A program that provides a tax credit for investors in Minnesota startups is proposed to be revived after it was left unfunded this fiscal year.
Minnesota Gov. Tim Walz last month proposed his recommended budget for the 2024-25 biennium, with expenditures of $65.2 billion – the largest in state history. As part of his proposal, Walz included funding for the angel tax credit program, proposing $10 million per year through fiscal year 2027.
The program provides investors and investment funds with a 25% state income tax credit for their equity contribution into a qualified early-stage Minnesota company, particularly those that are in the technology space or have a proprietary product or service.
The program began in 2010 but was unfunded in 2018 and 2020. Last year, the program was allocated $5 million but ran out of available credits by May. And this year, after an omnibus tax bill was left unapproved in 2022, the program was again left unfunded.
“This has been a really important program for us ... for not only encouraging early-stage small business development, but ultimately having these technology-based businesses continue to be able to grow and expand here in Minnesota,” Department of Employment and Economic Development (DEED) Deputy Commissioner Kevin McKinnon said in an interview.
This leads to additional capital, job creation, facilities investment and more, he said. Since its inception, the program has provided over $100 million in credits, yielding more than half-a-billion dollars raised by certified business, McKinnon said. Prominent Minnesota-based companies to have benefited from the program include Miromatrix Medical Inc. and 4C Medical Technologies Inc.
The program has long been popular among investors and those in the startup ecosystem, with several voicing their continued support for the program.
Mickayla Rosard, partner at pre-seed investment firm Groove Capital and leader of the firm’s angel-investing network, last month testified at the Capitol regarding the tax credit. There, she emphasized the ability to de-risk investments, provide critical early-stage funding and ensure more diverse funding, as certain angel investors, namely women and those of color, are participating to a greater extent.
She also wants to see the program be fully funded. Even at $10 million in 2021, “there was more demand than what there was tax credits,” Rosard said in an interview.
For the first nine months of the year, 50% of the credits are reserved for targeted businesses, which includes those owned by people of color, women or businesses based in Greater Minnesota. Lack of sufficient funding in the program causes such carve-outs to be needed, Rosard added.
In 2021, 83 businesses received investment at a total of $39.5 million. Of those, 16 were women-owned, 14 were minority-owned and six were based in Greater Minnesota.
The program has been criticized by some as providing public funds to wealthy people who would invest without a tax credit, the Business Journal reported in 2019. But while the threshold for becoming accredited as an angel investor is an annual income of at least $200,000, a comfortable salary, it is not inaccessible, Rosard added.
The tax credit allows the state to bet on the growth of several types of companies, and it only takes one to shift the trajectory of the ecosystem, said Frank Jaskulke, vice president of intelligence at Medical Alley Association. The group led the coalition that developed the angel tax credit program, with Jaskulke helping write much of the original language.
“We're at this inflection point where the ecosystem is going to grow faster if we keep up the momentum,” he said.
Businesses in the medical devices and related equipment industry have consistently been at the top for the number of business participating in the program and getting investment, according to DEED.
Medical Alley has worked to ensure permanent funding for the program in the state’s budget, the group said in a statement. In her testimony to the Capitol, Rosard also called for permanent authorization for the program.
The proposal to provide funding through the next few years is intended to provide that stability "so that people can ultimately plan for additional raises, line up investors for future years,” McKinnon said.
Diane Rucker, former executive director and chief executive officer of business incubator University Enterprise Labs, said she first began learning about the angel tax credit a few years ago, when the startups that she worked with had found "incredible benefit” from it.
That prompted her to get into angel investing herself, she said, where individuals can “see (their) money working in Minnesota's economy.”
While proposed, the budget recommendation must still go through the legislative process.
