In 1988, Maine enacted the first state legislation to provide investment tax credits to angel investors.  It was followed in 1993 by North Dakota, in 1996 by Ohio, and in 1998 by Kentucky and Virginia. Twenty-two states, including six since 2005, now provide investment tax credits to angel investors who make investments in newly formed, primarily technology-related companies within their states. What started as a way for states with little technology investment to “catch up” to states like California and Massachusetts is now increasingly seen by a large number of states as a way to develop and encourage major areas of high technology excellence. Like Avis, they are “trying harder”.

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Massachusetts hasn’t had to “try harder”. We have been blessed with an incredible “primordial soup” of outstanding colleges and universities, leading high technology firms, experienced venture capitalists, large pools of capital and, yes, a long history of extraordinary innovation. Massachusetts leads the nation in both college graduates and advanced degree holders. In short, we are the envy of most of the country and the world. Given this, why should we consider enacting an investment tax credit for angel investments?

The answer lies in Tom Friedman’s book title Hot, Flat and Crowded, where he describes the flattening of the world and how easy it is for other countries to rapidly catch up to the US. California and Massachusetts have been the historic leaders in venture capital investment, and their economies have benefited mightily from this investment. Over time, however, Massachusetts’ preeminent position has been challenged, as evidenced by the recent announcement that New York has trumped Massachusetts in tech-related venture investment.  Whether this is a short term aberration or a long term trend is not the point, the fact is that we are increasingly seeing “Silicon Prairies”, Silicon Bayous”, and “Silicon Hills” being set up by folks who are “trying harder”.   We have all seen our Massachusetts share of the pie drop; we can be fatalistic about it and accept it as the way things should be or we can try and do something about it.   The question for Massachusetts is whether we are “Hertz” or “Avis”: should we “try harder”?

All of these state investment tax credit programs for angels have several things in common: They all target newly-formed, technology-related businesses and they all focus on providing incentives to angel investors to make early-stage investments within their states.  They typically have limits on the amount of credit that can be claimed; limits on the amounts available in the program; criteria for qualifying investors, businesses, and time; additional credits for targeted investments; and criteria for when investors can claim the credit.  Essentially, the states are all trying to provide enough incentives to make it worthwhile and meaningful, while at the same time providing limits so as to properly direct or reward particular investment. While some states will credit the entire investment, most states have a 25% to 50% credit up to a specific total amount per company, per investor, or per year. The programs that have been highly successful are typically those that provide significant incentives and minimal restrictions; others, typically those with very modest incentives and significant restrictions, have met with limited success.

Why should Massachusetts provide an investment tax credit for angel investing?  The primary reason is that it is a highly-levered way for the State to encourage technology investment and job growth across the entire technology spectrum.  Angel investment is at the front-end of the venture capital and technology development food chain; a small amount of early stage investment can result in substantially more follow-on investment and jobs.  More angel investing can generate more successful early stage companies which, in turn, can generate more jobs and more successful later stage companies for venture and private equity investors. Right now, demand for seed financing far outstrips supply and we are suffering from a dearth of angel and seed investment. Many VC’s that formerly made early stage investments have moved “upmarket” and have essentially become later stage “growth equity” investors. Without adequate front-end capital, the entire technology chain is at risk and budding entrepreneurs move elsewhere to find capital and our VC’s will ultimately do the same because there aren’t enough exciting early stage companies. Essentially, without a continual flow of early stage opportunities, the entire ecosystem collapses.

The key for Massachusetts is to get the most “bang for its buck”.  Unlike one-shot subsidy programs such as tax credits for movie production that produce short-term jobs, an ITC program aimed at angel investment would have multiple benefits and long-term impact.  The State already invests funds directly into early stage cleantech companies through the Massachusetts Clean Energy Center. This is an excellent program but it is necessarily limited in terms of the dollars and staffing available.  By spreading the investment process out to the angels themselves, the State can have a highly scalable program without the necessity to build up a large internal staff of investment professionals.  The amount of the tax credit is typically a percentage of the actual investment. Thus a tax credit for angels would effectively leverage both the angels’ dollars and their labor.

Enacting an aggressive angel ITC program will allow Massachusetts to dramatically compete with the many other states that have such programs.  We are doing well, but we can do much better!  Other states are aggressively attacking Massachusetts’ privileged position – witness low-tax New Hampshire next door, and the fact that both Rhode Island and Connecticut have enacted investment tax credits for their angel investors. Importantly, unlike many other states, we are starting from relative strength which will let us get far more out of our own ITC program than other states. We already have the technology base and infrastructure to make this program a success. A Massachusetts ITC for angel investing would allow us to maximize that infrastructure and truly accelerate our technology, investment, and job growth for the future.


Bic Stevens

Bis is the principal of Stevens Capital Advisors, a cleantech investment bank, has extensive experience as a venture capitalist and cleantech investment banker, and has been a director of 28 high technology companies.

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