Anchorage 49th State Angel Fund will award $4.1M in 2012
Anchorage’s new city-run 49th State Angel Fund is off to a good start in stimulating local entrepreneurs with small business startups or expansions.
There were 25 direct applications from businesses and three from private or institutional investment funds in the first round of applications that closed Aug. 5, according to Joe Morrison, the Municipality of Anchorage’s manager for the program.
Anchorage has received $13.2 million in federal funds under the State Small Business Credit Initiative to start the program, and is the first U.S. city to receive such an allocation.
About 60 percent, or 15, of the business applicants survived the initial screening and are now before the Angel Fund’s advisory committee, he said.
“Our criteria is that these applicants be able to provide significant economic benefits to Anchorage, for example by maintaining a headquarters in the city. The economic benefits could extend statewide, of course, and even outside Alaska,” said Lucinda Mahoney, Anchorage’s city Chief Financial Officer, in a recent briefing to Anchorage’s Chamber of Commerce.
The city’s Angel Fund is being managed through Mahoney’s finance office.
Morrison said about $20 million in investments were requested, which is about five times the amount of money, about $4 million, that will be available this year.
“These are strong applications that were put together by people with experience, and who will help deploy this capital effectively,” Morrison said.
The identities of the applicants are confidential for now, but that will change by year-end.
“Our intent is that by the end of the year we will be able to tell the public who we funded and for how much,” although some details will not be disclosed, Morrison said.
Morrison said $4.13 million is expected to be awarded this year, with the balance, $8.5 million, to be awarded in 2013. The federal program is one-time funding.
A preliminary review of the applications was done by Anchorage Economic Development Corp. and municipal finance staff. An advisory group to the 49th State Angel Fund of local businessmen and finance specialists will make recommendations in mid-September.
Finalists to receive funding will be selected by Oct. 1, after which a three-month period of due diligence will be conducted. Mayor Dan Sullivan and Mahoney, the city CFO, will announce the final applicants chosen for investments at the end of the year.
“Angel” funds are traditionally investment funds run by private individuals, such as venture capital investors, who provide critical early start-up or expansion capital for entrepreneurs. These are typically in businesses with high growth potential, where there is considerable profit possibility.
Typically, angel funds also provide for the early investor to be bought out, hopefully at a considerable profit.
“Many companies, particularly small businesses and start-up companies, have found it increasingly difficult to obtain loans due to the tightening of credit markets,” Morrison said.
Congress passed the State Small Business Credit Initiative to help make more money available for small businesses.
Federal rules require the 49th State Angel Fund to limit applications to firms with 750 or fewer employees, a category which most potential small business applicants in Anchorage fit.
The applicant must also be able to match the city’s investment with his or her own money on a one-to-one ratio, so that if the angel fund invests $1 million the applicant must bring in $1 million in either equity or debt financing. It must also be new money, not funds already in the enterprise.
Another federal requirement is that the applicant must show an ability to bring in additional funds for further growth on a 10-to-1 ratio, in either further debt or equity funding.
“The applicants have to show us how they can leverage this investment with additional funds to grow quickly, and to provide us with an exit strategy so we can be bought out,” Mahoney said at the Chamber briefing.
Morrison said the decision on what to do with funds returning to the municipality after the city’s equity is bought out will be made by future municipal leaders.
However, it is expected that the city’s ownership of a share of the investment funds will continue for a number of years.
The angel fund strategy is also that most of the funds, about two-thirds, will go to local investment funds to help them grow.
“Our goal is that we want to help build these local private investment funds that are emerging in the community so they become more visible. There is risk capital available for entrepreneurs here but it is not highly visible,” Morrison said.
Meanwhile, many of the nine direct business applicants turned down in the first screening fell short not because of quality but because of difficulties in meeting the requirements like the one-to-one match, Morrison said.
Where quality deficiencies did exist, the applicants were referred to other resources in the community, like the University of Alaska Anchorage Small Business Development Center or another UAA group, the Center for Economic Development, Morrison said.
Applicants that weren’t funded in 2012 are also free to re-apply for the 2013 rounds of funding, he said.