How Georgia Can Fuel Job Creation with Early-Stage Capital

December 18th, 2009 by Leave a Comment

By Mike Eckert

Georgia is blessed with all of the elements to become a leader in 21st-century job creation and economic development. Schools in its University System and other colleges and universities within the state are among the finest in the country. Dynamic pockets of entrepreneurial activity exist throughout the state. Entrepreneurial activity is at an all-time high. But Georgia has a problem.

The state is falling behind and losing its competitive advantage to others when it comes to supporting and enhancing early-stage business creation. Georgia is increasingly seeing entrepreneurs who are products of our state colleges and universities take their ideas and businesses out of state. Forty percent of Atlanta’s high-tech start-up companies leave the state within three years, according to a recent Georgia Tech study.

“Instead of building great high-tech companies, Atlanta has become a feeder system for great high-tech companies in other states,” says study co-author Dan Breznitz.

It is a fact that in times of recession almost all new job creation comes from small businesses and entrepreneurial start-ups, not large companies. Large companies generally hunker down during economic periods such as those in which we live today. They reduce or freeze staffing and hiring. Georgia’s fastest route to job creation is to focus policy solutions on small business. In today’s climate it is nearly impossible for these businesses to find capital to support and grow their businesses. They are unable to obtain bank financing and too unproven for venture capital firms. So what are they to do?

Most small businesses start with personal funds or what is commonly referred to as “friends and family” money. As the business becomes validated it requires further capital to develop products, begin its sales and marketing activities and start to grow. This is where job creation begins. To fund this next stage of growth entrepreneurs often turn to what is known as “angel investors”.

Angel investors are not committed funds and they are not charitable institutions. They are generally high-net-worth individuals who invest their own money (think writing personal checks) into very high-risk, early stage entrepreneurial endeavors. Angel money is differentiated from venture capital funding in that it is an individual’s own money, is typically smaller amounts ($10,000 to $200,000) and, again, is much sought after earlier in the entrepreneurial process.

In today’s very difficult economic environment the state of Georgia must find ways to enhance the support of dynamic entrepreneurs. One way to do this is to incentivize angel investors to more aggressively support Georgia’s entrepreneurial start-ups.

Thus far, 22 states have developed tax credit programs for angel investors and, as a direct result, have marked significant measures of economic success. Based on annual reporting to the North Carolina General Assembly from 1999 -2008, North Carolina’s angel investor tax credit program resulted in approximately 660 new jobs per year in high-growth companies providing average wages of $58,792. The success and accolades of the program have opened the door to increasing the tax credit cap amount to $7.5 million annually.

In Georgia, angel investor activity is prevalent in various pockets throughout the state. These same pockets also have the greatest entrepreneurial activity in the state, so through implementation of a tax credit program similar to North Carolina’s, entrepreneurs throughout Georgia stand to benefit. By incentivizing further angel investing, more capital gets into the system; everybody wins and Georgia sees new job creation and enhanced economic development.

To minimize the immediate impact on the state budget, a tax credit program could be capped at $10 million per year and investors could wait two years to claim the credits. The risk, however, is not the cost but continued inaction. Put bluntly, had more angel investment “seeds” been planted over years past, Georgia’s unemployment rate and budget deficits would not be so high today.

This critical shortfall of capital for start-up companies in the region is the single greatest threat to the growth of Georgia’s economy. If Georgia is to succeed in the new economy, investment in early-stage companies, particularly coupled with Georgia’s strong university base and relevant industry base, will be crucial.

Georgia has an opportunity to demonstrate its commitment to innovation and the resulting job creation via the enactment of an angel investor tax credit. An angel investor tax credit enacted immediately, particularly in this at best changing and at worst challenging economy, will yield positive results in terms of encouraging entrepreneurship, keeping successful entrepreneurs in the state, propagating wealth creation statewide and keeping Georgia competitive with other states in the region that have already implemented angel investor tax credits.


 

Mike Eckert is a Venture Fellow with Georgia Tech’s VentureLab and also serves as an Entrepreneur in Residence with the Advanced Technology Development Center (ATDC). The Georgia Public Policy Foundation is an independent think tank that proposes practical, market-oriented approaches to public policy to improve the lives of Georgians. Nothing written here is to be construed as necessarily reflecting the views of the Georgia Public Policy Foundation or as an attempt to aid or hinder the passage of any bill before the U.S. Congress or the Georgia Legislature.

© Georgia Public Policy Foundation (December 18, 2009). Permission to reprint in whole or in part is hereby granted, provided the author and his affiliations are cited.

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