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A Federal Tax Credit for Startup Investors

While Washington wrestles with a jobs bill and a bill to nurture small businesses with tax credits, hiring incentives, and the like, it is neglecting to address the fundamental engine for economic growth: private investment in early-stage companies with big potential.

I propose that the federal government tag along on the tax incentive programs already in place in 30 states meant to stimulate this kind of investment. These programs' purpose is to encourage the development of high-growth business, create jobs, and ultimately return greater tax revenues to the states. The federal version would do the same but increase the scale.

There are 225,000 angel and seed-capital investors in this country, according to Angel Capital Assn. They, not government, will drive the creation of innovative industries that need capital before revenue and certainly before profitability. No bank will lend to these pioneering entrepreneurs, no proposed tax-credit program will help them, as these early-stage companies have losses on the bottom line and no profitability on which to take the small business incentives now proposed.

In my experience during the first decade running the nonprofit venture catalyst group Springboard Enterprises, angel and seed investors were critical to the success of our 407 companies. Without those investors who took a risk, I don't know how much of our companies' $4 billion-plus in revenue or how many of their 10,000 jobs would have been created.

Not Enough of a Boost

Don't get me wrong. I am not disparaging the recent initiatives to stimulate small businesses by providing credit through community banks or plans to lessen their tax burden, leaving them with more capital for growth. In fact, I support them, but I believe they are too little, and unfortunately for the tens of thousands who have had to shut their doors, too late.

We need a different solution for a different type of small business. My vision of the federal tag-along version doesn't require a burdensome federal program to administer. It can simply match the state programs dollar for dollar without creating a new program. It would amount to a public/private partnership with limited risk to public funds.

The book does not have to be rewritten to accomplish this. In February 2008, The National Governors Assn. published a report entitled "State Strategies to Promote Angel Investment for Economic Growth." While the report does highlight the need for standards for qualifying investments and measuring results of granting tax credits to angels, it concludes that "the benefits of supporting and encouraging angel investing can be great."

Template for Success

There is other evidence that state tax incentives for angel investing can be productive but must be well-designed, clear, targeted, and well-monitored. The National Association of Seed & Venture Funds published a report in May 2006 titled "Seed and Venture Capital State Experiences and Options" that offers a guideline for state tax incentive programs. It includes a suggested template for successful state programs, which should have the following characteristics: Tax credits should be 1) financially fair to the state; 2) sizable enough to be effective; and 3) managed at the discretion of experienced professionals in the private sector.

A July 2008 research report by Belmont University's Jeffrey Williams examined early adopters of tax incentive programs in four states and concluded that investor incentives stimulated business development important to each state.

Wisconsin, which initiated its tax credit program in 2003, was one of the states profiled in the report, and its execution and success is worth noting. The program works like this: Wisconsin's Commerce Dept. qualifies companies that can participate; investors in those companies then receive their tax credits as a pass-through from the companies. This is Wisconsin's way of allowing angel investors to remain anonymous to public records. The state's private-sector partner, Wisconsin Angel Network, provides education and deal flow and measures results. Angel early-stage investments rose from a little more than $1.7 million invested in 11 companies in 2003 to $15 million invested in 53 companies in 2008. Wisconsin is so encouraged that it has more than tripled its pool of tax credits starting in 2011.

Let's not reinvent the wheel here. Let's implement a tag-along federal tax program that stimulates growth, provides private risk capital for early-stage companies, and creates jobs and the skilled workforce this country needs.

Our future depends on it.

Kay Koplovitz is founder of USA Network and is currently chairman and CEO of Koplovitz & Co. and co-founder and chairman of Springboard Enterprises.

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