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The Better Angels of Business Development

Posted on December 16, 2013 at 10:13 AM
Tags: manufacturing, small businesses, angel tax credit, business expansion

Angel FundA couple years ago, Lisa Lavin posed a question to a friend over lunch. “Do you have a patent burning a hole in your back pocket?” she wondered.

The inquiry wasn't entirely out of leftfield, considering that Lavin’s dining companion was Mark Kroll, an internationally recognized biomedical engineer who helped revolutionize implantable heart defibrillators, who holds more than 350 issued or pending patents, and who is widely considered Minnesota’s most inventive genius.

“I asked him the question … and he proceeded to tell me about three issued patents for a ‘pet phone’,” recounts Lavin, a veteran entrepreneur whose own business background includes executive posts at startups and Fortune 100 companies focused on human and animal health care. 

The idea was for a wall-mounted video phone that lets people interact with their pets from anywhere. Using a smartphone, tablet or computer, owners would be able to see, hear and speak to their pets -- even dispense treats or release a pleasing or comforting scent. And pets could see, hear and speak (or at least arrf and meow) to their owners.

Petchatz2.jpg“I saw the great potential right away,” says Lavin, who was quick to recognize that the opportunities extended far beyond the 73 million U.S. households that own a pet.  

The same platform, she says, could be adapted to help the nation’s 43.5 million caregivers check on elderly loved ones and manage medications from a distance. There were also applications in child care and other markets to tap. 

The conversation eventually led to the formation of Anser Innovation LLC in 2011, with Lavin, Mark Kroll, and Braden Kroll as cofounders.

But good ideas don’t turn into marketable products all by themselves.  That takes research and development. And R&D takes money. Often, a lot of it. 

Where would Anser Innovation get the necessary capital to get the company off the ground? A couple of “angels” helped give them a lift.

Minnesota’s Angel Tax Credit and Angel Loan Fund

The company qualified to participate in Minnesota’s Angel Tax Credit program, which provides a 25-percent credit to investors or investment funds that put money into startup companies focused on high-technology or new proprietary technology.

Offering a tax credit of up to $125,000 per person, per year, the program has been an attractive and highly successful incentive for investors.  Since its inception in 2010, the program has generated more than $189 million in new investments in about 250 Minnesota firms.

Anser Innovation has raised more than $2 million in outside investment to date, a significant portion of which has been the result of the Angel Tax Credit program, says Lavin.

As startup businesses go, Anser Innovation has launched with a rather solid foundation and has some enviable advantages that many fledgling companies can only dream of:

  • Partners with deep expertise and a track record of success
  • Significant financial backing from investors
  • Decent cash flow
  • Innovative products ready for market and others in development
  • A business model that generates revenue on sale of devices and on the consumables inside
  • Agreements with reputable Minnesota companies to manufacture the devices and supply the consumables

Even so, traditional lenders have been unwilling to stick their necks out even a little. Over the past two years, several banks have declined to issue the company a line of credit for basic operating expenses.

Lavin is hoping Minnesota’s new Angel Loan Fund (ALF) program is about to help remedy the problem.

Through ALF, businesses that are certified to participate in the Angel Tax Credit program may receive interest-free loans of up to $250,000.

The loans, which must be repaid over seven years, may be used for startup costs, working capital, business acquisitions and expansions, franchise financing, equipment, inventory, construction, and to purchase certain commercial real-estate.

“For the first time a startup business has a source of cash outside the normal sources,” says Lavin, who points out that most entrepreneurs are “already all-in and strapped” and they typically don’t have the financial wherewithal to use their houses or other personal assets to secure business loans from banks.

A total of $6.7 million is being made available through Angel Loan Fund, a much needed financial rainfall during a deep drought in venture capital. Today, entrepreneurs face a tight lending market nationwide and stiff competition for limited resources as venture capital funding has dropped to its lowest point since the 1990s.

Petchatz 1.jpgAnser Innovation has applied for an ALF loan, which Lavin says would be a welcome boost as the company prepares for the 2014 launch of its first product, the PetChatz® video phone, and makes plans to follow-up soon with a web-enabled, audio-visual communication and medication management system that the company hopes will take elder care to a whole new level.

“The loan is not going to be the deciding factor of whether we win or lose, but it will be a great help,” says Lavin, who is the company's CEO. “I love the program. I’m so thankful that somebody thought of it and fought for it.”

How the Angel Loan Fund Works

Minnesota businesses may begin applying now for ALF loans. To be eligible, they must first be certified to participate in the Angel Tax Credit program.  Being certified to participate doesn't guarantee you’ll receive an ALF loan.

To qualify for an ALF loan, companies must raise a minimum of $200,000 and maximum of $2.5 million in new equity investment.  (Money raised in prior years through the Angel Tax Credit program doesn't count).  And at least one investment must be made by an individual or investment fund that has been certified to participate in Minnesota’s Angel Tax Credit program. 

When they apply for an ALF loan, companies must provide a target amount of new investment they intend to raise. Loans are set at 10 percent of the total amount. Companies then have 12 months to raise the money and show proof of investment.  

Companies that raise more than their target may apply for an increased loan. Those that raise less will have loan amounts reduced. And companies that fail to raise at least 70 percent of the target investment amount will not qualify for any ALF loan. So it pays to be realistic about what you think you can raise.

Learn More

For more information about the Angel Loan Fund, contact Lisa Dargis at 651-259-7446.

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