Fallen Angel: Michigan’s Angel Investment Tax Credit Likely to Die

5/10/11Follow @xconomy

Oh angel investment tax credit! We barely knew ye!

Michigan’s new and improved three year, $27 million angel tax credit, signed into law just last fall by then Gov. Jennifer Granholm, will likely not survive contentious budget negotiations, according to sources close to the state legislature.

Last week, the Michigan House passed a budget that will end the credit this year. If the House prevails, investors and startups will only have about six months to receive a share of the $9 million in credits the program allows for Fiscal 2011.

So far, seven startups have applied for the credit and are expecting investments, according to data from the Michigan Economic Development Corp. (MEDC), which administers the program. The agency is currently reviewing 22 more applications. All told, 32 investment groups have already registered with MEDC.

“It’s unfortunate,” says Chris Moultrup, associate director for Blue Water Angels in Midland, MI. “At a time when we need jobs, it’s kind of discouraging. We viewed the tax credit as a great vehicle to get new investors involved in safer, entry level deals, to take a chance and really invest in Michigan’s future. To see it end without giving it a try is quite discouraging.”

Ending the angel credit puts Republican Gov. Rick Snyder in a tough spot. A former venture capitalist, Snyder largely campaigned on his business experience and ties to investors and entrepreneurs. However, Snyder may have unwittingly put himself in this position.

Earlier this year, Snyder unveiled a budget to close a $2 billion shortfall by cutting spending and fundamentally reforming Michigan’s tax system.

Under his proposals, the state would eliminate a hodgepodge of tax credits, including the popular Michigan Film Credit, in favor of a flat corporate tax of six percent.

Snyder’s budget essentially says this: only a favorable, broad-based tax structure will key an economic recovery versus using tax credits to support so-called special interests. He did, however, recommend $50 million in general fund support for “business retention activities.”

However, the House and Senate proposed cutting the budget even further. Of that $50 million from the general fund, the legislature earmarked only $25 million.

If passed into law, the budget would be a bitter blow to angel groups that have long lobbied the state for the credit.

“We put a lot of time and effort into it,” says Jody VanderWel, president of Grand Angels in Holland, MI. “We finally go there and it might not stick.”

In 2010, angel and pre-seed investments in Michigan totaled $4.9 million, down 42 percent from two years ago, according to the annual report of the Michigan Venture Capital Association.

David Weaver, chair of the Great Lakes Angels, says the credit could be salvaged if investors could show results.

The goal of the credit was to encourage new investors to enter the game and perhaps also encourage the formation of new investor groups. Indeed, of the 32 investment groups registered with the state, several appear to be new, including Burns Park Angels, Swift Angels, and Windy Ridge Angels.

“It created a lot of buzz among the angels,” VanderWel of Grand Angels says. “It created the mindset of wanting to invest.”

The program has also attracted outside investors like DJF Mercury in Texas and Patronus Capital in New Jersey.

Moultrup of Blue Water Angels expects to have 70 members by the end of the year, up from 45.

The credit “really did change the dynamics of angel investment,” he says.

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