The recent economic downturn has led to significant changes in financial lending patterns, with banks now showing a reluctance to issue loans for new business start-ups. This pattern has been replicated across venture capital firms that now choose to target their investments at later-stage companies.
As a result, many entrepreneurs are struggling to receive start-up funding for potentially profitable business ventures. They are now, increasingly, turning to alternative investment channels.
For American economists and entrepreneurs alike, the need to identify alternative investment channels has thus become crucial to generating economic growth. Though angel investors have long been recognized as a means for financing business start-ups, supply is now failing to meet demand. This is particularly the case amongst entrepreneurs who lack business connections. Thus, in a bid to boost angel investment, a new generation of angel investors is being sought out.
Part 1: Female Angel Investors
Many believe that boosting the numbers of female angel investors is critical. This is because they believe that women investors would offer perspective and expertise to potential business start-ups. As per a report by the Guardian Life Research Institute, female-owned small businesses (now constituting 16% of total US employment), will likely be responsible for generating approximately 33% of the 5.5 million of the new jobs expected by the Bureau of Labour Statistics by 2018.
Additionally, it is thought that increasing the number of female angel investors will increase levels of corporate diversity. As per Ed Reitler, of Reitler Kailas and Rosenblatt:
‘It is incredibly important that the venture ecosystem includes women as angel investors. They are crucial to ensuring the funding of a more diverse group of companies.
Case Study: The Pipeline Fellowship, New York
The Pipeline Fellowship, founded in 2010 by Natalia Oberti Noguera, supports and develops female angel investors. It provides practical training to selected female philanthropists who wish to become angel investors. Training constitutes a six-month program and topics covered include due diligence, finance, and strategic portfolio management.
Upon completion of the program, angels (made up of ten investors) sort through multiple business plans submitted by female entrepreneurs and, from these plans, select companies to present business pitches. Following due diligence, they then select one company for investment, and each contributes $5000 (totaling $50000).
The success of the program has been huge. In 2011, it set out to train ten women in angel investment and, one year on has expanded to provide training for forty women within four programs held across two locations. This expansion represents 400% growth over a one-year period. As per founder, Natalia Oberti Noguera:
‘The Pipeline Fellowship is committed to increasing diversity in the angel investing community and training a new generation of angels to invest for good’.
Part 2 – Foreign Angel Investors
Attention, too, has turned to attract foreign angel investors. This drive responds to the limited number of foreign economies choosing to invest in US companies. In 2010, 84% of foreign money directly invested in US businesses could be linked back to only eight economies: Canada, Japan, Switzerland, Germany, France, Luxembourg, the Netherlands, and the UK.
Additionally, statistics show that there is a direct correlation between foreign investment in US companies and growth in numbers of high-paid jobs (up to 30% higher paying). Over the last 10 years, companies with majority-owned US affiliates of foreign companies have provided employment to 5-6 million individuals.
Case Study: The EB-5 Investment Visa
One method used for attracting foreign angel investors to the US is the EB-5 Investor Visa. This visa grants residency to foreign investors investing in new commercial enterprises that correspond to several key criteria. Namely, these criteria set the level of the financial investment at $500000 or $1000000 (figure linked to targeted employment area status rather than the predicted rate of return). They also stipulate that each investment will provide at least ten jobs for qualified workers within the US. Permanent residency is only granted following a two-year conditional permanent residency period and upon receipt of a green card.
Though the EB-5 visa was established to encourage entrepreneurs, in practice, since the creation of EB-5 Regional Centers, which were established to facilitate many EB-5 foreign investor deals, many visa recipients have been angel investors. These investors seek to achieve the best investment returns, and US residency, within a complex financial market. In many instances side by side investment -joint investment between foreign and international investors – is required.