Atlanta Business Chronicle: Tax credits sought for startups, jobs

Tax cuts stimulate economic recovery and job creation, said Rep. Tom Graves, R-Ranger, chief sponsor of legislation that calls for, among other things, the creation of a $10 million annual “angel investor” tax credit pool.

“Some folks believe that you grow government in order to create jobs,” Graves said. “We believe that you grow the private sector to create jobs.”

Under House Bill 1023, early-stage investors would receive an income tax credit of up to 50 percent (capped at $50,000) of an investment made in companies with 20 or fewer employees. The tax credits would be available after two years of investment.

Separate legislation, introduced by Rep. Chuck Martin, R.-Alpharetta, also offers a similar tax credit to angel investors — high-net-worth individuals who typically invest at the earliest and riskiest stage of a company’s growth.

The tax breaks can’t come soon enough. Angel activity has slumped as investors’ portfolios have gotten whiplash from the stock market’s gyrations. A healthy angel community is important for the venture firms and private equity guys higher up the food chain, too.

Unless there is adequate angel investment capital in a region, “you’re not going to have a stable of companies for venture capital to invest in,” Atlanta investor and entrepreneur Tom Noonan said.

“I’m watching it day after day after day — companies that don’t meet venture capital hurdles,” Noonan said. “Great ideas that die on the vine.”

Angel capital, in fact, played a critical role in helping Noonan’s Internet Security Systems Inc. become a software powerhouse that eventually sold to IBM Corp. for about $1.5 billion.

The proposed tax credit, “will help generate energy in [angel investing], ... it will help generate activity in this area,” Noonan said. “At the end of the day, I think, it will help generate jobs.”

Priming the pump
The angel investor tax credit, its champions say, will help create new technology businesses and drive job growth. Priming the financial pump, they hope, will attract new entrepreneurs to set up shop in Georgia and get current startups to grow.

“Companies follow the money,” said Robert Horne, chairman of the Technology Leadership Coalition, which has lobbied for the legislation for three years. “A lot of companies go to Silicon Valley or Austin, in order to get the money there.”

An angel tax credit will make investing in early-stage tech companies more attractive, said Gordon Rogers, president of Atlanta Technology Angels.

“It removes one element of risk,” Rogers said. “Right now people don’t need any more risk factors, they need fewer.”

Angel investors are a critical source of capital for tech companies — as banks become tight-fisted and venture firms grow ever more risk-averse.

“VCs have moved upstream and aren’t looking at a lot of companies that aren’t cash-flow positive, or at least have a year or two of trailing revenues,” Rogers said.

The proposed tax credit could create awareness and “get some [angels] back into the game,” said Tino Mantella, president of the Technology Association of Georgia.

“They’re going to make investments somewhere at some point,” Mantella said. “We want to make it enticing for them to look at [tech startups] as a viable option.”

Not everyone is convinced angel investors will spring open their checkbooks because of a tax credit. Tax breaks aren’t the primary driver for investing in a company, said Stephen Walden, a local angel investor and CEO of Slingshot Product Development Group.

“Angels will first do a deal, only if it makes money,” Walden said.

While the proposed tax break won’t take the risk out of a risky deal, he said, it could make a marginally profitable deal more attractive.

“Our problem in the angel investor world in the last year hasn’t been what to do with the profits,” Walden said. “It’s been a problem of what to do with the risk.”

Economic development
It won’t be easy to sell a $10 million tax credit while the state government grapples with revenues that have dropped nearly 14 percent over last year.

The economic downturn and high unemployment rate might actually help sell the legislation.

“[It] gives us a strong argument as to why we need to limit or reduce taxes on businesses,” Graves said.

Not having an angel tax credit puts Georgia at a competitive disadvantage, Lt. Gov. Casey Cagle said.

Twenty-one states, including North Carolina and Louisiana, offer similar tax incentives to investors.

North Carolina’s tax credit helped generate up to 700 jobs annually between 1999 and 2008, Cagle said. Those jobs paid, on average, more than $58,000.

Georgia cannot afford not to have an angel investor tax credit, Cagle said.

“This is really stepping up Georgia’s game in terms of economic development, specifically for emerging innovations,” the Republican said.

Georgia, through its research institutes, is good at creating new technology companies, Cagle said.

“We have the institutions that are fostering technology opportunities,” he said. “What we have to do is link the investor with the emerging technology.”

Horne is optimistic the angel tax credit will make it into law.

“At long last, the legislators recognize that they’ve got to generate jobs,” Horne said “And jobs are generated by startups. You can’t depend on the big companies to grow the economy out of our problems.”