Did angels really fear to tread here?

MPR's Bob Collins, reporting on the Angel investor tax credit being considered by the Minnesota Legislature, notes the bankruptcy of VitalMedix, a company that announced its intention last May to move to Wisconsin to take advantage of a supposedly more favorable investment climate. It moved in December.

Back in October, when a different firm announced plans to head across the St. Croix, we noted the dodginess of the tax subsidy game.

Meanwhile, another MPR story tells how the federal medical device excise tax will hit Minnesota disproportionately.

Is the grass really greener on the other side of the river? According to the report of the National Venture Capital Association [Download PDF], Minnesota invested $263 million in 23 companies in 2009, versus Wisconsin's $23 million in 9 companies. 

This isn't to say encouraging venture capital investment in the state is bad. But legislators in both parties need to remember that tax breaks aren't the only thing investors consider when they lay their bucks down.

— Charlie Quimby

Comments

[Frank Jaskulke]

Charlie,

Full disclosure: I'm a lobbyist for LifeScience Alley, a supporter of this legislation.

Your use of the NVCA report on venture capital in Minnesota and Wisconsin is the wrong data set. Venture capital and angel capital are different types of money. As Jay Hare of PriceWaterHouseCooper (the firm that produces the data used by the NVCA) indicated at a house hearing, the venture capital report does not track angel investment and thus cannot be used to draw conclusions.

Angel investments tend to be much smaller amounts of investment then venture capital (less then 1 million versues 3 million+) and are made by individuals or small funds, not large institutions that manage large sums of money.

Minnesota does very well in venture capital but is lacking in angel capital. Over time the lack of angel capital will spill over to a reduction of venture capital, which will decrease job creation long term.

VitalMedix is only one of many companies that moved or never started in Minnesota, but were started by Minnesotan's, in other states because of the difficulty of obtaining angel capital in Minnesota.

The grass on the other side of the river is greener in the angel arena. Minnesota still has many reasons to be the number one location for medical device technology startups. The passage of this credit will solidify that and protect against a decline in new company formation.

[Charlie Quimby]

Thanks for the clarification. This post isn't intended to be negative toward the angel credit, but to question assumptions about the relative effects of tax subsidies on business success. The large disparity in venture capital investment between the two states indicates there are other factors in play besides tax policy.

But your point is well taken. You did not include data on angel investment, so here's a link: http://bit.ly/9hluHr. Good data on angel investment is one thing Wisconsin has that Minnesota apparently doesn't. Legislators (and people like me) are suspicious of anecdotal statements about impacts.

That post links to a Star Tribune story that quotes the head of a Minnesota angel investment firm:
"It's not only Wisconsin's tax credits. They seemed to have gone further and set up an environment to help investors and entrepreneurs. We don't have that."

The issue of encouraging investment goes beyond tax credits, and without a strategy that effectively includes the University, investors and industry groups like yours, Minnesota still isn't on the side of the angels.

[Frank Jaskulke]

Charlie,

Thank's for the additional information. You are right on the lack of formal angel data (though I'm lobbyist, my main job in politics is to be a policy wonk, so I'm sensitive to that issue). I wish we had better data and one of our efforts that was running concurrent with the legislative activity is to build structures to track these activites.

We've based our advocacy on antedotal data, but in large numbers. We have around 200 member companies that are startups seeking to raise capital and nearly all of them have indicated it has become harder to raise capital in Minnesota over the last 15 years - even before the recession hit (this bill started way back in 1999).

You are very right that there are other issues at play, and they tend to favor Minnesota. We have more wealth, a larger banking sector, large companies that are training grounds for executive management, ecterea. That is why we targeted something very narrow like angel - the gap in new company formation was primarily in access to very early stage angel capital, not other factors.

As for coordination of activites to encourage investment and developing strategy I would direct readers to The BioBusiness Alliance of Minnesota (www.biobusinessalliance.org). A public private partnership setup by LifeScience Alley to inventory the state's life science community, develop a strategy for future growth and then lead implementation.

They have been very successful at supporting new company expansion and recruitment with little private money or subsidy (they do not provide any money to the company's they work with) by developing linkages with the UofM/MnSCU, Mayo, investors, our association and the local business community.

There is still significant work to be done to craft a new model of economic development that is sustainable and recognizes the proper role of government involvement in the private sector.