Investment tax credit measure dies

The angel investment tax credit is dead. Long live the angel investment tax credit.

Despite strong support from Gov. Tim Pawlenty, DFL and Republican legislators, and a host of entrepreneurs and investors, an effort to stimulate early-stage venture capital investments once again fizzled, even as Minnesota's economy stumbles and promising start-ups flee the state.

Thanks to a furious, last-minute lobbying effort, House and Senate legislators managed to insert a $10 million-a-year, 25 percent tax credit for angel investors in the final tax bill. Angel investors are affluent individuals who invest anywhere from $5,000 to $300,000 in early-stage, high-tech companies. But Pawlenty ultimately vetoed the package, citing opposition to tax increases in other parts of the bill.

"It's so damn frustrating," fumed Peter Bianco, director of life science business development at Minneapolis-based Halleland Health Consulting Inc. "We can't even get the simplest things done here."

Supporters say the tax credit would encourage angel investors to back high-risk start-ups in medical devices, biotechnology and clean energy, the types of emerging industries that could help replace the tens of thousands of jobs Minnesota is shedding today. Medtronic recently announced it will eliminate 1,500 to 1,800 jobs worldwide, including 600 in Minnesota.

"There might not be jobs there once we get out of the recession," said Sen. Kathy Saltzman, DFL-Rochester, who strongly backs angel credits. "Life is not going to be the same on the other side."

Start-ups of all types have struggled to raise money, partly because the recession has forced small firms to pull back and potential investors to become more cautious. Nationwide, seed and early-stage funding over the first three months of 2009 fell 45 percent, to $852 million, compared with the previous quarter, according to the MoneyTree report by PricewaterhouseCoopers and the National Venture Capital Association, based on data by Thomson Financial.

Populist distaste

Despite the recession and dearth of capital, states such as Minnesota are finding it tough to pass tax credits because of ballooning budget deficits and a populist distaste for helping seemingly wealthy investors, experts say.

Given the weak economy "it might be the perfect time" to pass such credits, said Marianne Hudson, executive director of the Angel Capital Association, a spinoff from the Ewing Marion Kauffman Foundation in Kansas City. "But people don't understand the field."

The prospects for angel credits seemed bright early in the legislative season. In November, Pawlenty called a press conference to plug his Green Jobs Initiative. Under the plan, investors who park their money in up to 20 regional investment funds could get tax credits totaling $20 million over four years.

"If the economy continues in its awful state -- and it looks like it's going to for the foreseeable future -- it will be more important than ever to do things that will try to encourage investment in job growth in Minnesota," Pawlenty said at the time.

In February, a commission of business leaders appointed by Pawlenty to recommend ways to reform Minnesota's tax code called for adopting a 30 percent angel investment tax credit, capped at $15 million a year.

But the early momentum ran into political reality as the DFL-led Legislature and Pawlenty failed to agree on how to close a $5 billion budget deficit.

"It's extremely disappointing that even though the DFL had money to fund things like a $32 million loan forgiveness to the City of St. Paul ...they couldn't find money for a proven job creation tool like an angel investment tax credit," Brian McClung, a Pawlenty spokesman, wrote in a e-mail.

John Alexander, president of TC Angels, a Minneapolis-based angel investment group, pushed for the credits but says he supports Pawlenty's stance against raising taxes.

"I understand he had a difficult decision to make," Alexander said. "There was no easy way to exempt [angel credits from the tax bill], even if it was a priority for him."

Wisconsin ahead

Some lawmakers and investors warn that local start-ups will move across the border. In Wisconsin, angel investors can claim a 25 percent tax credit over two years of up to $500,000 per investment; venture capital funds can earn a 25 percent credit over one year up to $2 million per investment.

Rapid Diagnostek Inc., a home-grown start-up that makes sensors for detecting bacteria and viruses, recently moved to Hudson, Wis. VitalMedix Inc. might do the same. The company, spun off from the University of Minnesota, is developing a hemorrhagic shock drug to keep alive victims of serious trauma.

"We are starting to walk east," said VitalMedix CEO Jeff Williams.

Another planned spinoff based on U researcher Dr. Doris Taylor's work in regenerative medicine might also bolt Minnesota if it can't find funding; the company has received offers from investors in Boston, said Doug Johnson, who heads the schools's Venture Center.

The prospect of promising U start-ups moving out of Minnesota is galling to Bianco, who credited the school for revamping its once-troubled technology transfer program.

"You can no longer blame the U," Bianco said. "They have done everything we asked them to do. The state has to step up."

Supporters say they will try again next year. But this year's failure is still hard to digest.

"I'm worried that our legislators are sending the message that Minnesota isn't really interested in promoting entrepreneurship and innovation in the state," said Joy Lindsay, president and founder of Bloomington-based StarTec Investments. "That's a big mistake. These start-ups and small companies are a key factor for future economic `growth."

Thomas Lee • 612-673-7744