Maybe next year.

For supporters of a venture capital tax credit, that phrase carries an all-too-familiar whiff of resignation. Despite a dearth of early stage venture capital money in Minnesota, proposals for an angel investor tax credit once again failed to survive the recently concluded legislative season.

"I'm frustrated," said Rep. Tim Mahoney, DFL-St. Paul, chairman of the House Committee on Biosciences and Emerging Technology. "I get it into the bill every year, but it doesn't stay there."

Incentives to lure angel investors -- affluent individuals who contribute $5,000 to $100,000 to start-ups -- attract bipartisan support. The Pawlenty administration had initially called for a $3 million venture capital tax credit next year that would double to $6 million in 2010. Under the proposed SEED program, investors would have received a 25 percent tax credit when they invest in regional angel funds that focus on emerging businesses and new technologies.

Yet what ultimately passed was a stripped-down tax credit (45 percent up to $112,500 a year) that applies only to small and emerging companies in western "border cities," including Breckenridge, Dilworth, East Grand Forks, Moorhead and Ortonville.

"We were hoping for a deal on a broader scale," said Kirsten Morell, a spokeswoman for the state Department of Employment and Economic Development.

Some observers note that it's unrealistic to expect the Legislature to pass an expensive tax credit during an economic downturn and budget shortfall. Others wonder whether the government should use taxpayer money to help finance risky start-ups, noting that venture capital is best left to free markets.

"I firmly believe that good deals do get funding in Minnesota," Paul Bieganski, managing director of Black River Ventures Fund, said during a recent discussion on venture capital.

Shortage of start-ups?

But industry data suggest Minnesota struggles to attract venture capital. Despite the presence of major medical devicemakers such as Medtronic Inc. and top research institutions such as the University of Minnesota and Mayo Clinic, local firms raised only $60 million in venture financing, or less than 1 percent of the national pool, in the first quarter of 2008, according to the MoneyTree Survey by PricewaterhouseCoopers and the National Venture Capital Association, based on data by Thomson Financial.

Start-ups, in particular, face a difficult time raising money as investors opt for safer bets in more developed, later-stage companies that already generate sales and profits. In April, LifeScience Alley, an industry group, said it terminated Alley Ventures, an investment fund for early stage life science companies. The fund had failed to raise any money during its five-year history.

"A shortage of early stage venture capital in Minnesota continues to be a problem," Andrew Nelson, a HealthPartners executive and member of LifeScience Alley's board of directors, said in a statement.

For some venture capitalists, Minnesota's dearth of seed money is particular worrisome given the aggressive efforts by nearby states to lure investors and start-ups with generous tax breaks and other incentives. In Wisconsin, angel investors can claim a 25 percent tax credit over two years up to $500,000 per investment; venture capital funds can earn a 25 percent credit over one year up to $2 million per investment. The state recently raised the annual pool of available tax credits for angel investors to $5.5 million from $3 million; the credits for venture firms rose to $6 million from $3.5 million.

Joy Lindsay, president and co-founder of StarTec Investments, said she worries that such incentives may lure promising start-ups across Minnesota's eastern border. Based in Bloomington, StarTec invests in early stage technology companies.

"If you talk to first-time entrepreneurs, it's very difficult to raise money," Lindsay said. "What I would hate to see is Minnesota at a disadvantage to other states. Companies would be encouraged to move as a result."

Lindsay is serving on a commission that will recommend business tax reform to Pawlenty by the end of the year. She says she will push for an angel tax credit.

Sizable incentives

Evidence suggests tax credits stimulate investment activity. Angel investment in Wisconsin jumped 55 percent to $100 million in 2006, the year after the state enacted the program, according to a survey by NorthStar Economics Inc., an economic research and consulting firm based in Madison, Wis.

For these tax credits to work, they must be large enough to attract investors, said Scott Nichols, state and local tax director for RSM McGladrey, an accounting, tax and business consulting firm based in Bloomington.

In Hawaii, for instance, taxpayers claimed only $162,000 from the state's 10 percent investment credit. After Hawaii raised the rate to 100 percent in 2002, investors claimed $26 million.

But do these tax credits really create long-term economic benefits for the state?

"Many angel investors are enthusiastic about tax credits because credits increase angels' return on investment," according to a February report by the National Governors Association Center for Best Practices. "However, the economic benefits ... are unknown because of the lack of data and the difficulty of measuring economic impacts."

Vance Opperman, chief executive of Key Investment Inc. in Minneapolis, said the state should best invest money in university research. But an angel tax credit "is a useful tool that would have an immediate impact in generating additional start-ups in Minnesota," he said.

"People are not going to invest just for a tax credit," Opperman said. "On the other hand, it can make the difference on the margin. And there are a lot of things we can do at the margin."

Thomas Lee • 612-673-7744