Angel investment tax credit in Minnesota: The Burden of Proof

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Minnesota House Tax Committee Chair Ann Lenczewski

Minnesota House Tax Committee Chair Ann Lenczewski

ST. PAUL, Minnesota– In a packed State Building Office hearing room Tuesday, witness after witness rose to speak in support of H.F. 2750, a bill that would grant $32 million in tax credits over three years to angel investors who fund risky, high tech start-up companies. Entrepreneurs, investors, university officials, industry groups warned lawmakers that the lack of early stage capital meant innovative start-ups in Minnesota would either die or move to another state.

Rep. Ann Lenczewski of Bloomington, the powerful Democratic chair of the House Tax Committee and a vocal opponent of the bill, listened politely. Then she called her one and only witness: Joel Michael, a House Research staff coordinator who helped authored a report, at Lenczewski’s request, on Minnesota vs Wisconsin venture capital.

Michael, whose gray hair, spectacles, and low droning voice proved fitting for a numbers cruncher, began his report by saying it was not a report, even though the report begins with “This report…” Ooookay. He then offered the following caveats: he was not a venture capital expert and there was little data to draw on.

Nevertheless , the non-expert who authored a non-report concluded that Minnesota, with no angel credits, generated more than three times venture capital per capita over a nine year period than Wisconsin, which offers generous angel credits. Moreover, “it’s not clear whether Wisconsin’s experience justifies experimenting with Minnesota’s angel investment incentives,” the non-report concludes.

Before the pro-angel crowd could spontaneously burst into frustrated flames, Jay Hare, a Minneapolis-based analyst with PricewaterhouseCoopers (and an actual expert on venture capital), came to the rescue. Michael’s non-report was based entirely on PricewaterhouseCoopers data, which does not include angel money.

Hare made one more key point: Minnesota certainly does boast more venture capital dollars than Wisconsin but the Badger State vastly outshines its neighbor in the number of such deals: plus 300 percent since 2002 versus minus five percent for Minnesota. So in this context, Minnesota is the United States in overall market size but Wisconsin is China in rate of growth.

“We’re in really tough shape in early stage capital,” Hare said. “Without medical devices, we would be in a world of hurt.”

It suddenly occurred to me that none of this really matters. If the fate of angel credits rested on research, data, and industry best practices, the bill would pass in a heart beat. No, this is about one woman’s opposition to the tax credits.

“Folks need to take a long and hard look at” the tax credits that primarily go to wealthy people, Lenczewski said. The burden, she says, rests with proponents to prove the tax credits work.

With all due respect to Lenczewski, I offer her a different challenge: prove that they don’t work. So let’s take a line by line look at Lenczewski’s arguments:

1. There’s not enough data or evidence that Wisconsin’s tax credits work.

Um…really? Hare’s testimony on growth rates in Wisconsin versus Minnesota seems like good data to me.

But how about this? From 2005, the first year Wisconsin angel credits took effect,  to 2008, the amount of angel money invested has jumped nearly three fold  from $5.3 million to $15 million, according to a report by the Wisconsin Angel Network. The number of deals ballooned from 18 to 53.

Or this? Since 2007, three biotech start-ups that spun off from the University of Wisconsin-Madison and received angel money fetched $1 billion from outside buyers, a greater value than the 107 companies that the University of Minnesota spun off over the past 25 years. VitalMedix Inc., a promising drug company from the University of Minnesota, recently moved to Hudson and Miromatrix Inc., based on the work of Dr. Doris Taylor, warn they will leave the state if they can’t find angel financing.

2. The tax credits would benefit Minnesotans earning more than $300,000 a year who might just pocket the tax credit and spend just as much as money as they normally would.

That’s certainly possible but unlikely. Tax credits don’t simply pad an investor’s bank account but rather subsidize risk. Since venture investment is a high risk game that mostly results in failure, sweetening the pot might nudge investors to assume more risk. The reason angel investors exist is not to pocket tax credits but to fund start-ups that could grow into blockbusters companies.

As for the credits going to wealthy people, well, that really can’t be helped. Who else has $100,000 lying around to play with? Angel credits will not convince teachers who earn $30,000 a year to fund a start-up for the simple reason they can’t afford it.

3.  According to Michael’s non-report, Minnesota is really doing relatively well in venture capital. A key piece of evidence: strip out California and Massachusetts, and Minnesota looks quite favorable compared to the rest of the country.

What a bizarre argument. That’s like saying if we remove the New York Yankees and the Boston Red Sox from Major League Baseball, then the perennial underachieving Baltimore Orioles look pretty darn good.

And with all of its intellectual prowess and rich innovation, why shouldn’t Minnesota aspire to be like California and Massachusetts? The two states, the report notes, are “hotbeds” for technology and venture capital. How do you think that happened in the first place? Did California and Massachusetts’ innovation ecosystems magically appear out of pixie dust?

4. The angel credits are expensive and tough to fund with a multi-billion dollar budget deficit.

“The money is not there,” Lenczewski said. “And this is a new spending program.”

Fair enough. But consider this: Minnesota didn’t offer angel credits even when the state boasted surpluses. Credits are most needed during a tough economy when credit is tight versus a booming economy when credit is plentiful.

And if I’m not mistaken, Lenczewski’s grant proposal would certainly qualify as a new spending program- $40 million over three years to be precise.

Finally, it’s interesting to note that, other than the House non-report, Lenczewski didn’t offer any other experts or research to…uh..discredit angel credts. In fact, I’m not sure if any lawmaker or outside expert or interest group has openly voiced opposition to the bill.

So the question remains…what does Lenczewski know that the Center for Venture Research, Pricewaterhouse Coopers analyst Jay Hare, LifeScience Alley, BioBusiness Alliance, University of Minnesota, Twin Cities Angels, Rainsource Capital, Minnesota Department of Revenue Commissioner Ward Einess, Senate Majority Leader Larry Pogemiller, Rapid Diagnostek CEO Harry Norris, Miromatrix founder and famed stem cell researcher Dr. Doris Taylor, Minnesota High Tech Association, StarTec Investments president Joy Lindsay, and the 28 states that offer angel credits don’t know?

I’m not sure. Maybe we need more data.

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Thomas Lee

By Thomas Lee

Thomas Lee was the Minnesota Bureau Chief for MedCityNews.
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