , Mississippi ( Mississippi Angel Network) http://www.technologyalliance.ms/services/ms-angel-network.php and Washington (WTC Angel Network)http://www.watechcenter.org/?p=WTC+Angel+Network&s=5 . These organizations unite angel investment groups from around their respective states and provide a convenient starting point for new companies seeking early-stage capital.

A working paper from Veroniek Collewaert, Sophie Manigart, and Rudy Aernoudt, however, argues that the case for public support of angel networks may not be so cut and dry. In Europe, the popularity of Business Angels Networks (BANs) has surged in recent years. Groups in the United Kingdom, Belgium, Germany, Italy, the Netherlands, and Spain have been established with public funds to connect the investment and entrepreneurial communities. The authors observe that it has often been taken for granted that these organizations require public subsidies to get off the ground, but that after a few years, they will become self-sustaining though the collection of fees, dues and contributions. This, however, is rarely the case. Though many applaud the work done by these groups, few of Europe’s publicly supported angel networks have made the transition to financial independence.

Collewaert, Maingart and Aernoudt, therefore, sought to test the typical justifications for permanent government support of these networks. Their study evaluates the operations of Belgium’s four BANs between 1999 and 2004. The proponents of BANs contend that these networks help overcome certain market failures that impede economic development. They argue that many entrepreneurs suffer from a lack of information about early-stage capital resources which can be overcome through the efforts of BANs. Through quantitative and survey data, the authors confirm this line of reasoning. Many early-stage firms suffer from a lack of information. Futhermore, nothing about these firms suggests that they present less desirable investment opportunities than firms that do have access to angel investors.

On the other hand, the authors found that angel investment-backed companies in the study lose money in the short term. During the two-year period following angel investment, most firms in the study failed to create value. Thus Collewaert et al. are hesitant to endorse the idea that angel networks remedy an existing market failure.

Still, the authors find that BAN-backed companies have contributed significantly to the Belgian economy through new jobs and taxes during the period of the study. These firms appear to contribute as much to the economy as firms that found angel financing without the aid of angel networks. Also, the researchers found that BANs were an effective way to raise awareness about regional opportunities among entrepreneurs and investors, to provide entrepreneurial education, and to help firms leverage additional funding following the initial investment.

Read "An Assessment of Government Funding of Business Angel Networks: A Regional Study" at: http://ideas.repec.org/p/vlg/vlgwps/2007-16.html

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