Angel investment tax credit in Minnesota: The Burden of Proof

Minnesota House Tax Committee Chair Ann Lenczewski

ST. PAUL, Minnesota– In a packed State Building Office hearing room Tuesday, witness after witness rose to speak in support of H.F. 2750, a bill that would grant $32 million in tax credits over three years to angel investors who fund risky, high tech start-up companies. Entrepreneurs, investors, university officials, industry groups warned lawmakers that the lack of early stage capital meant innovative start-ups in Minnesota would either die or move to another state.

Rep. Ann Lenczewski of Bloomington, the powerful Democratic chair of the House Tax Committee and a vocal opponent of the bill, listened politely. Then she called her one and only witness: Joel Michael, a House Research staff coordinator who helped authored a report, at Lenczewski’s request, on Minnesota vs Wisconsin venture capital.

Michael, whose gray hair, spectacles, and low droning voice proved fitting for a numbers cruncher, began his report by saying it was not a report, even though the report begins with “This report…” Ooookay. He then offered the following caveats: he was not a venture capital expert and there was little data to draw on.

Nevertheless , the non-expert who authored a non-report concluded that Minnesota, with no angel credits, generated more than three times venture capital per capita over a nine year period than Wisconsin, which offers generous angel credits. Moreover, “it’s not clear whether Wisconsin’s experience justifies experimenting with Minnesota’s angel investment incentives,” the non-report concludes.

Before the pro-angel crowd could spontaneously burst into frustrated flames, Jay Hare, a Minneapolis-based analyst with PricewaterhouseCoopers (and an actual expert on venture capital), came to the rescue. Michael’s non-report was based entirely on PricewaterhouseCoopers data, which does not include angel money.

Hare made one more key point: Minnesota certainly does boast more venture capital dollars than Wisconsin but the Badger State vastly outshines its neighbor in the number of such deals: plus 300 percent since 2002 versus minus five percent for Minnesota. So in this context, Minnesota is the United States in overall market size but Wisconsin is China in rate of growth.

“We’re in really tough shape in early stage capital,” Hare said. “Without medical devices, we would be in a world of hurt.”

It suddenly occurred to me that none of this really matters. If the fate of angel credits rested on research, data, and industry best practices, the bill would pass in a heart beat. No, this is about one woman’s opposition to the tax credits.

“Folks need to take a long and hard look at” the tax credits that primarily go to wealthy people, Lenczewski said. The burden, she says, rests with proponents to prove the tax credits work.

With all due respect to Lenczewski, I offer her a different challenge: prove that they don’t work. So let’s take a line by line look at Lenczewski’s arguments:

1. There’s not enough data or evidence that Wisconsin’s tax credits work.

Um…really? Hare’s testimony on growth rates in Wisconsin versus Minnesota seems like good data to me.

But how about this? From 2005, the first year Wisconsin angel credits took effect, to 2008, the amount of angel money invested has jumped nearly three fold from $5.3 million to $15 million, according to a report by the Wisconsin Angel Network. The number of deals ballooned from 18 to 53.

Or this? Since 2007, three biotech start-ups that spun off from the University of Wisconsin-Madison and received angel money fetched $1 billion from outside buyers, a greater value than the 107 companies that the University of Minnesota spun off over the past 25 years. VitalMedix Inc., a promising drug company from the University of Minnesota, recently moved to Hudson and Miromatrix Inc., based on the work of Dr. Doris Taylor, warn they will leave the state if they can’t find angel financing.

2. The tax credits would benefit Minnesotans earning more than $300,000 a year who might just pocket the tax credit and spend just as much as money as they normally would.

That’s certainly possible but unlikely. Tax credits don’t simply pad an investor’s bank account but rather subsidize risk. Since venture investment is a high risk game that mostly results in failure, sweetening the pot might nudge investors to assume more risk. The reason angel investors exist is not to pocket tax credits but to fund start-ups that could grow into blockbusters companies.

As for the credits going to wealthy people, well, that really can’t be helped. Who else has $100,000 lying around to play with? Angel credits will not convince teachers who earn $30,000 a year to fund a start-up for the simple reason they can’t afford it.

3. According to Michael’s non-report, Minnesota is really doing relatively well in venture capital. A key piece of evidence: strip out California and Massachusetts, and Minnesota looks quite favorable compared to the rest of the country.

What a bizarre argument. That’s like saying if we remove the New York Yankees and the Boston Red Sox from Major League Baseball, then the perennial underachieving Baltimore Orioles look pretty darn good.

And with all of its intellectual prowess and rich innovation, why shouldn’t Minnesota aspire to be like California and Massachusetts? The two states, the report notes, are “hotbeds” for technology and venture capital. How do you think that happened in the first place? Did California and Massachusetts’ innovation ecosystems magically appear out of pixie dust?

4. The angel credits are expensive and tough to fund with a multi-billion dollar budget deficit.

“The money is not there,” Lenczewski said. “And this is a new spending program.”

Fair enough. But consider this: Minnesota didn’t offer angel credits even when the state boasted surpluses. Credits are most needed during a tough economy when credit is tight versus a booming economy when credit is plentiful.

And if I’m not mistaken, Lenczewski’s grant proposal would certainly qualify as a new spending program- $40 million over three years to be precise.

Finally, it’s interesting to note that, other than the House non-report, Lenczewski didn’t offer any other experts or research to…uh..discredit angel credts. In fact, I’m not sure if any lawmaker or outside expert or interest group has openly voiced opposition to the bill.

So the question remains…what does Lenczewski know that the Center for Venture Research, Pricewaterhouse Coopers analyst Jay Hare, LifeScience Alley, BioBusiness Alliance, University of Minnesota, Twin Cities Angels, Rainsource Capital, Minnesota Department of Revenue Commissioner Ward Einess, Senate Majority Leader Larry Pogemiller, Rapid Diagnostek CEO Harry Norris, Miromatrix founder and famed stem cell researcher Dr. Doris Taylor, Minnesota High Tech Association, StarTec Investments president Joy Lindsay, and the 28 states that offer angel credits don’t know?

I’m not sure. Maybe we need more data.

Thomas Lee

Thomas Lee was the Minnesota Bureau Chief for MedCityNews.

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Tags: angel investing, Ann Lenczewski, BioBusiness Alliance of Minnesota, Doris Taylor, LifeScience Alley, Minnesota, Miromatrix, Politics, Rain Source Capital, St. Paul, Twin Cities Angels, University of Minnesota, University of Wisconsin-Madison, VitalMedix

Comments Post a comment

Great post Thomas, were you there?

It’s totally appropriate for Rep. Ann Lenczewski to request and expect the burden of proof given her role as Chair of the House Tax Committee. It’s also totally appropriate to deliver on that burden of proof – what a slam dunk!?!?

I could not believe what I was hearing from the mouth of Mr. Michaels, it was totally ludicrous. I wasn’t alone as people were literally squeaming in their chairs; it was really awkward and uncomfortable. I had to leave after 45 minutes of hot air…hope that Mr. Hare brought everyone back into reality. Did he expose that “non report” as the joke that it was?

Did he deliver?

Nice dissection above – this is the kicker, you nailed it:

“And with all of its intellectual prowess and rich innovation, why shouldnâ€™t Minnesota aspire to be like California and Massachusetts? The two states, the report notes, are â€œhotbedsâ€ for technology and venture capital. How do you think that happened in the first place? Did California and Massachusettsâ€™ innovation ecosystems magically appear out of pixie dust?”

Again, solid content Thomas, hard hitting, even (painfully) humorous at times.

PS-Curious to know if you have a source for this: “From 2005, the first year Wisconsin angel credits took effect, to 2008, the amount of angel money invested has jumped nearly three fold from $5.3 million to $15 million, according to a report by the Wisconsin Angel Network. The number of deals ballooned from 18 to 53.”

Comment by Jeff Pesek — February 10, 2010 @ 9:06 pm

I understand that we are trying to justify the tax credit by comparing the state of Minnesota to Wisconsin, but may I ask, why? Is Wisconsin a model state for innovation? Has the Minnesota tech industry not completely slipped off the national radar screen while tier two markets like Colorado and Texas have blown passed us? We need this angel tax credit because Minnesota is a very conservative business community. Due to this risk avoidance culture, we need to provide an extra nudge states with risk takers, Colorado and Texas for example, don’t need to take. The rich? Who do you think creates all the jobs in this country? By the way, have you seen the average return for venture capital the past decade? It is horrible (actually negative). If something isn’t done, it is going to complete dry up.

Enough with the weak reports shunning our needed bill. Support this tax credit, or we, the tech community of Minnesota, will unite as a voting body and take a portion of our angel dollars to fund some real state representatives who understand business and our culture.

Comment by Rob Weber — February 10, 2010 @ 9:55 pm

The spirit of this tax credit goes beyond merely supporting entrepreneurship, but also includes the tangible and intangible economic stimulation that comes with new business and technology creation. To me, this discussion is really about ‘one in the hand’ for government vs. ‘two in the bush’ for the entire state. Anything other than a competitive investment tax credit would be incredibly short-sighted. What some (misguided) government representatives thinks that tax income could do for government today would no doubt product much better economic returns in the short-term in the hands of an entrepreneur, with the upside of coming to full fruition in the long-term. Government doesn’t solve problems, it subsidizes them. Offering credit to constituents who stake themselves in economic potential is an opportunity that should be seized, not forsaken. I invite Rep.Lenczewski to come to my office and see the incredible things being done with angel investment.

Comment by Lief Larson — February 11, 2010 @ 3:56 pm

Thanks to Tom Lee for an informative and entertaining piece on the investor tax credit hearing in Wisconsin. As president of the Wisconsin Technology Council, which includes the Wisconsin Angel Network among its programs, I can add my voice to those who believe targeted investor tax credits work. That has been a major part of the story in Wisconsin’s tech-based economy. Some might ask: Why would Wisconsin care if Minnesota adopts a credits law of its own? Isn’t it better for Wisconsin to wage a “border war” to attract Minnesota companies? A healthier angel climate in Minnesota is good for Wisconsin, and vice versa. The entire I-Q Corridor, which extends from Chicago through Wisconsin to the Twin Cities and beyond, is stronger if the right incentives are in place. Thanks for your coverage of this important issue.

Comment by Tom Still — February 12, 2010 @ 1:31 pm

[...] Barca, a top Democrat in the Democratic-controlled Wisconsin State Assembly, was more than a little puzzled by a Minnesota House Research report, commissioned by angel tax credit foe and Tax Committee chair Rep…. [...]

Comment by Wisconsin angel credits could snag top Minnesota biotech start-up : MedCity News — February 15, 2010 @ 2:49 pm

[...] Tim Pawlenty and legislative leaders are trying to push a three year, $40 million tax credit to spur angel investment in young companies. Such a credit will “definitely help” the [...]

Comment by Affinity Capital in Minneapolis to help launch new $10 million early stage fund : MedCity News — February 18, 2010 @ 1:13 pm

[...] PAUL, Minnesota– For all of her fierce opposition to angel tax credits, Rep. Ann Lenczewski (D-Bloomington) now has a more pressing issue to focus on: how to pay for [...]

Comment by Angel tax credit just $10 million short of finish line : MedCity News — February 23, 2010 @ 5:43 pm

[...] Thomas Lee, Med City News “ST. PAUL, Minnesotaâ€“ For all of her fierce opposition to angel tax credits, Rep. Ann Lenczewski (D-Bloomington) now has a more pressing issue to focus on: how to pay for [...]

Comment by TECHdotMN – Angel tax credit just $10 million short of finish line — February 23, 2010 @ 7:55 pm

[...] company soon became a rallying cry for supporters of a long elusive Minnesota angel credit that could make the state more competitive with Wisconsin and other 26 other states with similar [...]

Comment by VitalMedix Inc., a start-up developing a drug to aid first responders, files for Chapter 7 : MedCity News — February 24, 2010 @ 6:22 pm

I applaud the efforts of the enlightened legislators who finally realized that Angel investors are really doing the work of politicians. We put money to work to create jobs and grow businesses. In the end, the benefit of our investments will more than pay for any tax credit from corporate and individual income taxes, capital gains taxes and the multiplier effect of the employed spending their salaries in the local economy. The people of MN are the ultimate beneficiary due to a more vibrant economy attracting and retaining entrepreneurs and their business.

Comment by Alex Danzberger — April 1, 2010 @ 4:57 pm

Hare made one more key point: Minnesota certainly does boast more venture capital dollars than Wisconsin but the Badger State vastly outshines its neighbor in the number of such deals: plus 300 percent since 2002 versus minus five percent for Minnesota. So in this context, Minnesota is the United States in overall market size but Wisconsin is China in rate of growth.

Interesting – as an entrepreneurial investor i would be winging my way to Wisconsin even if there were no tax credits now, the momentum itself makes it more attractive on it’s own. If Minnesota tax credits were offered I would perhaps take my money there for the right opportunity but the lack of credits does affect these decisions.

Comment by Richard Cunnington — September 9, 2010 @ 6:16 am