Come August 1, Minnesota’s shiny, new $60 million angel tax credit will be open for business. Now if only Wall Street cooperated.
Fueled by fears of an European debt meltdown, the Dow Jones Industrial Average Tuesday dropped more than 250 points to below 10,000 before recovering to close at 10,043. The index is down more than 12 percent for this month.
Since angels derive much of their personal wealth from stocks, it seems prudent to wonder whether the market volatility will spook investors, tax credit or no tax credit. After all, legislators designed the credit to encourage investment by mitigating risk, not eliminate it completely.
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Of course, one can argue the tax credit couldn’t come at a better time, providing a measure of reassurance in uncertain times.
‘”I’ve heard it both ways,” said Joy Lindsay, president of StarTec Investments, an angel firm in Bloomington, Minn.
On the one hand, angels won’t take a credit just for the sake of taking a credit, especially if the market wipes away their wealth, she said. On the other hand, angels can’t do much worse than stocks and might as well take a chance and take advantage of the credit, Lindsay said.
Experienced angels who already devote a certain percentage of their portfolios to such investments are not likely to panic. But the point of Minnesota’s angel law is to get more angels into the game. Will the wealthy individual who has money but lacks experience feel comfortable taking the plunge now?
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John Alexander, president of TC Angels, says the recent volatility is just that — volatility. Since 2009, the markets, encouraged by a recovering economy, have been on an upswing. But if the volatility indicates a more serious problem to the American economy, then we have a problem, he said.
History has shown that sinking stocks don’t bode well for angel money. The dot-com meltdown in 2001 wiped out so many angels and with it, early stage capital for startups. That’s why Minnesota needed the credit in the first place.
One thing is for sure: the European debt crisis could not come at a worse time for Minnesota’s fledgling angel credit program.