Help from the Heavens?

Can a Minnesota tax credit persuade angel investors to be more angelic? That’s an enduring question, and one likely to generate more debate at the Minnesota Legislature next year.

Angels, wealthy individuals who take modest equity stakes in start-ups or early-stage companies, play an increasingly important role in financing these businesses. Angels helped launch Google, Apple, Starbucks and other corporate giants. Today, angel investors occupy a niche largely abandoned by venture capital firms: smaller financings, generally below $2 million.

At least 18 states offer such investors the opportunity to reduce their state tax liability by taking credits for the capital they sink into promising new companies that are growing up within state borders. Minnesota is not among them.

Steve Mercil is the founder and CEO of St. Paul–based RAIN Source Capital, which formed and manages a network of 23 groups of angel investors in six states, many of them in greater Minnesota. (The name RAIN derives from “regional angel investment network.”) Together, they’ve invested $75 million in 55 companies. Mercil, who is also treasurer of the national Angel Capital Association (ACA), says that angel tax credits can create an environment that encourages investors on the sidelines to look seriously at putting capital into start-ups.

“The tax credit is not a silver bullet, but it will level the playing field regarding one of many factors that influence investors’ decisions,” Mercil says. “Most importantly, an angel tax credit will enhance part of an investment infrastructure or ecology that begins to encourage investors to focus on early-stage investing as well as a variety of new technologies.”

Moving to Wisconsin

For years, backers of a Minnesota tax credit have sought it in legislative bills. This year, a 25 percent credit for taxpayers putting up to $50,000 into small, technology-oriented enterprises made it into the omnibus tax bill that went to Governor Tim Pawlenty. But the governor, who supports the credit, vetoed the bill because it boosted taxes.

Meanwhile, the 2009 Wisconsin Legislature passed and Governor Jim Doyle signed a bill that, starting in 2011, will triple to $37.5 million the amount Wisconsin has budgeted annually for its popular tax credit for angels and venture capitalists.