Minnesota start-ups have new tool to lure capital: the angel tax credit Raising cash to fuel a start-up business is always a challenge — one that became next to impossible during an economic downturn. With the economy in a slow rebound, there's no shortage of young businesses looking for investors. The latest tool Minnesota start-ups have to lure capital is a tax credit for angel investors — typically high net-worth individuals who roll the dice and put money into companies trying to get off the ground. In the program's first year in 2010, 67 companies raised a total of $28 million using the tax credit. It's a modest sum even compared with the ever-thinner slice of U.S. venture capital that finds its way to Minnesota. But for entrepreneurs at businesses that have barely cleared the launch pad, the credit can help enhance the sales pitch to investors. One company that got a boost from the angel credit is Minneapolis-based Spyeworks LLC, which develops software for digital signage on flat-screen TVs. One of Spyeworks' first clients is the Amplatz Children's Hospital in Minneapolis, set to open later this month. Spyeworks software powers the content displayed for visitors on screens in a commons area at the hospital. Larger companies trying to move into the digital signage business "all want Wendy's or McDonalds to buy 5,000 screens," said Paul Krumrich, Spyeworks' president. "People are going after the huge installations." But fewer companies seek out the chains, small banks or auto dealerships with 5 to 10 locations, Krumrich said. The smaller businesses are the ones he's targeting. Krumrich tapped investors wherever he could find them, including a well-to-do relative and CEOs, some of whom run businesses in fields related to Spyeworks' niche. "They understood enough to feel comfortable with the business model," Krumrich said. "And the tax credit was huge." In 2010, Spyeworks raised $500,000 through the program, and investors received $125,000 in tax credits. Those totals put Spyeworks somewhere in the middle of the pack among the 67 Minnesota companies that raised money using the tax credit. The tax credit "brings people to the game. That's the most important thing," said Steve Mercil, CEO of Rain Source Capital, a St. Paul-based firm that runs angel investor funds and helps connect new companies and investors. Data on venture capital invested in Minnesota by the PriceWaterhouseCoopers Money Tree Survey showed that $140 million flowed to firms last year — the lowest level recorded since Money Tree started measuring it 15 years ago. That was down 48 percent from 2009's total of $266.2 million and down 71 percent from 2008's $479 million. Venture capital typically flows to companies that are further along in development. Money for companies still trying to open their doors is even harder to find. The venture capital firms "can't afford to take the risks they used to," Mercil said. "That's why states have been driven to offer credits (to angels) — because the gap has gotten bigger." The recession is the primary culprit, he said, along with the resulting drop in individual net worth. Two thirds of U.S. residents saw their net worth reduced during the recession, with a median decline of 18 percent, according to a recent U.S. Federal Reserve study. Past studies have shown wealthy "angels" are willing to "play" with about 2 to 5 percent of their net worth. So while investors aren't feeling as flush post-recession, the tax credit "helps create an audience for us," Mercil said. At least 21 states have similar angel tax credit programs, many offering the same 25 percent tax credit. Most states did put the credits in place for a limited period of time — Minnesota's program is set to run through 2014. As 2010 came to a close, the first year of the tax credit was marked by a flurry of investor activity, said Bob Isaacson, director of JOBZ and the business finance office at the state's Department of Employment and Economic Development. "I was surprised how much activity occurred in December," he said. Half or more of the $7 million the state gave out in tax credits was processed in December. "People probably looked at their tax bills" and decided tapping the angel credit would be a good idea, he said. While the state had $11 million worth of tax credits to give out in 2010, the $7 million figure means $4 million was rolled over into 2011. But Isaacson says 2011 is off to a stronger start than 2010, and he thinks investors will use the full tax credit amount available. State data show companies that benefited from the angel tax credit produced just 47 jobs last year, or $149,000 in tax credit per job. But Isaacson said that's the wrong number to be looking at for start-ups. In the early stages of raising cash and developing a business, "the first thing they're not going to do is hiring," he said. "I'd do research and development." Investors are looking several years down the road when they invest in such young companies, he said, and job creation should be viewed the same way. The angel tax credit made a difference for Tom Henke, president and CEO of QuickCheck Health. The Excelsior-based company uses technology to allow people to test for certain medical conditions remotely, without leaving home. A small handheld device allows the user to self-test for strep throat, for example, or other conditions. The device then generates a code the user sends to QuickCheck, either online or by phone. The testing technology has been around for years, but "our real secret sauce is the code process," Henke said. "It proves to the remote clinician that there was a positive or negative result. They're not trusting the user's word." If the result is positive, the user can talk to a clinician about whether a prescription is appropriate. The biggest opportunity for the business, Henke says, is in rural areas where people might have to drive 30 miles to see a doctor. There are tests for about 17 conditions that can be commercialized, Henke said, including cholesterol, mononucleosis and ulcers. The first product launch is tentatively set for later this year with a test for urinary tract infections. With a goal of raising $2 million, QuickCheck has pulled in more than $800,000, $100,000 of which was raised through the angel tax credit last year. "People are telling me that's very good," Henke said. Source: twincities.com << Back Author: John Welbes

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