Minnesota legislature passes historic angel tax credit

The Minnesota House and Senate Monday overwhelmingly approved a five-year, $50 million tax credit designed to spur early-stage investment in high tech start-ups, including biotechnology and medical devices.

Minutes after the House passed a jobs bill, which included the angel credits, 112-20, the Senate followed suit, 58-3. The lopsided vote capped an epic, seven-year struggle to make Minnesota more competitive with neighboring states like Wisconsin, whose generous angel credits had lured homegrown start-ups across the border.

Gov. Tim Pawlenty is expected to sign the bill after the legislature returns from Easter break.

“It’s all about priorities,” said Sen. Kathy Saltzman, a leading supporter of the bill. “It was painfully obvious that we were missing a critical economic development tool.”

Over the past few weeks, lawmakers struggled to find a way to fund the credit in the face of a $2 billion budget deficit and fierce opposition by Pawlenty to any tax increase. The original bill called for $40 million over four years, but lawmakers whittled it down to $22.5 million over five years less than two weeks ago.

In the end, the legislature approved a proposal from Sen. Tom Bakk to use a gas tax credit the state offers lower income residents to finance the bill.

Investors and entrepreneurs applauded the bill, noting Minnesota has struggled to attract capital to fund promising early-stage companies. Minnesota start-ups, mostly medical device firms, raised $255.5 million in 2009, down a whopping 40 percent from the previous year of $426.5 million, according to the MoneyTree Report by PricewaterhouseCoopers and the National Venture Capital Association based on data from Thomson Reuters. Most of the money went to lower-risk, later-stage companies as venture capitalists stopped making new investments in favor of paring down their current portfolios.

John Alexander, chairman of Twin Cities Angels, said the bill will persuade angel investors to take more risk and “put more money to work in more companies.”

The bill also spells good news for a slew of new, early-stage funds trying to raise money from wary investors.

“I’m very excited,” said Barbara Nelsen, co-manager of a planned $20 million early-stage fund from Affinity Capital and Triathlon Medical Ventures. “There is a real need for additional funding for early-stage/seed companies. This will make it much easier to work with angel investors to put together first-round financing. It’s a nice complement.”

The University of Minnesota also lobbied hard for the bill, which means homegrown technology is now more likely to stay home, said Doug Johnson, head of the school’s Venture Center. Neighboring states have been wooing promising university-bred companies like Miromatrix Inc. and Hennepin Life Sciences, he said.

“It shows that the state is now where it needs to be to compete with other states trying to lure our spin-offs from the university,” Johnson said. “We fixed tech transfer and now we’re ready to hand the baton off to investors.”