Michigan’s Angel Investment Tax Credit: Take Two

Let’s do this again.

This week, Michigan rolled out Angel 2.0, a three-year, $27 million effort to encourage wealthy individuals to fund promising high startups in the state.

“This is a huge deal,” says Paul Brown, vice president of capital markets for the Michigan Economic Development Corp. who’s supervising the program. “Angels had been advocating for this for years.”

Well, to be more specific, angels had been advocating for a tax credit they would actually use. The state’s previous incarnation would only grant credits to angels who invested the money they earned from a previous investment into another company. Which kind of makes it hard to start, since there aren’t many people who have that kind of track record.

This time, an angel doesn’t need to have such gold-plated experience. Qualifying applicants can immediately receive up to $250,000 in credits a year. By offering $9 million worth of credits a year, the state hopes to convince its rich citizens to roll the dice and bankroll risky early stage startups.

Across the country, angel credits have become a popular economic development tool, especially in the Midwest. Last year, Minnesota passed a five- year, $60 million program; Illinois approved an annual $10 million credit until 2016. Wisconsin’s program is already one of the most generous in the nation.

Michigan’s version is far less generous by comparison. The state is offering less than half than Minnesota’s total pool and 46 percent less than Illinois.

Minnesota investors can also receive a cash refund if their credits exceed their tax bill. The program also does not require participants to be Minnesota residents or even have a tax liability in the state. Michigan lacks all of those features.

[Minnesota’s angel community, however, is much smaller than Michigan’s.]

For angels to receive a credit, Michigan requires a minimum $20,000 investment per company. In Minnesota, individuals must spend at least $10,000.

Michigan’s requirement may turn off potential new investors, says Jason Townsend, co-founder and managing director of Resonant Venture Partners in Ann Arbor, MI. A first time angel may be reluctant to spend $20,000 on their first investment.

Do these credits even work? The answer is unclear, experts say.

“These policies can be controversial and their impact has not been rigorously evaluated,” according to 2008 report prepared for the National Governors Association. “Even angels are in disagreement as to the economic growth benefits of tax credits. Additional monitoring and evaluation will be needed in the field of angel investment to better determine the effectiveness of financial tools.”

So far, things look good in Minnesota and Wisconsin. In just six months of the program, Minnesota awarded $10 million in credits, helping to spur $30 million in investments.

In 2009, Wisconsin angels invested $22.1 million in 56 deals, compared to $5.4 million in 18 deals in 2005, according to the Wisconsin Portfolio Report. That’s a four-fold jump in dollars and a three-fold increase in deals in just four years.

Brown, the Michigan official, says he established four ways to evaluate the program.

  1. Did the credit create new angel investment groups?
  2. Is more angel money flowing into the state?
  3. Are startups attracting later stage capital?
  4. Are new jobs being created?

“We’re looking to create a pure investment ecosystem, something that will last long after the credit is gone,” Brown said.

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