Judging from the urgency expressed at the recent hearing by the House Biosciences and Emerging Technology Committee, it appears some sort of investment tax credit to create startups will become law next year, perhaps in a matter of weeks.

(A wrecked economy can be a powerful source of motivation or as Rep. Ryan Winkler, DFL-Golden Valley,  put it: “an opportunity to change the way we do things now because of the economic crisis.”)

Here is the breakdown and some analysis of three proposals that will likely influence final legislation.

Job Growth Investment Tax Credit

Author: Gov. Tim Pawlenty

Cost: $20 million over four years

Details: 25 percent tax credit for investments in regional angel funds. A maximum of $5 million each year, including up to $200,000 per investor and $1 million per fund.

Pros: Rides the popular wave of green innovation. President-elect Obama has proposed a two year federal stimulus plan to create or save 2.5 million jobs, party by developing wind, solar, and fuel efficient cars.

Cons: Too many restrictions. 50 percent of credits to green start-ups. Recipients must hold hold investments for three years. Funds must invest 60 percent of money in its geographic region. No more than 3 funds may serve more than 15 counties. No more than 5 funds may investt in businesses in the metro area.

Comments: Some VCs aren’t hot on the idea of focusing investments on specific industries. The general idea is to let VCs decide where best to spend the money. If that happens to be a wind energy firm or a medical device start-up, so be it. A good idea is a good idea.

But Pawlenty’s insistence on spreading tax credits through “geographic diversification” might be the real sticking point. Surprisingly, two people from rural areas, the types you would think would support such an approach, testified at the hearing that geography really doesn’t matter. A good idea is a good idea.

“There is no need to limit (tax credits) geographically,” said Brian Walters, president of the Greater Fargo Moorhead Economic Development Corporation. “There is (investor) money sitting in every town.”

“Keep it simple,” said Chris Huisinga, director of business development for Life-Science Innovations in Wilmar. “Location (incentives) are counterproductive.”

Minnesota Business Investment Act

Author: Winkler

Cost:  $160 million

Details: Beginning in 2013, provides 80 percent tax credit over four years to insurance companies who form limited partnerships with investment funds. Tax credit counts against state taxes on premiums collected by insurance firms. Investment funds will provide capital to hopefully 40-60 early stage and growth companies in a ten year period.

Pros: Taps into deep pool of capital held by insurance companies

Cons: Untested idea. $160 million cost might be too high. Given the credit crisis, insurance companies might be reluctant to put precious capital into risky startups. Not a core area of expertise for insurance firms.

Angel Investment Tax Credit

Author: Sen. Kathy Saltzman (bill proposed in last legislative session)

Cost: $3 million in one year

Details: 25 percent tax credit capped at $25,000 per individual, $300,000 per fund.

Pros: Few restrictions. Targeted toward ”‘qualified high technology field’ includes, but not limited to, aerospace, agricultural processing, alternative energy, biotechnology, defense, drug delivery, environmental engineering, food technology, cellulosic ethanol, information technology, green manufacturing, materials science technology, medical devices, nanotechnology, pharmaceutical technology, and telecommunications.”

I think that pretty much covers it.

Cons: Limited impact. Will $3 million in one year really jump start our economy?

Regardless of what passes, some experts threw out caution flags.

90 percent of the companies that ask for VC money will walk away empty handed, said Steve Mercil, CEO of RainSource Capital, a St. Paul-based network of angel investors. Investing in startups is risky and requires patience and long term commitment, he said- two things that always seem to be in short supply at the State Capitol.

“This is a 10,15, 20 year game that we play,” Mercil said.

Facing a $5 billion budget deficit, legislators seems to be leaning toward delaying the tax credits until the economic outlook improves. For instance, Winkler’s bill would start awarding tax credits in 2009 but companies cannot receive the credit until 2013.

Not sure if that will really work. Startups and investors need stimulus now- the mere promise of stimulus down the road might not be enough of an incentive for VCs to spend. That’s sort of like telling someone you’ll get him a fire hose next week when there’s a fire currently raging in a room.

What’s really needed is “institutional capital” that can take products to market, said Mike Berman, a well-known medical device entrepreneur and investor. Spreading seeds over the ground is fine but who’s going to water them so they grow into trees?, he said.

An angel investor tax credit is “wise public policy,” he said, “but not a game changer.”

This entry was posted on Thursday, December 11th, 2008 at 10:26 pm and is filed under Uncategorized. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.