After failing to enact a 35 percent tax credit for “angel” investments in startups, a state agency is proposing Connecticut create a bifurcated incentive allowing investors to take a 25 percent tax credit up front for such investments, and a second tax credit later to cover any losses they may incur.
As part of its 20-year strategic plan for the state of Connecticut issued last month, the Department of Economic and Community Development proposed the tax credits along with myriad others to promote the formation of fast-growth technology companies.
Separately, DECD wants the state to create a panel to evaluate Connecticut”™s overall tax structure, including the costs and benefits of all tax credits currently in effect and whether such credits are effective in spurring growth in targeted sectors.
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The tax credits would allow investors to claim a tax credit of up to 25 percent of their investment in a qualified startup, as well as tax credits covering an unspecified portion of any losses those startups may produce for those investors over a three-year period.
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The goal of the latter incentive is to encourage investment in the riskiest endeavors that might produce the biggest reward: a company that creates a new market via a blockbuster product, and so becoming a fast-growth employer in Connecticut.
The initiative is born of the belief that an active angel investment community is an integral piece of successful high-tech corridors nationwide, along with a strong, focused university base; early-stage venture capital; research parks and startup incubators; and long-term development efforts.
The recession has had an impact on angel group investments, according to a survey last spring by the Angel Capital Association, as investors saw their wealth evaporate amid extreme market uncertainty.
Angel groups amped up investments in existing portfolio companies to help them ride out the recession, but their appetite ebbed for new deals. When they did go in on a deal, they sought out co-investors more often than before, even as the quantity and quality of opportunities increased ”“ presumably due to layoffs at corporations that gave talented people an unsought opportunity to create their own business.
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In hard times there are more of these people available, notes Matthew Nemerson, president of the Connecticut Technology Council. Couple that with Fairfield County”™s large numbers of sophisticated corporations, wealthy investors and professional services firms that can assist startups, and the region is well positioned to benefit from an aggressive angel tax credit program, according to Nemerson.
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Connecticut has several existing angel groups, loose affiliations of investors that trade information on prospect startups and consider syndicating on investments. Those groups include the Fairfield-based Connecticut Angel Guild; Landmark Angels in Greenwich; Golden Seeds L.L.C., which lists a local presence in Cos Cob; and the Angel Investor Forum in East Hartford.
By comparison, however, Massachusetts has more than 50 such groups, according to Nemerson.
As of 2008, Massachusetts was one of 20 states that made tax credits available for angel investors, ranging from the skimpy 10 percent incentive offered in New Jersey to Hawaii”™s eye-popping 100 percent tax credit, which has a $2 million cap annually.
The most visible evidence of a recent tax credit creating an industry overnight is a 2006 law that created a 30 percent tax credit for the cost of producing films, TV programs and digital media in Connecticut, with Hollywood productions descending on the state over the next few years. Critics carped that the program was a drain on the budget; proponents argued that was a necessary sacrifice in the early years as infrastructure is created to accommodate productions that might otherwise stay in New York City or elsewhere.
