Early-stage investors in fledgling companies cheered when Gov. Tim Pawlenty this month signed an economic stimulus bill that included the long-sought "angel investor" tax credit designed to put Minnesota on an equal footing with Wisconsin and other border states.

The credit, targeted at start-up enterprises, permits a 25 percent tax credit to qualified investors not to exceed $250,000 per year per household and no more than $4 million in credit-eligible investments in any one emerging company. The pool of available tax credits totals nearly $58 million over the next five years.

"We are thrilled companies in our state will now be in a better position to get started and grow here," said Don Gerhardt, CEO of LifeScience Alley, a trade group for the Upper Midwest's medical-technology, drug and health care industry.

The legislation, which had bipartisan support, also expands the existing research-and-development tax credit for companies of all sizes. The package was designed to help bring promising technology and products to market developed by fast-growing small businesses.

Angel investors typically are affluent individuals who back high-risk, garage-based inventors' ideas long before they demonstrate enough promise for venture capitalists or a bank to finance them.

This year's passage by a wide bipartisan margin followed alarm over the flight of several high-profile start-ups in recent years to Wisconsin, which already had an angel-investor tax credit. Still, tax breaks do not a company make.

For example, VitalMedix Inc., a promising start-up that was rooted in the University of Minnesota, designed a drug to keep alive victims suffering near-fatal injuries. But the company filed for bankruptcy several weeks ago after jumping from Minneapolis to Hudson last year in hopes of finding deep-pocketed investors in a more favorable tax situation.

The federal government provided most of the company's funding to date. The U remains a significant shareholder and licensor of the therapy.

"The Minnesota tax credit is important, but not just because of people moving across the border ... to Wisconsin," said Steve Mercil, chief executive of Rain Source Capital of St. Paul, which runs 23 early-stage-finance funds in several states. "This puts on the Minnesota state seal of approval and makes angel investors a little more comfortable and may bring more people into the pool. And that's good. But it's still about understanding risk and taking risk."

The University of Minnesota, beset in its medical school by a reputation for bureaucracy, infighting and economic conflicts, is to an extent is still living off the legacy that bore Medtronic and St. Jude Medical, among others, that were funded by a venture capital community rooted in the state's medical-technology heritage.

In recent years, the U has faced criticism that the University of Wisconsin is better at bringing research from the lab to a business model. In response, the University of Minnesota has hired a key business developer from UW and taken other steps to streamline the process.

Diversification a challenge

Global Insight, which tracks capital flows and is a research tool used by economists and the state of Minnesota, says that in 2008 Minnesota venture-capital-backed companies generated $159 billion in 2008 revenue and employed 365,584 jobs, making the state the fifth-highest state for venture-capital-backed jobs.

Still, we face a challenge. Our legacy in medical technology also was built on a long stream of ever-more-sophisticated and expensive pacemakers, surgical instruments, therapies and treatments. The just-passed health care bill is designed to increase coverage to more Americans while at the same time cutting costs by focusing more on healthy lifestyles and on prevention.

Meanwhile, medical venture capitalists increasingly are complaining about tougher and shifting standards for proving that new technology is cost-effective; these are coming from the Federal Food and Drug Administration (FDA), health insurers and Medicare.

Mercil expects the angel investor network to expand its interest markedly from the Minnesota staple of medical technology to the fast-growing "clean tech" market for production of energy alternatives from crops, waste oils and garbage.

"The medical venture capitalists are complaining about the cost of getting FDA approval," Mercil said. "There will still be a lot of innovation in health care information technology. We'll also see growth in the energy side and in health care services.

"Our organization is just telling angel investors that they have an opportunity to get a 25 percent tax credit on their investment ... and that's a nice advantage in terms of the cost of capital."

Neal St. Anthony • 612-673-7144 • nstanthony@startribune.com