Tax incentives to boost ‘angel investments’ likely on legislative agenda

Without a doubt, Minnesota is a leader when it comes to producing innovative research.

The problem is that other states are doing a better job of plucking ideas from the laboratory (and sometimes our laboratory) and spinning them into successful, job-creating businesses.

That was the argument made by a group of bioscience leaders and elected officials this week at a special joint legislative hearing at the LifeScience Alley Conference in Minneapolis.

Wednesday’s annual conference was the largest gathering of bioscience professionals in the Upper Midwest, drawing more than 1,500 this year from 500 companies and 27 countries.

The House Bioscience and Emerging Technology and Senate Business, Industry and Jobs committees heard testimony about two proposals, both aimed at increasing the available early-stage and growth funding necessary for small Minnesota science and technology start-ups to succeed.

High-risk, high-potential companies may be a key to recovery
Advocates say supporting high-risk, high-potential companies in these sectors, even if most of them fail, is still among the most promising tools for growing the state out of its recession.

Minnesota start-up companies are at a disadvantage when it comes to finding investors, and as a result, the state is falling behind in the area of commercializing technology, said Brian Walters, a Fargo-Moorhead area economic development official.

Our risk-averse, Scandinavian blood might deserve part of the blame, Walters said. But other states, such as Wisconsin and North Dakota, are having success luring Minnesota innovators with start-up incentives.

“We either have the financing here, or we’ll export them to other places,” Walters said. “We’re behind overall in the U.S., and it’s time for an overhaul.”

Legislators mull angel-investor credit
An angel-investor tax credit is “is a critical missing piece of Minnesota’s economic development puzzle,” said Rep. Jim Davnie, DFL-Minneapolis.

Angel investors help fill a void in early-stage financing, putting their money into promising but unproven companies before they qualify for bank loans.

A bill introduced by Davnie would take some of the risk out of angel investing by setting aside $6 million for a 25 percent tax credit for angel investments in the high-tech, biotech, medical-device and green-manufacturing sectors.

The reality for many of these start-up companies, Davnie said, is that it’s often easier to find investors willing to chip in a few million later on than it is to find ones willing to invest a few hundred thousand earlier on.

Sen. Kathy Saltzman explained that it’s sometimes called the “valley of death.” We have the money for basic research, and we have the money for ideas once we know they are successful. What’s missing is that “bridge funding” in between.

Saltzman has also introduced an angel investor tax credit bill. Her latest version calls for $3 million to encourage Minnesotans to get past their aversion to risk and put their money into ideas and companies that could transform the state.

“It’s time for Minnesota to look at what we can do to help emerging businesses,” Saltzman said.

Mark Lofthus, business and community development director for the Minnesota Department of Employment and Economic Development, also testified, noting that Gov. Tim Pawlenty has proposed $20 million in angel tax credits over four years.

Governor’s plan differs from legislators’ view
Pawlenty’s plan differs in at least a couple of key respects.

First, investors wouldn’t be able to claim the tax credit until four years after the investment is made, in 2013 or later. (Yes, that conveniently means the plan won’t affect the state’s budget until after the next gubernatorial election.) Both the House and Senate versions would award the credit the same year the investment was made.

Second, the governor’s plan comes with geographic strings attached. The idea is to make sure the investments aren’t concentrated in the metro area. However, business leaders from Greater Minnesota advised the committees against adopting geographic rules, which they said unnecessarily complicate the incentives.

“Location stipulations are counter-productive,” said Chris Huisinga, business development director at Life-Science Innovations in Willmar. “I’d much rather see a situation where everybody has the same opportunity to compete on a level playing field.”

Sen. James Metzen, DFL-St. Paul, who chairs the Senate committee, noted that “it’s not rocket science.,” There is enough common ground on the credits, Metzen said, that he wants to see agreement within a few weeks, not a few months,

A second proposal by Saltzman and Rep. Ryan Winkler would target investment in slightly larger, growing, small businesses. The Minnesota Business Investment Act is modeled after successful programs in Texas, Missouri and Wisconsin.

The plan calls for putting $200 million over the next seven years into a group of funds that would invest in growing high-tech companies in the state. The size of investments would be in the $3 million to $5 million range, Winkler said.

While the upfront price tag might seem daunting, the example show that states can come out far ahead. A $50 million investment program in Wisconsin, for example, is estimated to have generated $90 million in new net tax revenues, along with 1,300 new jobs.

“One of the challenges, according to economists, is that we don’t have any industries that look like they’re going to lead us out of recession” Winkler said. “This powers the tech industry to pull the state forward.”

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