Sunday, April 24, 2011

Angel Tax Credits: Is Wisconsin beating the chedder out of Minnesota?

Angel investor tax credits are all the rage in the United States. Nearly 50% of states have implemented a tax credit[1] for wealthy investors who inject start-up capital in promising small businesses. In 2010, Minnesota followed suit and introduced its Angel Tax Credit Program[2]. Proponents of the tax credit note the $28.8M in investment provided to 65 businesses in the program's first year.[3]

Not everyone is a fan...
Program critics exists as well. Tax credits in general have their detractors. In addition, some are bothered by the fact that angel tax credits, by definition, are provided to wealthy individuals. Others suggest that the 47 jobs created in the program's first year represent an unacceptably low return given the $7M in tax breaks granted.

And then there are the conspiracy theorists. And actually they present a rather formidable argument. An argument that states that the REAL reason Minnesota implemented an angel tax credit was because the state has been getting creamed (or should we say "cheesed") by our neighbors to the east.

Is Wisconsin stealing business investment from Minnesota?
The statistics are hard to ignore. Decide for yourself...
  • According to the Wisconsin Angel Network, in 2010 angel investors provided over $120M to Wisconsin-based businesses.[5] There is evidence that some of these businesses are Minnesota transplants.
  • In the last four year, three biotech startups spun off from the University of Wisconsin and were sold for over $1B. This is more money than the COMBINED value of the 107 startups the University of Minnesota has spun off over 25 years![6]
  • Wisconsin has enjoyed a 300% increase in angel investment deals since 2003. Minnesota? A 5% DECREASE.[7]
The following graph shows Wisconsin's growth in angel investment between '03-'09.

How does Minnesota respond?
Short of boiling Wisconsinites in a vat of beer cheese soup, Minnesota has some options for keeping up, including:
  • Political leaders in Minnesota should not let the angel tax credit expire (it is currently set to end in 2014). In fact, if sufficient demand exists Minnesota would be smart to increase the amount of dollars available. Minnesota's larger metropolitan areas and the fact that it is home to 21 Fortune 500 companies (Wisconsin has 9),[8] means that it is not enough to simply match Wisconsin's investment. In its first year, the Minnesota program leveraged $4 in business growth for every $1 in tax credit. That is sound business development strategy.
  • Minnesota's business community needs to reestablish its connection with the University of Minnesota. Specifically, the University's role in incubating growth businesses needs to be more strongly recognized. Institutions like the Holmes Center for Entrepreneurship and the Office of Business Development must be supported and funded.
Innovation has been a historic part of Minnesota's growth. Just ask 3M or Medtronic. The angel tax credit is a good bet for continuing that tradition. And for besting the cheeseheads once and for all.


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