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Angel tax credit reshapes Minnesota’s innovation culture

March 30, 2010 4:34 pm by | 2 Comments

The $50 million angel tax credit passed by the Minnesota legislature Monday will no doubt provide much-needed early stage capital for young start-ups. But the law’s biggest benefit may not be dollars and cents, but rather how outsiders see Minnesota and how Minnesota sees itself.

By passing the bill quickly in the legislative year and with such overwhelming bipartisan support in the face of a $2 billion budget gap, lawmakers have instantly established Minnesota as a credible place to innovate and embrace risk, investors and entrepreneurs say. That’s quite a departure from the traditional rap on Minnesota, a high tax state whose 19 Fortune 500 companies had made its residents and leaders complacent and timid.

“People always whispered about these things but were too scared to say anything,” said Peter Bianco, director of life science business development for Nilan Johnson Lewis in Minneapolis. The angel credit will spark “an awakening that changes people’s attitudes and help us get out of this funk.”

Minnesota had lost its entrepreneurial swagger or its mojo, said Marti Nyman, a former Best Buy official who helps lead MOJO Minnesota, a grassroots group of investors, entrepreneurs and lawyers who backed the angel credits.

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There are small pockets of entrepreneurialism in the state, but “we don’t have the general atmosphere, including risk capital, where people are willing to pursue their dreams of starting a company,” Nyman said. ” You need the rest of the ecosystem. You don’t get a lot of community support in Minnesota as you would get in Silicon Valley. People here want to applaud you, but they think ‘you left that comfortable job at 3M? Why did you do that?’”

The most striking part of the angel bill is where lawmakers found the money: a gas tax credit for the poor. Legislators have traditionally favored social services over economic development, said Matt Kramer, a former Gov. Tim Pawlenty chief of staff who now heads the Office of Business Relations at the University of Minnesota.

Kramer noted 86 percent of the state’s budget goes to services like health care, education and local government aid.  By contrast, the state only gives $2.5 million every two years to the Minnesota Investment Fund, a program run by the Department of Employment and Economic Development (DEED).

“Legislators always confused [angel credits] with tax breaks for the rich,” Kramer said.

Shifting credits from the poor to the wealthy (angels usually invest anywhere from $25,000 to $500,000 per company) did not sit well with many lawmakers, especially in the more liberal House where Tax Committee Chairwoman Rep. Ann Lenczewski strongly opposed the angel bill.

In the end, the weak economy made creating jobs a more pressing priority over subsidizing gas for lower income residents, said Sen. Kathy Saltzman, a leading supporter of the angel bill.

In other words, the country’s economic crisis proved to be the catalyst that shoved Minnesota’s priorities from social welfare toward free-market dynamicism.

“You know Minnesotans, we don’t let a good crisis go to waste,” joked Rep. Tim Mahoney, chair of the House Bioscience and Workforce Development.

In addition to the angel credits, DEED has been quietly working on an innovative program to steer money from its pool of small business development loans for manufacturing to high tech start-ups like Miromatrix Inc., a regenerative medicine company founded by famed university researcher Doris Taylor.

Sources say the government will provide a $250,000 loan to Miromatrix that it doesn’t have to repay for six years with the possibility of more funds. The money has already helped the company raise money from other investors, sources say.

Experts say the credit is only the beginning and it will take more time to change the state’s risk-averse mindset. Indeed, the angel bill contains several restrictions, including a $1 million cap on investments in any one company and a list of penalties if investors fail to comply with holding and employment requirements.

Saltzman says the state still needs an overall economic development strategy.

The angel credit is only a small piece of the puzzle, said David Welliver, a former member of  Gov. Pawlenty’s 21st Century Tax Reform Commission.

The real problem is the state’s corporate tax rates that force companies like Medtronic and 3M to build plants and research and development centers in other states, he said. Welliver, who supports abolishing corporate taxes, is founder of WellAdvised LLC, a St. Paul-based consulting firm for start-ups.

For now though, the angel investment credit will do just fine, supporters say.

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Thomas Lee

By Thomas Lee

Thomas Lee was the Minnesota Bureau Chief for MedCityNews.
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2 comments
Frank Jaskulke
Frank Jaskulke

Tom, one more big one - the 1 million dollar per company is credits, not investments. A company cannot receive more than 1 million worth of credits, which equates to 4 million of investment. The final language is now up on the house website under HF2695, 3rd engrossment.

Frank Jaskulke
Frank Jaskulke

Tom, Tom, Ann Lenczewski was the chief author of the house bill. While she had concerns about the legislation, as she does with all tax expenditures, she worked very hard to refine the bill, drum up support and move the legislation in a manner acceptable to the advocates. Given her views on tax policy in general, I think she did a fine job of getting this through (and as a policy wonk, it was fun working with her and staff as they really turn the screws on making the advocates justify policy).

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