The big focus in Washington right now is regulatory reform of the banking system. The effort is gaining momentum following the Securities & Exchange Commission's civil fraud charges against Goldman Sachs Group (GS) on Apr. 16. There's no question that an overhaul is needed. Without better regulation, the existing "too-big-to-fail" policy all but guarantees that financiers will eventually drive the economy back to the brink of collapse. The money crowd has learned that profits at globally interconnected financial firms remain privatized, even as their future losses have been socialized. Still, it's disturbing that the focus on preventing another round of bailouts has obscured a more fundamental problem: how to better encourage further savings and investment in the economy's entrepreneurial, innovative, knowledge sectors—away from the trillions in synthetic securities, derivatives, and other engines of speculative finance that mostly wind up lining the pockets of predatory middlemen.

"Our economic system needs to stop channeling funds into super-risky, highly leveraged, and speculative areas," writes Richard Florida in The Great Reset: How New Ways of Living and Working Drive Post-Crash Prosperity. "Instead we must return to the original vision and purpose of the financial markets: supporting innovation and the growth of the real economy," adds Florida, director of the Martin Prosperity Institute at the University of Toronto's Rotman School of Business.

One way to accomplish this basic shift in purpose is to encourage angel investors. These are mostly entrepreneurs and former entrepreneurs who invest in bootstrap companies too young and raw to attract attention and money from professional venture capitalists. Unlike venture capitalists that manage funds of money raised largely from such institutional investors as pension funds, angels risk their own money.

Angels helped Apple, Amazon, Google

Angels are in the vanguard of financing entrepreneurship and innovation and when an investment pays off, venture capitalists come in to further build up the company. Angels fund real companies. They don't create collateralized debt obligations. (Some would argue that those complex financial instruments were the handiwork of the angels' opposite numbers.)

A number of well-known companies got their start with angel money. An Intel (INTC) executive and shareholder put $91,000 in seed money into fledgling Apple (AAPL). A dozen angels invested $1.2 million into Amazon.com (AMZN) after founder Jeff Bezos was turned down by venture funds. Perhaps the most famous angel stake in recent years was the $100,000 that Sun Microsystems founder Andrew Bechtolsheim invested in Google (GOOG). The money let founders Larry Page and Sergey Brin move out of their Stanford University dorm rooms and market their search engine product. Many of Google's newly minted millionaires are now trying their hands at angel investing.

"It's entrepreneurs looking to play with house money, make some more money, and help out other entrepreneurs," says Gary Smaby, a Minneapolis-based venture capitalist and sometime angel.

To be sure, angel investing cooled off somewhat with the downturn in the economy. Last year, some 259,480 angels invested $17.6 billion in 57,225 entrepreneurial ventures, according to the University of New Hampshire's Center for Venture Research. The number of ventures held steady, compared to the previous year. Funding levels were down 8.3% percent but that's a heartening number when you consider that the recent downturn in the U.S. was the worst since the 1930s.

A bigger problem is that a section of the reform bill from Senator Chris Dodd (D.-Conn.) has three provisions that, taken altogether, could dampen angel investing far more than the Great Recession did. Currently, fledgling companies can raise money from accredited investors—high-net-worth individuals—without regulatory approval. The Dodd bill would require money-raising startups to register with the SEC, which would get 120 days to review the filing. The wealth and income baselines for angels would also double. The bill proposes revoking the rule that allows angels to follow federal regulations, rather than various state rules, in funding companies.

Angel communities abound in the U.S.

The U.S. needs a greater number of successful angels to reinvest money and entrepreneurial talent in new ideas and new companies, not fewer. Angels have a knack for backing the types of companies that create additional jobs. And the angel community has been growing. Typically angels have hooked up with entrepreneurs through ad-hoc social networks—friendships created with other entrepreneurs over the years, perhaps at the country club or local philanthropic events. Since the late 1990s, however, there has been a proliferation of formal angel groups that screen investments and pool money on local or regional levels.

"You would be hard-pressed to find a major metropolitan area without a good, robust angel community," says Susan Preston, general partner for the CalCEF Clean Energy Angel Fund, as well as CalCEF Clean Energy Angel Network.

The anti-angel section of the Dodd bill constitutes a step in the wrong direction. Left alone, the pool of angel investors will likely grow. Angel investing has moved from the fringes of entrepreneurial society to the mainstream over the past two decades or so. For angels, the high-risk endeavor is social, fun, competitive, and potentially lucrative. What's not to like from an entrepreneurial point of view?

Even more could be done. For instance, many immigrants are well-educated in such tech-related subjects as math, engineering, and the sciences. Less appreciated is how many of these well-educated immigrants are attracted to entrepreneurial enterprises and later become angel investors themselves. That's why moves to make it easier for educated immigrants to stay permanently in the U.S. may not only provide a short-term job-creating boost, but also increase the startup financing funding pool over the long term.

With an unemployment rate at 9.7% and an increasingly competitive global economy, America needs its angels more than ever.

Origin Investment Group

Origin Investment Group, a La Crosse-based angel group, was established in 2001 with the support of the SBDC. The purpose of the group is to invest in high-potential businesses that seek equity funding for growth and expansion. The SBDC coordinates monthly meetings on the UW-La Crosse campus to review proposals and discuss investment actions. There are 20 investor-members and since 2001 over 10 investments have been made, totaling approximately $1.2 million.

At the time the LLC was formed, the UW-La Crosse Small Business Development Center (SBDC) assumed the managing role. The SBDC serves as a contact point for both prospective investor-members and also entrepreneurs seeking equity funding. The office provides meeting logistics and LLC record keeping. The SBDC provides assistance to the entrepreneurs in preparing for the presentation to the investment group.

Most recently the SBDC is coordinating advisory meetings of selected angel investors with early stage entrepreneurs from Western Wisconsin. These companies are not yet ready to seek angel investments, but benefit from advice from the network of these successful business people.

NEED UPDATE - For more information, contact the SBDC at 608-785-8782 or e-mail Stephen Woessner at woessner.step@uwlax.edu

CEO Jason Swenk of Solar Velocity, an Atlanta-based interactive marketing agency, explains the tension this way, “It is hard to hear conversations, if you are in a noisy room of people talking. But, if no one is speaking, a whisper can be heard loud and clear. If your competition is not advertising your marketing dollars will go much further than you expect.

”For some businesses who are embracing this philosophy, the results seem to be speaking for themselves. General Mills' finished this past fiscal year with revenues up 8%, that is $14.7 billion dollars. And according to Business Week, “In its most recent quarter, the company spent 16% more on marketing than it did in '08.” Analyst Robert B. Moscow, who watched the company have 9-10% revenue growth in categories growing at 5%, attributes the movement to the company's new creative marketing. General Mills' Chief Marketing Officer Mark Addicks explains the growth this way, “Brands that continue to expand [and] give hope and optimism [during rough patches] historically do well.

”And history does seem to support Addicks' statement:

“McGraw-Hill Research in a study of U.S. recessions showed that business-to-business firms that maintained or increased their advertising expenditures during the 1981-1982 recession averaged significantly higher sales growth, both during the recession and for the following three years, than those that eliminated or decreased advertising. By 1985, sales of companies that were aggressive recession advertisers had risen 256% over those that didn't keep up their advertising.”

The car maker Volkswagen raised its ad spending 45.7% in 2008. Consequently, its U.S. market share moved from 1.4% to 1.9% from the end of 2008 to April 2009. In a USA Today article in May 2009, Tim Ellis, U.S. VP of Marketing at Volkswagen, said, “When we invest in marketing, things happen. We think it's important to stick to our roots and stick to our value message. We're getting a higher percentage of the dwindling marketplace. And when this crazy situation comes straight side up again, we'll be positioned to increase our share even further.”

How are companies actually positioning themselves in the market? Many are working online. The Internet has opened the door for more engaging avenues of customer communication. Here's a few ways any company can innovatively use the Internet during this time:

1. Strengthen Social Marketing—Turn your customers into your greatest advocate. Used properly, social marketing has the ability to amplify the conversation surrounding your brand like no marketing tool before it.

2. Look at Search Marketing— Search Engines are vastly becoming the means by which people find goods and services they need.

3. Invest in Email Marketing— To be effective, email marketing has to communicate and not annoy its way into inboxes. Your clients want to hear from you, so communicate with them.

Although the economy is walking a little slower these days, don't let its pace hinder your energy. Now might be the very time to lay the foundation for some great movement for the months and years ahead. And while history would explain that spending for marketing does bring increase in revenue, let's make sure we don't throw the money at just anything. Strategy might enter the conversation with a voice gently reminding us to research an effective plan created for the business. Each marketing strategy needs to be a case-by-case development in order for history to be proven true again.

"You would have thought the world was coming apart," says Johnson, CEO and president of Cox Industries in Orangeburg, S.C. One salesman—convinced that the computer would be used to track his movements outside the office—up and quit. A buyer who'd been with the company for 35 years said he'd like a fax machine, but couldn't see why he needed a computer when he'd managed just fine without one for so long.

And that was just the beginning. In an industry where some businesses still write delivery tickets by hand and tote them up on calculators, Johnson recently led the company through an ERP (enterprise resource planning) software conversion and distributed iPhones to the sales team so they can use the company's new customer relationship management system.

"Let's just say I have spent quite a few Sunday lunches after church explaining technology acronyms to Granddad and Grandmom," Johnson says.

The resistance to new technology quieted, however, after Johnson was able to point to market share growth of 35% at the $200 million business in the past year. "The numbers are starting to resonate," he says. "Five years ago, I couldn't even say what our market share was because we didn't have the technology to figure it."

Technology Changes

Johnson's experience is not unusual for family-owned businesses that survive into a third generation. About 40% of U.S. family-owned businesses turn into second-generation businesses, but far fewer—approximately 13%—are passed down successfully to a third generation, family business experts say.

One reason is technological change that moves so swiftly it bypasses the older generation. Unless the next generation is poised to update, and can get buy-in from longtime employees wedded to "the way we always did it," a business can quickly become obsolete.

"Every once in a while, a business finds itself in a protected niche and they can continue to do business the same way for quite a while," says Craig E. Aronoff, principal of The Family Business Consulting Group in Marietta, Ga., and author of From Siblings to Cousins: Prospering in the Third Generation and Beyond.

But even companies that survive on longtime relationships must be nimble enough to build a consensus around change, Aronoff says, and support younger-generation family members when they take over. If they don't, "it's a dangerous thing, because the transition will be made and the business collapses. All the old-timers will say, 'The kid didn't have it like the old man did,' but the reality is that the old man left the business in a mess and the poor kid never had a chance."

The good news is that third-generation family business owners are likely to have gotten formal business education before they return to head the company. And if they are able to leverage that training effectively, it can propel the company forward dramatically.

Going Digital

That's what happened 30 years ago, when Jim Warjone became chairman of the Port Blakely Cos., a fifth-generation forestry business based in Seattle. Warjone is the grandson of John W. Eddy, who bought out the company from its founder in 1903.

Warjone was a systems engineer at IBM (IBM) when he was tapped as CEO in 1978. At that time, Port Blakely's tree farm division mapped inventory using old-fashioned surveying methods.

Warjone worked with a team to create the company's first digital inventory system, one of the first of its kind in the forest products industry.

"At the time, there was a belief that it was not practical to digitize," Warjone says. "Like all change, it's very difficult when you start with a vision but no real boundaries." But his background at IBM gave him the courage to try—and he was able to persuade company managers to let him.

The end result was that Warjone's team wrote its own software and achieved results at a fraction of the cost that Port Blakely's competitors paid later. "Today, we have a large database that is very valuable in operating and managing the company," Warjone says. "We heard that some of the photo recognition technology we developed ended up being used by Boeing (BA) for their cruise missiles."

Warjone would not disclose annual revenues, but said the company, one of the oldest in the Pacific Northwest, is considered midsize for the lumber industry and currently employs 200 full-time workers.

Succession Planning

Not all third-generation transitions involve upheaval. Nancy Goedecke, chairman of Mayer Electric Supply Co. in Birmingham, Ala., credits her father, Charles Collat, with keeping the company on the cutting edge. "He wanted to have the best information technology around," she says. "We've been ahead of the curve in pretty much everything we've done."

Her father, who took over from his father-in-law, Ben Weil—who had founded the wholesale electrical products and services distribution company in 1930—also made sure that the third-generation transition went smoothly. For nearly two decades, he and his family met regularly to discuss the company and plan for succession.

That kind of cooperation and planning is invaluable, but unfortunately not the norm.

At The Cellular Connection, a family-owned cell-phone retailer based in Indiana, third-generation CEO Scott Moorehead, 32, headed up a five-year technology overhaul designed to enhance customer service. His grandfather and father had shepherded the company over the decades from an electrical contractor to a telephone equipment provider and finally into the cellular-phone industry in the 1990s.

While his father had the vision to pursue cell-phone sales early on, he was infamous in the company for not using a cell phone himself. "It was kind of comical," Moorehead says. "He's an entrepreneur, but not the most techie guy."

Modernization Drive

Moorehead was fortunate that he was given free rein to modernize the company, which now does $200 million in revenue through retail locations in 16 states. Cell-phone carriers are focusing increasingly on customer service and are eliminating many mom-and-pop retail chains that do not have up-to-date systems, he says. "There's no doubt in my mind that if we hadn't made some of these extreme changes—which were costly at the time—we would have been irrelevant a long time ago," he says.

John A. Davis, a partner of OMBI, a family business consulting firm in Cambridge, Mass., and faculty chair of the Families in Business Program at Harvard Business School, says he is seeing the traditional reluctance to change disappearing, mostly out of necessity. "Ten years ago I saw a lot of business leaders who were reluctant or negative about technology," Davis says. "But you don't hear that as much anymore. The older folks are either retired or dead and the younger crop has been disabused of the notion that they can escape, avoid, or delay getting on board with new technology."