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Minnesota’s Angel Investor Tax Credit spurs startups

Two weeks ago the Minnesota Department of Employment & Economic Development released its first report on the Angel Investor Tax Credit (AITC) program that was passed in the 2010 “Jobs Bill.” The report showed that nearly $30 million was invested in 67 companies, costing the state $7 million dollars. The report also showed that a net 47 new jobs was created as a result.

Some groups have asked if 47 jobs for $7 million dollars is a prudent investment of state dollars.

LifeScience Alley believes it has been a great investment, but not because of the 47 jobs created. Our support for the legislation was based on the need to increase the formation of new, high technology businesses that have the potential for significant job and revenue growth.

Minnesota has lagged in new company formation and early stage investment for many years now, which has a long-term job creation impact: Fewer small companies now means fewer big companies later.

Assessment shows what’s occurring
The 2010 statewide assessment from The BioBusiness Alliance demonstrated what is happening. The average size of a medical-device firm in the state (Minnesota has more medical-device employees per capita than anywhere in the world) has increased from 50 to 75 people. While this means the companies are growing, it also means we are not creating enough new companies. It is also a sign that our large firms are purchasing startups in other parts of the world. That means over time they will expand in those areas instead of Minnesota.

All firms and industries go through a cycle of formation, growth, stabilization and eventual decline or reengineering. To maintain job growth we must ensure that there is a steady supply of new firms that inject new ideas into the market.
 
The AITC makes it easier for this to happen. It also makes sure it happens in Minnesota instead of  somewhere else. By seeding more startups we increase the odds that Minnesota will generate a high-growth firm that can become Medtronic, Boston Scientific or others.

A good start to refilling the pipeline
In the three months of 2010 that the program was active, 67 companies utilized the program. So far in 2011, 27 have participated. This is a good start to refilling the pipeline of small, entrepreneurial companies with potential for major growth.

Medtronic and Boston Scientific were both startup companies many years ago and now employ 13,000 people in Minnesota. More recently, Compellent, which started in 2002, was acquired by Dell for nearly $1 billion dollars. Compellent has indicated plans to hire hundreds more employees, many in Minnesota.

There will be failures along the way. This is risk capital — which is why the state’s involvement is so smart. For every $4 private investors put in, the state puts in $1. This allows the state to help a large number of companies with a smaller pool of money.

Odds are favorable that some of them will be wildly successful, some will moderately successful and some will fail. History suggests that the winners will more than make up for the losers.

Frank Jaskulke is the director of member services for LifeScience Alley, with responsibilities for member service, retention, development and government affairs. In his membership role he seeks to facilitate new business and clinical opportunities. In his government affairs role he seeks to advocate for affordable and accessible health care technology and Minnesota economic development.

Comments (3)

  1. Submitted by myles spicer on 03/29/2011 - 01:38 pm.

    I think Jaskulke is correct that there is value in this program; and it is premature to evaluate true results. However, what small businesses really need (established ones, and these new start ups) is access to working capital. That access is sorely lacking now — banks simply are not lending and/or are making lending so restrictive, that it is stifling small company growth. Having been in business for myself for over 50 years, this lack of working capital liquidity is about the worst it has ever been.

    There needs to be discussions on how the state could participate in programs (either by leveraging or encouraging lending to credit-worthy small businesses, without putting any significant taxpayer money at risk as AITC does) — and that would stimulate growth much faster than the risk and and time frame it takes for small start ups to begin to contribute to Minnesota’s economy.

  2. Submitted by Frank Jaskulke on 03/29/2011 - 02:50 pm.

    Hi Myles,

    I think your point about the need for working capital is spot on but there is a small nuance I would add.

    The Angel Investor Tax Credit helps companies obtain working capital – if they are the type of company that raises financing through equity.

    These tend to be higher risk businesses that cannot obtain debt financing. With higher risk though also comes potential for higher reward.

    Banks are highly unlikely to ever loan money to a startup medical technology firm. A company that might not have revenue for 10 years if ever is not bankable.

    I’m highly open to discussions on how we could encourage lending to bankable businesses with minimal or no taxpayer involvement. We sought to make the tax payer involvement as small as practical in the AITC program (75% of the money is private and since the investors tend to be high income, returns generated will generate large tax bills in Minnesota, which with the way the credit is structured, are harder to avoid).

  3. Submitted by myles spicer on 03/29/2011 - 03:32 pm.

    Yes Frank
    We agree there are two seperate issues here; and the start ups are getting a chance with equity financing.

    My complaint — but still in the genre of “small business” is that more mature small businesses still lack the ability to find working capital in today’s banking environment. I see the value of AITC as an incubator; but as I point out a second teir of business stimulation (possibly through some sort of statte program) is badly needed to assure growth of small businesses now stymied from growth by inadequate lending.

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