Angel investors get credit

December 11, 2010
| By Pete Daly |
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Gov. Jennifer Granholm is expected to sign new tax credit legislation passed in December that is intended to generate more angel investment in Michigan small business start-ups.

The law is expected to have a positive effect on “angel bands” — organized groups of angel investors across Michigan — in two ways.

“We hope this will encourage our members to invest in more businesses,” said Jody Vanderwel, president of Grand Angels investors based in Holland. “The other positive impact we hope it will have is that we’ll gain some new members.”

The bill on the governor’s desk creates the Small Business Investment Credit, which will allow a Michigan income taxpayer to claim a credit equal to 25 percent of a qualified investment in Michigan-domiciled “seed” or early stage business as defined in the Michigan Early Stage Venture Investment Act. The businesses must be worth less than $10 million prior to the investment, be less than five years old and have fewer than 100 full-time employees.

The investment would have to be made in 2011 or 2013, would have to be at least $15,000 and certified by the Michigan Strategic Fund. According to the Senate Fiscal Agency, the taxpayer would be limited to a maximum credit of $500,000, which must be taken in installments over two years. However, a credit that exceeds the investor’s tax liability can be carried forward for up to 15 years.

Under the law, the total amount of credits the MSF could certify in one year is $10 million.

State Rep. Ellen Lipton, D-Huntington Woods, who sponsored the legislation, said it is “designed to create jobs by helping small businesses located in Michigan secure funding and expand during these difficult economic times when many businesses cannot access the investment capital they need to stay in business.”

The Michigan Early Stage Venture Investment Act is particularly focused on supporting start-ups in alternative energy technology, high-tech manufacturing and the life sciences industry. Granholm called for the tax credit incentive in her last State of the State address, to help “diversify our economy and create jobs.”

Vanderwel said Michigan Economic Development Corp. officials have indicated to the Michigan Venture Capital Association that the law is written to require an individual to make the qualified investment in concert with an angel band.

“Part of the purpose of the state in creating this tax benefit is they want to encourage more people to come out and join angel bands and become limited partners in venture capital firms,” she said, adding that the state sees value in this type of investing, especially if it is done with others who already have expertise in this type of investing.

According to Vanderwel, a supposed tax incentive was passed several years ago to encourage angel investments in small business start-ups. “It was called a credit but never really was a credit, just a delay” of the capital gains tax, she said.

There were other weaknesses in the previous law, according to Vanderwel.

“Unfortunately, the state decided to set the minimum investment limit at $100,000. Angels typically invest anywhere from $15,000 to $25,000 in a deal,” she said.

“Nobody ever took advantage of the capital gains delay, because virtually nobody puts $100,000 in a deal,” she added, explaining further that the idea of angel bands is to allow the investor to diversify an investment in 10 or 15 different “deals.”

Vanderwel said an angel band is different from a venture capital organization in that the angels take a higher risk by investing in an earlier stage of a start-up’s existence.

Grand Angels has lately invested in a new web-based company called Kabongo, which helps pre-school and early elementary children learn reading, writing and problem-solving skills. The Kabongo game software was written by a child psychologist from Ann Arbor, she said. The 10 other start-ups in which Grand Angels has invested range from bioscience companies to Creative Byline, an online marketplace for authors, and Plumstone LLC, which produces innovative products for gardening enthusiasts.

Grand Angels now has 35 members. It was organized in 2004 by former Grand Bank founder and CEO Charles C. Stoddard and entrepreneur Craig T. Hall. Grand Angels is part of the Angel Capital Alliance, an organization sponsored by the Ewing Marion Kauffman Foundation in Kansas City.

According to the Grand Angels website, it is not like other venture capital organizations because it offers mentoring to start-ups and has a “relatively patient exit strategy, meaning invested funds need not be returned as quickly as would be expected by commercial or other investors.”

“We’d love to grow,” said Vanderwel. She said anyone interested in the new Small Business Investment Credit that isn’t part of an angel band should call her at Grand Angels.

Vanderwel also mentioned that that although the organization has its offices in Holland, “we’re really a West Michigan group.”

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