Wednesday, February 8, 2023

The Minnesota Angel Tax Credit Program – good news for startups; good investment in Minnesota.

The Minnesota startup community received good news to begin 2023 as Gov. Tim Walz proposed $20 million in funding for the Angel Tax Credit Program in his biannual budget.

The Minnesota Angel Tax Credit Program, started in 2010, provides a refundable 25% tax credit to investors and angel investment funds that make equity investments in emerging—primarily high-tech—Minnesota businesses. The tax credit, worth up to $125,000 per individual or $250,000 for taxpayers filing jointly, incentivizes a rather low risk investment in capital-needy businesses, fueling their growth, and, in turn, creating more jobs, tax revenue, and vibrant Minnesota communities.


To qualify, businesses and investors must meet certain requirements aimed at ensuring the program promotes economic development within the state. Businesses must not have received previous equity investments totaling over $4 million, and they must be headquartered in Minnesota, engage in technological innovation, employ fewer than 25 employees, operate for fewer than 10 years, and commit to maintaining a majority of employees in Minnesota for five years. An investors must be a natural person, invest a minimum of $10,000, or a minimum of $7,500 if investing in a certain other enterprises (such as businesses owned and managed by women, members of certain minority groups, or veterans, and businesses located in Greater Minnesota). An investor must also be an accredited investor. An angel investment fund must be organized as a pass-through entity, and have a minimum of three qualifying investors who are natural persons. A fund must also make a minimum investment of $30,000.

Since the program’s inception, more than 530 Minnesota businesses have received in excess of $498 million in equity investments. In 2021, tax credits totaling $10 million in investments in Minnesota start-up business resulted in about 900 direct and indirect jobs. In 2019, the program largely supported medical device and biotechnology companies, but the third-largest investment category was the food and drink industry.

The program has generally always exhausted its allocation, which indicates that interest in the program is high. Yet, despite this success, the Angel Tax Credit has only received sporadic funding. The legislature failed to approve $7 million proposed for the tax credit program last year, meaning 2023 will be the third year of the past seven in which the Minnesota Angel Tax Credit program failed to operate. As in any investment strategy, consistency is key.

Another area the program could be improved is delivering on its promise of supporting entrepreneurs in underfunded communities, who often lack access to generational wealth or affluent family and friends to tap into to fund startups. Since 2015, 50% of the program has been designated to support businesses owned by women, veterans, or persons who are black, indigenous, or people of color (BIPOC), as well as businesses located in Greater Minnesota (defined as any area outside the Twin Cities). Unfortunately, this allocation has been underutilized. Only about 25% of total investments credited to the program have been made into underrepresented businesses. Last fall, several other Lathrop GPM attorneys and I often heard entrepreneurs express their frustration about the program’s failure to connect BIPOC founders with capital investors when we attended the annual Lunar Summit, an accelerator event hosted in St. Paul designed to support women, people of color and LGBTQ entrepreneurs. The Angel Tax Credit Program provides a relatively low-risk way to invest in startups, but more work needs to be done connecting the angel investment community with diverse communities.

Designed to stimulate economic development in Minnesota by leveraging private capital, the Angel Investment Tax Program may have the added benefit of nurturing Minnesota’s nascent angel investment community. Minnesota, despite claiming fame to 167,000 millionaire households, the 14th most in 2020, was only graded 43rd for startup activity nationally. One recent estimate approximated just 100 active angel investors in Minnesota despite 73,000 individuals earning over $200,000. Greater MSP ranked the Minneapolis metropolitan area 11th out of 12 similarly sized areas in terms of venture capital investment. Any number of factors contribute to this lack of startup investment—a knowledge gap about what angel investment entails, the inability to connect funds and investors with the right startups, or even an ingrained Midwestern modesty and aversion to risk. Whatever the reason, the Minnesota Angel Tax Credit Program can be an essential tool developing both Minnesota businesses as well as the capacity and confidence of its potential angel investors to participate in startup-phase projects. We hope that startup funding becomes a more routine aspect of Minnesota’s investment portfolios.

With a $17.6 billion budget surplus, Minnesota has a unique opportunity to support the many needs of the state. It only makes sense to devote resources to programs like the Angel Tax Credit that will continue to return dividends for years to come. After all, that’s what a good investment is all about.

 
[1] https://knsiradio.com/2023/01/19/governor-tim-walz-releases-4-1-billion-economic-budget/

[2] https://mn.gov/deed/business/financing-business/tax-credits/angel-tax-credit/

[3] https://mn.gov/deed/business/financing-business/tax-credits/angel-tax-credit/for-businesses/

[4] https://www.mncpa.org/resources/publications/footnote/april-may-2022/minnesota%E2%80%99s-angel-tax-credit/

[5] https://www.minnpost.com/state-government/2021/02/officials-say-minnesotas-angel-tax-credit-program-is-crucial-for-the-states-post-pandemic-recovery-its-also-long-failed-to-meet-equity-goals/

[6] https://mn.gov/deed/business/financing-business/tax-credits/angel-tax-credit/lists-reports/

[7] https://tcbmag.com/calling-all-angels/

[8] https://tech.mn/news/2020/07/29/mind-the-gap-we-need-more-minnesota-angel-investment

[9]https://www.greatermsp.org/clientuploads/Publications/Regional_Indicators_Dashboard_2019.pdf

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