Wednesday, March 25, 2015

Job Creation, Angels and Entrepreneurs

We know from US Census data that newly formed businesses are the prime job creators in the US Economy.  The Kaufman Foundation recently released a new study that confirms this fact (“The Importance of Young Firms for Economic Growth,” Kauffman Foundation Entrepreneurship Policy Digest, September 25, 2014).  They concluded “New businesses account for nearly all net new job creation…”  Read the report here.

Here are the data.  The blue line is the net job creation by young firms.  The red and yellow lines are net job creation by companies six years old and older. At best, the net new job creation by older companies is zero, and in some years, less than zero.

The implication of these data is that one of the most important steps a community interested in economic growth can take is to create a robust entrepreneurial ecosystem.  One facet of that ecosystem is the availability of risk capital for early-stage growth businesses.  Angels typically provide that capital.

Some Boise angels have been investing together for nearly eight years through “angel funds.”  Angel funds are companies formed for the specific purpose of making early-stage investments.  Three have been formed in the Treasure Valley.  Collectively they have invested $2 million in 20 local companies.

One measure of impact is job creation.  As of December 31, 2014 these 20 companies have created 330 jobs since we made our investments.  This is a significant positive impact on our economy. If, for example, the jobs created averaged only $30,000 per year (I suspect, but don’t know that it is much higher), that’s an annual impact in the Treasure Valley of nearly $10 million, not counting multiplier effects. 

Also important are the sales of these companies.  In 2014 the total sales of all companies in the portfolios was approximately $185 million. 

Improving the entrepreneurial ecosystem is not a quick fix.  It takes time to have an impact. Here’s a table of the jobs created by these companies:

Year    Cumulative
            Jobs Created

2010               25
2011               66
2012               109
2013               208
2014               330                       

It's clear to me.  If you want to create more jobs, increase the number of start-ups.  One roadblock to doing this is capital.  We don't have enough early-stage capital in Idaho.  

A number of dedicated folks are working to increase the capital available. Jessica Whiting of Startup Grind arranged for Scott Kupor, Managing Partner of renowned Silicon Valley venture capital firm Andreesson Horowitz to come to Boise in early March, 2015.  Brad Bertoch, CEO of Salt Lake-based Wayne Brown Institute has brought its programs to Idaho to help connect Idaho companies to Utah angels and venture capitalists.  And the Idaho Technology Council has had an initiative almost since its founding to increase investment capital in the state.

While all these efforts are good and much appreciated, there is a simple public policy step that would directly impact the availability of startup capital. That step is to give a state income tax credit for equity investments in startup companies. At least 18 states and all of Canada does so.

For example, "Minnesota's Angel Tax Credit provides a 25-percent credit to investors or investment funds that put money into startup companies focused on high technology, new proprietary technology, or a new proprietary product, process or service in specified fields. The maximum credit is $125,000 per person, per year ($250,000 if filing jointly). The credit is refundable. Residents of other states and foreign countries are eligible.” (Quoted from their web site.)

How does an angel tax credit work? It’s simple. An angel makes an equity investment in a startup and receives a reduction in his or her state income taxes equal to some percentage of the investment. In Minnesota’s case, it’s a 25% credit. Minnesota is so committed to this, the tax credit is refundable. That is, an investor with no Minnesota tax due can get a refund equal to 25% of his or her investment, subject to the maximums. This means if I invest $100,000 into a qualifying Minnesota company, the state of Minnesota will send me a check for $25,000. The practical effect is I receive a $100,000 interest in the Minnesota company for a net $75,000 investment.

What do the taxpayers of Minnesota get out of this? They get a more robust startup economy, which will increase jobs, provide opportunity to its citizens, and ultimately increase taxes paid by those companies and their employees to the state of Minnesota.

An angel investment tax credit is an elegantly simple means of stimulating investment in our Idaho companies. The free market makes the investment decision. His or her tax savings increases the investor’s available capital. The company gets the investment. Our citizens get the jobs. Our state gets the tax revenue once the company begins to grow.

The Idaho legislature has flirted with this over the last few years.  I hope next year they will enact some type of credit that will favorably impact the availability of capital to our state's entrepreneurs.

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