A push to bolster Minnesota’s tech economy takes shape

When Steve Grove was appointed commissioner of the state’s Department of Employment and Economic Development (DEED) in January, one of his first priorities was to grow the state’s technology sector to compete with cities like Seattle, Boston and Austin.

That agenda is now taking shape with help from the Legislature. In the two-year budget approved in May, lawmakers passed a slate of proposals made by Grove and Gov. Tim Walz to foster startup businesses and build tech companies.

The Legislature re-instituted an “angel” tax credit for people who invest in startups and created “Launch Minnesota,” an initiative focused on nurturing the tech scene with grants, mentorship and collaboration with private businesses. The Legislature also agreed to spend $40 million on a grant program that helps build infrastructure for rural high-speed internet.

DEED did not get everything Grove had wanted, including more spending for broadband internet grants. But Grove, a former executive at Google, said the state is taking critical steps to support a sector that can help create jobs, attract young workers in a tight labor market and put Minnesota on the economy’s cutting edge.

“You have to build programs that create the kind of economy you think is going to build the future of Minnesota,” Grove said. “And if we’re just putting economic development money into the usual suspects, we’re not thinking about where the jobs of the future are going to come from. And they’re going to come from high tech companies and startups.”

Plans for boosting Minnesota’s tech scene

As a tech region, the Twin Cities is unexceptional. In a 2018 report on tech hubs by commercial real estate firm Cushman & Wakefield, Minneapolis/St. Paul ranked in the second tier of its top 25 cities and regions in the United States and Canada. The Twin Cities were below 10 other places, including Silicon Valley, San Diego, Raleigh/Durham, Seattle and Boston.

The report found the Twin Cities had the 15th highest share of tech employment and its growth in that sector was below average between 2010 and 2017. The Twin Cities also ranked low in venture capital spending, which is used to seed startups. 

The report even found Minneapolis/St. Paul had $40 million less venture capital spending in late 2017 and early 2018 than it did in 2011, in a section comparing post-recession funding to current seed money. Chicago had $645 million less venture capital spending than in 2011, but every other tech hub cited by Cushman & Wakefield saw increases. 

In 2018, PitchBook reported Minnesota as having the 15th most venture capital spending in the U.S., ahead of some states with similar populations like South Carolina and Wisconsin, but below others like Colorado, Maryland and Utah. “The lack of capital is a disadvantage,” Grove said. “It’s growing, but it’s not where you’d like to see it.”

In the Cushman & Wakefield report, the Twin Cities also had one of the smallest millennial populations by percentage among tech hubs. Many see a large millennial workforce as critical to a tech economy, especially as the country deals with workforce shortages. 

The report did cite low rent and property values in Minnesota as positives — at least compared to other tech areas, which have seen extreme surges. And Grove said Minnesota’s tech scene has a lot going for it, including a host of big companies to learn from, startups with a high “survivability” rate and strong “civic pride” in the tech sector.

That includes, for example, MN Cup, a startup competition supported by the University of Minnesota, foundations and private companies like Wells Fargo and General Mills. The U says Minnesota Cup is the largest statewide competition of its kind. “The kind of ‘pay it forward’ feel here is, I think, really strong,” Grove said.

Still, Grove’s proposals are aimed at sparking more growth in what he describes as the tech “ecosystem.” Coming into the legislative session, DEED proposed a $20 million angel tax credit over the 2020 and 2021 fiscal years to entice more venture capital spending. Minnesota had an angel credit for seven years, but it lapsed in 2018 when a large omnibus bill that included legislation to continue the program was vetoed by Gov. Mark Dayton as part of an unrelated budget battle.

The Legislature this year approved $10 million for 2019 and another $10 million in 2021. DEED began taking applications for that program on Monday. It will operate essentially the same as it did in the past. An investor can get a tax credit worth 25 percent of their investments up to a maximum of $125,000 for a single person or $250,000 for a married couple filing joint returns.

Half of the tax credits must be used for investment in businesses owned by people of color, women or people outside of the Twin Cities metro area. The Legislature did lower the minimum investment needed to qualify for a credit from $10,000 to $7,500 if an investor is giving seed money to a business owned by a person in an underrepresented demographic.

Lawmakers also approved Grove’s plans for “Launch Minnesota,” a program that doles out “innovation” grants to high-tech startups and colleges working to advance the sector. Launch Minnesota will also have a 10-member advisory board made up of people from the private sector, government and higher education institutions. The initiative got $5 million in the latest two-year budget.

Grove said Launch Minnesota was influenced by similar programs in other states, including startup incubator 1871 in Chicago and the public-private collaboration Launch Tennessee. The commissioner also said he envisions Launch Minnesota to be run without help from state government down the road.

Both Republicans and DFLers at the Capitol prioritized rural broadband funding this year as well. And while lawmakers approved $30 million less than Walz’s administration and DEED had asked for, the $40 million in spending has still been celebrated by lawmakers as a step in the right direction for businesses.

The demons of the angel tax credit

The most controversial part of Grove’s innovation agenda is the angel tax credits. While Minnesota had the program from 2010 to 2017 and many other states have similar tax breaks, the program has still attracted skeptics who see it as a subsidy for wealthy investors to make high-risk gambles.

A state report on the history of the credit in Minnesota says it created 1,533 direct jobs over seven years and total private investment was more than $420 million. The public cost was more than $100 million, however. Since 2013 DEED has estimated spinoff jobs from the program, too. In 2017, it said angel tax credit was responsible for 320 direct jobs, which led to another 1,012 indirect ones. Nearly all jobs created by the program have been in the Twin Cities.

State Sen. Roger Chamberlain, a Republican from Lino Lakes who chairs the Senate Taxes Committee, described the angel credit as “not terrible, not great,” and said its return on investment is hard to track and the short-term pay off isn’t promising. Chamberlain said he supported the tax credit in a limited fashion to stay competitive with other states using one.

But he warned such government coordination with big business for subsidies can lead to corruption and said he’d prefer to put the money toward his school district and make broader cuts to regulation and taxes.

“The best way to set ourselves up to be competitive to have a strong future economically — whether it’s high tech or anything else — is to simply reduce the spending and tax burdens on the citizens to make this a more attractive state for people to come to, live, invest and stay,” Chamberlain said. “That’s the overall large strategy instead of doing one-offs all the time hoping that it will work when you’re only picking winners and losers.”

Art Rolnick, a senior fellow at the U’s Humphrey School of Public Affairs who specializes in the economics of early childhood development, said the state would be far better off investing that money into targeted pre-K scholarships for low-income families. 

Rolnick said his research has shown a high return on investment for child care spending and he questioned whether the angel credit was helping wealthy investors who would spend venture capital money even without the tax cut. Rolnick, previously the senior vice president at the Federal Reserve Bank of Minneapolis, said the venture capital market works on its own and will fund people with good ideas. To that point, Minnesota’s venture capital numbers may not top the nation, but the state broke its own record in 2018 with $786 million, according to the Star Tribune. Tax breaks have a spotty record in general, Rolnick added.

Rolnick did say targeting angel tax credits for those who invest in startups run by people of color and other underrepresented groups is a good idea since they might get passed over in the current market simply because of discrimination. “If there’s some evidence there isn’t enough going into this particular area of lending, I would concede that one,” he said. “But then I would put all the money into that. Because that is where the market failure would be.”

Making a case for investing in tech

While the angel credit has some opponents across the political spectrum, it also has many supporters. A range of DFLers and Republicans introduced bills to revive the tax break at the Legislature this year and it eventually became law during a session in which the parties often clashed over tax policy.

Grove said Minnesota needs to take an active role in enticing companies to invest in Minnesota startups. He said more than half of investment from the old angel tax credit came from venture capitalists who don’t live here, and a new credit could keep drawing in outsiders. Grove noted the state spends more than $600 million in incentives every biennium for mining, forestry, agriculture and manufacturing. “Ten million dollars to create the companies of the future is a drop in the bucket compared to that,” he said.

Grove also said tech companies can persuade people to move here, and keep successful startups from moving to the Bay Area when they need seed money. 

One success story Grove cited is Sezzle, a Minneapolis startup that allows people to pay for goods in installments at thousands of stores without interest. (They do charge late fees.) In 2016, Sezzle raised $1.09 million in venture capital money, for which the state doled out $272,500 in tax credits. The Star Tribune reported in May that Sezzle now has 78 employees. 

To justify his push for a thriving tech sector, Grove also frequently cites research by Berkeley economist Enrico Moretti, who argues that each new high-tech job creates five more spinoff jobs in industries in a wide range of industries, such as nursing and food service. “This doesn’t just lead to having a fancy high-tech ecosystem here,” Grove said. “It leads to more jobs for everyone.”