Montana Gets A Much-Needed Angel Fund

By Jonathan Weber, 5-04-06

Our friend Elizabeth Marchi at Montana West Economic Development today announced an initiative that's sure to delight entrepreneurs in Montana and throughout the region: the Frontier Angel Fund, an investment group that will finance growth businesses in Northwest Montana and nearby locales.

The new fund is being created in partnership with St. Paul-based RAIN Source Capital, which has a network of 14 similar funds in rural areas in Minnesota, Iowa, and the Dakotas. Steve Mercil, the CEO of RAIN Source, says the group is actively working on additional funds in Montana, Idaho, Washington and Oregon. As an entreprenuer who recently spent a considerable amount of time raising money for a Montana start-up business, I can testify that such funds are sorely needed, especially in areas that are far from the major financial centers on the East and West coasts.

Angel investors are wealthy individuals who are interested in start-ups and other businesses that have good growth potential, but that are too small or otherwise unsuited for traditional venture capital investing. Angels often operate individually, or as part of semi-formal groups such as the Bozeman-based Bridger Private Capital Network (which helped secure some funds for New West), and they play an increasingly important role in supporting entrepreneurship. The Frontier Angel Fund has secured initial commitments of $800,000 from 15 angels and institutions, and aims to raise a total of $1.5 million. The fund members will collectivey decide on investments.

Marchi, who played a key role in facilitating the formation of the fund, says it's all about creating higher-value jobs in Montana. “While Montana has record low unemployment, we are lagging significantly in wages," she said in announcing the fund today. "We believe that increasing access to start-up and equity capital is essential to building innovative, high value, new economy companies in the state.”

Access to capital, or a lack thereof, is a major issue for the "new economy" companies that could potentially bring high-wage jobs to Montana and other economically under-developed regions. While many state governments have developed programs to create incentives for venture capital and angel investing, Montana in particular has struggled in this area; An attempt to create a venture fund with help from the state Board of Investments collapsed earlier this year when Credit Suisse First Boston, the investment bank hired to put it together, informed the state that it couldn't find enough interested investors.

Financial professionals say places like Montana lack sufficient "deal flow," or possible investment opportunities, to attract venture capital. But there is a chicken-and-egg aspect to this, since a lack of funding options for early stage companies means no deal flow is being created for the VCs, who are financed by institutions and typically invest much larger amounts than angels. Denver and Salt Lake City have vibrant VC communities, and Boise and Albuquerque now have some funds as well. But there are no VC funds in the Rocky Mountain West outside of those places, and most VCs like to invest close to home so they can keep an eye on their money.

Angel investors are a key piece of the puzzle. There are certainly plenty of wealthy individuals in the region. But without organized approaches like the Bridger Private Capital Network or the new Frontier Fund, it can be very hard for entrepreneurs to find those people, and vice versa. In my case it took many, many months to raise angel money for New West, and while much of the money came from people in the region, my success ultimately depended largely on my personal connections and reputation from my previous job in San Francisco. Most entreprenuers don't have that advantage.

John O'Donnell, who heads Bridger Private Capital and is executive director of the TechRanch in Bozeman (and a New West board member), said the creation of Frontier was "definitely a positive step" for the funding environment in the state. "It's very appropriate for Montana," he said.

RAIN Source, which got its start as a state-backed initiave to support rural development in Minnesota and was privatized in 1998, is a unique and, to my mind, highly promising model for closing the capital gap. The company makes a small investment in each of its funds, provides tools and support in areas such as legal and accounting, and will in some cases co-invest with the local funds on specific deals provides and even invest larger amounts at later stages. It works with local business leaders and groups like Montana West Economic Development, which itself is a local business development group. (Full disclosure: Montana West and Liz Marchi have been great supporters of New West, advertising on the site and enabling us to tap one of its employees, Kate Downen, as our Flathead node editor).

Mercil said additional RAIN Source funds in the area could be launched in the next six to 12 months. Potential investors in the Frontier fund, or businesses who would like to be considered for funding, can contact Elizabeth Marchi at 406-257-7711.
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