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Mississippi Angel Fund could become go-to-place for startups

By TED CARTER

Tony Jeff

Innovate Mississippi expects to boost investments in promising Mississippi startups through a regional angel-fund setup it says can make deals easier and more plentiful.

Organizers of the Mississippi Angel Fund say they will invite the State of Mississippi to support the funds through tax credits or perhaps even through buying shares that would entitle it to financial rewards when the startups are acquired or go public.

The funds will total $500,000 to $1.5 million with investment over roughly a three-year period.

They are seen as adding to the Mississippi Angel Network, a group that relies on investors and founders of startup companies. That arrangement has led to unfulfilled potential, says Tony Jeff, executive director of Innovate Mississippi, a Jackson-based “virtual incubator” that serves as a matchmaker for mentors, investors and startups.

“Because of our staff limitations, the angel network has not been growing as much as it could be,” Jeff said. “With the economy growing, people are looking for more opportunities.”

In Innovate 2018 Innovation Report, Jeff said the fund approach is expected to increase the number of startup investments annually from the six to eight typically made within the network. The funds, he said, aren’t just trying to pick one winner.

“This allows them an easy way to do two a year for a few years,” he said.

Innovate Mississippi has helped startups raise about $46 million since its creation 19 years ago, according to Jeff. “Those companies have gone on to raise $173 million.”

Most of the startups with which Innovate Mississippi worked got their liftoffs with about $300,000 each in angel investments.

The current angel network is essentially a list of individuals and groups that share an interest in funding promising knowledge-based startups. “The problem with the angel network,” Jeff said, “is that it relies on an investor to make sure the deal closes.”

With the angel fund, individuals and groups pool investments to back startups in their regions. “Unlike a network, they are committing capital to a fund,” he said, giving, as an example, investors from Louisville to Starkville joining to back promising enterprises in their region.

As each deal comes along, fund members vote whether to back it. “The fund may invest $1 million but individuals will invest alongside of it,” Jeff said.

Creation of angel funds has been successful in states such as Louisiana and Arkansas, according to Jeff, who is borrowing the strongest elements of each state’s approach in setting up the Mississippi funds.

The fund creators here will eventually ask the State of Mississippi to take part in some fashion. An angel investor tax credit is among the most popular features, Jeff said, and explained that an investor in a Mississippi angel fund would get tax credits akin to those private developers receive when restoring historic buildings in Mississippi.

Arkansas and Louisiana have this, and it’s helped to create new investment and give investors higher returns, Jeff said.

Louisiana is the easiest example, Jeff said. Say a company is going to raise $300,000. Louisiana certifies the investors ahead of time. The credits can be sold and traded outside Louisiana.

In Arkansas and Tennessee, according to Jeff, the angel funds can get matching allocations from the states based on the likelihood of the fund making a return for the states. Jeff said he is not inclined to seek a similar arrangement in Mississippi.

“I do think it is a bad idea for the state to try to fund venture capital with public money,” he said, but added he does see the effectiveness of the practice in raising money to get startups going. Tennessee’s public-private fund, he said, stands at about $120 million.

Arkansas at one point set up a $20 million fund in a bid to get venture capital firms to move to the state, Jeff said.

Any change in Mississippi’s tax policy or financial incentives would have to be decided by the governor and legislators. But Glenn McCullough Jr., executive director of the Mississippi Development Authority, says he is encouraged by the privately backed fund initiative.

“The creation of additional angel fund networks would contribute to continued entrepreneurial and innovative development,” McCullough said in an email.

One of Mississippi’s most successful startups is Oxford’s FNC, a mortgage technology company created in the 1990s that sold to CoreLogic in early 2016 for $475 million. Forty-five people each took more than $1 million out of the deal, according to Jeff.

“When they see that kind of return, they say, ‘Where is the next one’?”

The success of FNC, Jeff said, “has made a big difference” in Mississippi’s overall angel investing ecosystem.

“The problem in this state is that if you have 80 investments, you are going to make all of your money from one or two,” Jeff conceded. “It’s just a risky space.”

Bill Rayburn, a founding partner in FNC and now CEO and chairman of Mortgage Trade in Oxford, says he thinks some “positive exits” that generate attractive returns will help to cement a place for the funds.

“We need to concentrate our angel funds on research areas promulgated by our research universities,” he said in an email.

The problem with universities is that “they are collectively bad at what is known as ‘development,’ or taking an idea conceived inside academia and turning it first into a product and then into a company,” said Rayburn, a finance and business professor at the University of Mississippi for 12 years.

Most universities want to get an idea, get it patented, then license the intellectual property to another company and call it “development,” Rayburn said.

“That means jobs and innovation benefits from creating products and entire companies go to other areas and, frankly, that is terrible.  We should see those jobs and innovation benefits stay in Mississippi.”

Fertile areas for development, Rayburn said, are polymer science, pharmacy and applied sciences, “to name a few.”

Added Rayburn, “We need to concentrate our angel funds in specific areas of expertise to increase success rates.”

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