For angel investors such as Mark Kroll, the spirit is willing but the wallet is weak.

Kroll is a prolific inventor and entrepreneur who frequently invests in medical device start-up companies. But a weak economy and a tumbling stock market has sapped his wealth, forcing Kroll to say no when he normally might have said yes to requests for capital.

"I just don't feel as flush as I did a year ago," Kroll said. "Generally, I would have no problem investing in a recession. People can get bargains. But I have to think about our retirement [money]."

Angel investors are affluent individuals who typically pump $5,000 to $300,000 into new companies.

But the current recession -- reflected in falling home values and shrinking stock portfolios -- means that investors such as Kroll are unwilling or unable to fund risky start-ups, depriving entrepreneurs of a precious source of early stage capital during a time when they need it the most.

"Start-ups are even more dependent on angel money today," said Jay Hare, an analyst with PricewaterhouseCoopers in Minneapolis.

"But all of the factors needed for successful angel investing [a strong stock market, easy credit, demand for initial public offerings, robust balance sheets] ... there's nothing there."

That's particularly alarming in Minnesota, where seed capital has been in short supply. The dot-com tech bubble collapse in 2001 wiped away several venture firms that specialized in start-ups. Since then, investors have shied away from riskier start-ups in favor of more developed and experienced companies. Industry officials have feared that the lack of funding would force promising start-ups to leave the state.

Angel investors have tried to fill the void. But the reeling economy will make such money scarcer as these people feel less confident about their personal wealth, Hare said.

The pool of early stage capital "was never good," said Joy Lindsay, president of StarTec Investments, an angel investment firm in Bloomington. "It's definitely going to be worse. [For start-ups] I think it's a very difficult time to raise money."

State officials are weighing tax credits to provide incentives for angel investors.

Gov. Tim Pawlenty recently proposed a plan in which investors who park their money in one of as many as 20 regional investment funds could get tax credits totaling $20 million over four years. Half of the credits would go to investments in companies that create "green" jobs.

Another proposal by Rep. Ryan Winkler, DFL-Golden Valley, calls for a four-year, $163 million tax credit to insurance companies who form limited partnerships with early stage investment funds.

But Hare believes that the tax credits may not be enough. Individual investors who bet larger sums of money are nervous.

"It's too early to tell, but my guess is [that the economy will have] a big impact" on angel investing, said Mike Berman, a veteran medical device entrepreneur and investor. "I don't know. I'm thinking about" pulling back.

Lindsay of StarTec said she normally would invest $200,000 to $250,000 in a start-up. But now she's spending about $100,000 for an initial investment.

Group dynamics

But group funds such as Rain Source Capital and Sofia Angel Fund seem more optimistic.

That's because fund members typically commit smaller amounts of capital (less than $100,000) compared with individual angel investors. The group structure also allows members to pool risk and share expertise in different industries, said Cathy Connett, chairwoman of Minneapolis-based Sofia, which focuses on businesses led by women.

Fund officials say members are continuing to invest in the overall pool. Individual deals in portfolio companies, known as "side-by-sides," also appear steady. TCAngels, another group fund, plans to launch a fund in early February that may fetch as much as $8 million.

"It's a great time to invest," said Dan Mallin, a tech entrepreneur and a member of TCAngels. "Everything is on sale. I'm still bullish on new opportunities."

During a recent meeting, Connett said she asked Sofia members whether they could still participate in the fund. Members never thought otherwise, she said.

"They looked at me like, 'Why do you even have this on the agenda?' " Connett said.

But angel funds are not immune to the economy. A recent report by the Angel Capital Association, a trade association of angel investment groups in North America, estimates that the average angel group will invest $1.72 million this year, a 10 percent decline from 2007. While such groups are spending more on each deal, they are making fewer investments, the survey said.

That's explained, in part, because the rest of the venture capital industry looks so bleak. According to a survey by the National Venture Capital Association, 62 percent of venture capitalists believe investment will fall more than 10 percent next year, to less than $27 billion.

Economic uncertainty makes it hard for venture capitalists to properly value their portfolios, experts say.

And if larger firms won't make new investments, angel investors will not want to bankroll a start-up that has little chance of attracting additional capital from venture funds.

"The venture world has completely collapsed," said John Alexander, president and founder of TCAngels. "If the venture guys are uncertain, that makes our jobs more difficult."

Steve Mercil, president of St. Paul-based Rain Source, said members are reserving cash to support existing investments. That money would normally have gone toward new start-ups, he said.

Thomas Lee • 612-673-7744