The Role of Angel Investing in the Rise of Connecticut Startups
Without angel investors, many dynamic young companies would never get off the ground. Angels are a pivotal means of support for the entrepreneurial ecosystem by providing startups with difficult-to-raise seed capital.
But why should angels choose to invest in Connecticut among the myriad other investment choices and options across the country? And, for that matter, why would a startup take its revolutionary new idea and bank on Connecticut as the place to get it off the ground and onto a successful growth trajectory?
One measure of reassurance is a recent statement by newly elected governor Ned Lamont wherein he has “pledged to reinvigorate the formation of homegrown companies” in the state. There’s also the Angel Investor Tax Credit Program along with other enticements to attract startups and investors. For this article, we interviewed successful founders and experienced angel investors to explore the appeal of starting a business and investing in Connecticut. The following consolidates their comments and feedback.
WHY FOUNDERS ARE CHOOSING CONNECTICUT FOR THEIR STARTUPS
The consensus among the article’s contributors is that when companies choose to locate in Connecticut, they are drawn to some very specific advantages the state has to offer. Namely, talent and resources, prime location, and affordability.
Talent and Resources
Connecticut’s world-class university system, particularly Yale University and the University of Connecticut, produces some of the best and brightest technology minds with each graduating class. What’s more, the state also boasts a depth of professional expertise in fields such as biotech, digital health, fintech and advanced manufacturing. There are a number of industry powerhouses in the state, such as United Technologies, Pratt & Whitney and Stanley Black & Decker, that are committed to cultivating cutting-edge innovation and have the resources to help make it happen. A number of companies are choosing to locate in the state based on these local factors.
Given its position between New York and Boston, a major draw of businesses to Connecticut is its accessibility to multiple global transportation hubs. It also has cities like New Haven, Hartford and Stamford that foster a climate of diversity, inclusiveness and multiculturalism—key attractors for a creative young workforce. On the softer side, Connecticut is a great place to live with a natural environment of beaches, lakes, bike and hiking trails, hundreds of top schools—from pre-K through postgraduate, and many options for first-rate dining, entertainment and culture.
For many people who find places like New York and Boston somewhat overwhelming, not to mention incredibly expensive, Connecticut offers a great alternative. While other locations in New England struggle with high costs of living and commercial overdevelopment, Connecticut represents a great place to do business that still retains value and opportunity for growth.
WHY ANGEL INVESTORS CONTINUE TO BET ON CONNECTICUT
For some of the same reasons founders decide to put down stakes in Connecticut, angel investors see the opportunity for innovative local startups to thrive. Angels recognize the advantages of proximity to major markets and transportation routes, the rich source of talent, and local industry resources dedicated to advancing breakthrough technologies. But what are some of the other deciding factors that encourage investors to take the risk to support very early stage companies in the state? Our interview participants have suggested the following motivations.
For the most part, angels like to invest close to where they live and work. While they hope to realize a profitable investment, angel investors particularly enjoy seeing their capital at work creating jobs and stimulating economic growth in their own communities.
Many angels, having accumulated wealth as a result of their own successful business ventures, have a great deal to offer other than finances to startups. Of most value is their industry knowledge and contacts. And if they are close by, they’re in a much better position to lend their expertise, perhaps even taking a seat on the board, while also closely monitoring their investment.
Investors are always seeking good risk-reward opportunities. For angel investors, because investing in startups is at the far end of the risk spectrum, they are generally unwilling to go it alone. But when they see other seasoned investors or angel groups involved and when the company itself is raising a significant share of the initial capital required, those are the deals angels are comfortable pursuing.
Angel Investor Tax Credit
The other major advantage to investing in Connecticut is the Angel Investor Tax Credit Program.* In the words of one of the investors we interviewed, “Whenever I’m looking at a set of investments and one has a tax credit, I usually tilt in that direction.” And from a founder’s perspective, “The tax credit has made a real difference in our ability to attract angel investors.”
WAYS TO GROW THE STARTUP ECOSYSTEM IN CONNECTICUT
Develop Educational Programs
In the opinion of one of the angel investors who contributed to this article, the greatest way to advance the startup ecosystem is through education—getting the word out through a series of events across the state aimed at informing and engaging both founders and investors about what early-stage investing is, what it takes to launch a successful startup, and what Connecticut has to offer to support such efforts. For instance, an event might focus on introducing the Angel Investor Tax Credit Program and Angel Investor Forum. Or sharing specific stories of successful Connecticut startups—the more examples of actual successes, the more people will be willing to consider taking the risk to invest.
As strange as it may sound, a vital means of supporting the startup ecosystem in Connecticut is to encourage the acceptance of failure as part and parcel of the startup world. Of all the founders that attempt a startup company, a great many will probably fail. But many will also succeed. In places like Boston, New York and even Silicon Valley, entrepreneurs are not afraid to take risks, and as a result there are many successful startups. Connecticut should strive to inculcate this mindset—that it’s okay to take a risk, and in the event of failure, entrepreneurs should just learn from the missteps and feel emboldened to try again. The same rule should apply on the success side. When companies are successful and they spin out other companies, the talent that helped make it happen should be encouraged to stay in Connecticut and start their own new companies. Ideally, the ecosystem will evolve to the point where this is an ongoing, sustainable cycle.
Invest in Infrastructure
To truly bolster the startup ecosystem, our article contributors believe the state should pursue opportunities to renovate and rebuild its infrastructure while continuing to fund and support organizations like Connecticut Innovations that foster high-tech industry development. On the infrastructure front, one specific recommendation was to enhance the state’s transportation systems—both within the cities and by increasing the speed of regional train lines. Another suggestion was to be out in front in adopting a 5G wireless infrastructure, which would give Connecticut companies a decisive competitive advantage in the global digital economy.
Foster an Entrepreneurial Business Climate
Our contributors expressed confidence that many elements are beginning to take shape to foster a more entrepreneurial business environment in Connecticut. Business incubators and accelerators are gaining momentum in providing resources and funding for early-stage companies. There are a number of coworking spaces in full vigor. Some local VCs are ramping up their activity. The university system continues to yield cutting-edge intellectual property—with spinouts of next-generation technology companies. And there is Innovation Places—the CTNext flagship program that seeks to support entrepreneurs by revitalizing prime locations in the state to attract the talent high-growth enterprises need. In the words of one founder, “Innovation Places is exactly what we need.”
Without angel investing, many of today’s successful startups would never have made it past their innovative idea. The seed funding stage is the crucial moment when angel investors have a chance to make a difference and maybe contribute to the next great technology breakthrough. As this article has highlighted, Connecticut continues to build its startup ecosystem and offers a number of tangible benefits for founders and investors alike.
NOTE: Special thanks to the following founders and investors who were interviewed for this article and whose insights are incorporated herein:
Ben Berkowitz, Co-Founder and CEO, Seeclickfix
Joe DeMartino, Investor, consultant and advisor to early-stage technology companies; Managing Director and Deal Flow Chair, Angel Investor Forum
Alan Mendelson, Investment Committee Member, Connecticut Innovations; Board Member, Connecticut Technology Council and MIT Enterprise Forum
Charles O’Connell, Founder and CEO, FitScript
Angel Investor Tax Credit Program Requirements for Connecticut Startups
- Less than $1 million in gross revenues
- Operating in Connecticut for less than seven years
- Less than 25 employees; 75% Connecticut residents
- Primarily owned by management and/or families
- Apply to CI for Qualified Connecticut Business (QCB) status*
* QCB must recertify annually
Requirements for Investors
- Accredited investor
- Cash investment of $25,000 to $1,000,000
- Control less than 50% of the QCB
- Apply to CI for tax credit reservation number**
- Register for angel tax credit certificate
- Tax credit (25% of investment) may be sold, assigned or transferred
** subject to annual limits; expires 45 days from issuance
A complete list of QCBs may be found on the Connecticut Innovations (CI) website.