The Maine Angels, a group of state investors who provide a much-needed source of capital for early-stage companies, invested a record $1.5 million in eight Maine companies in 2012.
However, a recent development poses a hurdle members of the group believe may prevent that level of investment in Maine companies from being repeated in 2013.
The Maine Angels, founded in 2003, invested in more than just state companies last year. In total, its members put $3.3 million into 20 companies throughout New England, including the $1.5 million in Maine-based companies, according to Sandra Stone, of Cumberland, who just wrapped up her first year as chair of the group.
The previous investment record was set in 2008, when slightly more than $2 million was invested in the first half of the year before the financial crash, Stone said. In its 10-year history, the group has invested nearly $9.7 million in 42 companies.
Angel investors play an important — but risky — role in helping Maine startup companies gain traction and build a sustainable business model, Stone said.
Often, angel investors get involved in a startup’s trajectory at a point where the entrepreneur has already exhausted credit cards and tapped friends and families, but “where a bank wouldn’t touch it with a 10-foot pole,” said Stone.
The eight Maine companies who received investments from the Maine Angels in 2012 were Portland-based Zylo Media, which received roughly $200,000 from the group’s investors; Gorham-based Pika Energy, which received $250,000; Eliot-based Abierto Networks; Portland-based Academic Merit; Orono-based Cerahelix; Brunswick-based Gelato Fiasco; Portland-based Maine Wealth Partners; and Newfield Design in Newfield, which received $205,000. The investment figures weren’t immediately available for all companies.
These companies, sometimes at a stage where they’re not yet producing any revenue, are often stuck with a brilliant business idea, product or service, but without the wherewithal to build that idea into a scalable model. This gap between raising funds from friends and family and more traditional financing options is where the individual investors who belong to the Maine Angels — who must meet certain income or net worth criteria for the Securities and Exchange Commission to recognize them as qualified investors — come in.
“Not every individual who might qualify has the stomach for it,” she said. “It’s risky.”
It’s risky, but an essential ingredient in a healthy business climate, according to Bob Bruce, CEO of Zylo Media.
“I think angel investors play a critical role in any startup ecosystem,” Bruce said.
That’s especially true in Maine, he said, where raising capital can be more difficult. While there are plenty of angel investors in Boston, New York City and Silicon Valley looking for investment opportunities, Bruce said it’s hard for Maine companies to get noticed among all the other startups in those areas.
“There’s some strange barrier about crossing the Piscataqua River bridge and going above Portsmouth,” Bruce said, referring to the sphere of interest of big-city investors. “So it’s critical for Maine to have a community of individuals who have the interest, have the experience, and have the capital to support early-stage companies. This is the hardest time [for companies] — trying to get traction. It’s very high-risk money, and angels play an important role.
“If you don’t have the support for these early-stage companies, we’ll never have that critical mass. Because we’ll never have another Unum move in. You need to grow your own stuff. It’s all got to come together, but without the angels, we’d be at a great loss. I know Zylo Media would be. [Without them] I’d be doing something else now.”
Besides cash, angel investors also offer their expertise and often serve as mentors for the companies they aid financially. The mentorship is often just as important as the cash, and reduces the risk perception for other potential investors, Stone said.
In addition to a record year of investment, the Maine Angels also attracted an impressive 19 new members last year, bringing the group to 51, Stone said. Recruitment is a necessity for an angel investing group because these types of investments don’t produce results in a very timely manner, meaning existing members often reach a limit of how much they can invest or how much time they can spend mentoring their portfolio companies. New members, on the other hand, bring new energy, expertise and investment capital to the table.
None of the 42 companies Maine Angels has invested in has yet to produce a return for its investors, Stone said. Angel investors aren’t interested in being long-term partners in a business, she said, but they don’t get paid unless the entrepreneur builds the operation to the point where a larger company buys it out or the entrepreneurs themselves buy out their equity investors. The ideal return would be within 3 to 5 years, Stone said.
Although none of the group’s early investments have panned out, Stone expects that to change.
“We feel that the quality of deals has improved and we are anticipating seeing some returns in the next 12 to 18 months,” she said.
Currently, the majority of the Maine Angels are based in the Portland area, but as the word has spread and the energy behind the group has grown, there’s been interest in expanding its reach.
There’s currently work being done on creating a Maine Angels chapter in Bangor, according to Stone and John Porter, CEO of the Bangor Region Chamber of Commerce.
The Bangor chamber had been contemplating how to better support early-stage companies in the area, especially those coming out of the research and development being done at the University of Maine, Porter said. They had considered a few models, but none fit quite right.
“We had heard that there was new energy around the Maine Angels,” Porter said. “They were back to doing deals, there was a lot less tire kicking.”
Porter and a Bangor-area angel investor, Fritz Oldenburg, are recruiting interested investors to consider starting a Bangor chapter. They have about a half dozen interested so far, but are looking for at least a dozen qualified investors to be get involved.
“I’m cautiously excited. I think it could turn out to be a really good thing for the region,” Porter said. “We’ve been poking at his idea from different directions, and this is the most promising direction we’ve come up with so far.”
However, there is one factor that will pose a hindrance to reaching the level of angel investing the state experienced last year.
In late January, the Maine Seed Capital Tax Credit Program reached its statutory limit of $30 million, according to the Finance Authority of Maine, which administers the program. The Maine Angels made roughly $75,000 additional investments in January 2013, which tapped the program, Stone said.
The program is designed to help early-stage companies secure seed capital. It allows qualified investors, such as those who belong to Maine Angels, who invest no more than $500,000 in a Maine-based business with less than $3 million in gross sales to receive tax credits equal to 60 percent of the investment.
The tax credits defray the risk of an investment, make the Maine companies more attractive in some cases than other out-of-state ventures, and entice investors to increase the level of their financial support, Stone said, adding that she is speaking from experience.
“I know myself; I overextended trying to grab [the tax credit] when I could,” she said.
Stone and Don Gooding, vice chair on Maine Angels and director of the Maine Center for Entrepreneurial Development, agree that if the program is abandoned, its absence will “dampen” investments in early-stage Maine companies.
“At this moment in time, the pause button has been pushed,” Gooding said. “I don’t know at what point it will become unpaused.”
Stone estimated that without the tax credit incentives available during 2012, last year’s investments would have been probably half the $1.5 million that was ultimately put into Maine companies.
The seed capital tax credit program was very important in helping Ogden Morse raise capital for his company. Morse is co-founder and CEO of Academic Merit, a Portland-based company developing educational software. He received an investment from a Maine Angel in the low six figures, and knows the program was a factor in that investment.
“To lose it would really have negative repercussions,” Morse said.
Bruce at Zylo Media agreed. “I think we would have had a hard time achieving the fundraising we did in January  and even in November without the seed capital tax credit to help reduce the risk somewhat,” he said.
There are efforts to raise the program’s cap. Sen. Linda Valentino of York introduced a bill this legislative session, currently titled LR 1377, to “extend and improve” the program.
But the lack of tax incentives alone won’t prevent Maine Angels from considering investments in Maine companies.
One word of caution, though. Stone said the majority of entrepreneurs who pitch the group are not ready. “We probably turn down 80 percent of what comes in the door,” Stone said.
“We’re not looking for people with back-of-the-napkin ideas,” she said. “We’re looking for people who have a good handle on what their idea is and have a good team in place.”
Before approaching an angel investor, she recommends entrepreneurs tap the various programs currently in place to help entrepreneurs hone their ideas, such as the Maine Center for Entrepreneurial Development, the Maine Technology Institute and the monthly office hours held by John Voltz and Blackstone Accelerates Growth.