Angels Sought for NJ’s Emerging Technologies
Across the state, the biggest pharmaceutical manufacturers have been laying off employees, shuttering facilities and expanding operations elsewhere. At the same time, venture capital for biotechs has remained hard to come by. The double whammy has increasingly left New Jersey, which has long bragged about being the nation’s medicine chest, with the equivalent of empty shelf space.
To plug this yawning hole, a bill that would create a tax credit aimed at so-called angel investors has been re-introduced in the state Senate. The idea is to offer these investors, who are often wealthy individuals looking to provide money to start-up companies, a credit worth 10 percent of whatever investment they would make in an emerging technology business in New Jersey.
“Every time I’m in a room with someone talking about creating or retaining jobs, I hear that we need to cut taxes. But we really need to find a way to get people to invest in businesses,” said Sen. Fred H. Madden (D-Camden, Gloucester), who is the primary sponsor. “If you go down the checklist, a lot of it has to do with money. It’s very expensive to start up companies. My hope is this will give us an edge.”
Typically, angel investors fill the gap between start-up financing that is often provided by the entrepreneur, along with any friends and family, and venture capitalists who look to invest larger sums at a later stage. An angel investor, essentially, provides a bridge that can be a one-time injection of seed money or ongoing support. But the backing provided by angel investors can be substantial.
In 2009, the last year for which figures were available, about 259,500 angels nationally invested $17.6 billion in roughly 57,000 deals, according to the Angel Capital Association. The money rivaled funds provided by venture capitalists, but emphasized the early going -- 35 percent was seed money and 47 percent went to early stage, compared with 9 percent of the venture capital investments.
Total angel investments in the US last year were $22.5 billion, an increase of 12.1 percent over 2010, according to the Center for Venture Research at the University of New Hampshire. Biotech accounted for the fourth-largest share with 13 percent of the total (software garnered the largest amount, followed by healthcare and energy). Overall, 66,230 entrepreneurial ventures received angel funding in 2011, a 7.3 rise from the year before. And there were also more angels -- 318,480, up 20 percent. Moreover, angel investments were credited for creating 165,600 new jobs in the US last year or 2.5 jobs per angel investment.
These may be impressive figures, but whether New Jersey can benefit from an increase in angel funds or even whether the legislation will become reality is far from certain. For one, an angel investor tax credit does not yet appear to be on Gov. Chris Christie’s radar screen, according to a source. Although Christie has previously talked up the need to attract business investment, a Christie spokesman declined to comment on the odds the bill would gain his signature.
Nonetheless, the bill has been greeted with enthusiasm by the local biotech industry, which regularly argues that New Jersey must use every legislative tool available to remain competitive, especially as other states -- notably, neighboring Pennsylvania -- look to grow their own biotech and technology industries by dangling various incentives.
“There are so many stages in the life of a biotech company where funding is critically important and the early stage is so critical and its one of the most challenging, frankly,” says BioNJ president Debbie Hart. Proof of concept and Phase I testing are both early stage steps that angel investments can make a real difference with. “So anything that incites or encourages an investor to fund early stage and gives them an incentive is vitally important for the growth of this industry in the state. It’s one more tool in the tool chest.”
Indeed, 23 states offer some type of angel investor tax credit, according to the Angel Capital Association, including New York, Maryland and North Carolina, all of which are home to biotech and technology companies. And more may be on the way. In Pennsylvania, for instance, a bill was recently re-introduced that would offer angel investors a 25 percent tax credit.
For this reason, though, a 10 percent tax credit does not generate excessive enthusiasm from Mario Casabona, who heads Casabona Venture, a business advisory firm based in Kinellon, and also chairs Jumpstart New Jersey Angel Network, which has about three dozen active investors. In his view, the legislation is certainly welcome, but fails to go far enough.
“Most of the angels in our group really don’t get excited about a 10 percent tax credit,” he says. “What would be more exciting for us is a 20 or 25 percent tax credit. Angel investors truly do early stage, high-risk investments, so the reward has to be commensurate. Getting 10 percent on our state return is OK. Does it go far enough? We don’t think so, but it’s still better than nothing.”
He also suggests modifying the legislation so that residents outside New Jersey are also given incentives, perhaps a rebate, meaning that the state would match or reimburse investors for a portion of their investment. By doing so, Casabona believes the state would quickly widen the pool of interested angels. “Right now, it’s only applicable to individuals paying New Jersey taxes,” he says. “If the bill was expanded to those outside the state, but could invest here, it would be a differentiator.”
There is another issue, though, that has generated criticism of the legislation. The bill would provide a tax credit for angel investment in any company with up to 225 employees, which is a sizeable number and, generally, signifies a much larger workforce than would be found at a typical start up or early stage business.
To some, this suggests the New Jersey bill may be a well intentioned, but misplaced effort. At a time when Trenton is struggling to control its finances, the proposed tax credit appears to cast too wide a net to help genuine start-up companies, according to Julia Sass Rubin, an associate professor at the Edward J. Bloustein School of Planning and Public Policy at Rutgers University.
“That’s a lot of people and it tells me they’re not focusing as much on the companies that are trying to get on their feet,” she says. “If you look at where capital is needed, it’s overwhelmingly in start up. So if you’re a legislator and you want to encourage more companies to start up and create jobs in your state, I would think the first thing you do is look to get seed money on where it’s needed most.”
Rubin also suggests the state consider more than just a tax credit, but look to get a piece of the action. In her view, the legislation should be expanded to require the state to demand a mechanism for obtaining a return on its investment, rather than follow a time-worn model of offering incentives in hopes that jobs and tax revenue will be created later.
“As it now stands, the state gets nothing financially” from the legislation, she says. “If [angel investor tax] credits lead to investments that otherwise would not have occurred, yes, you could argue the state gets the benefit of those investments and the credits given. But the state could get that and more if it pursues a way to also get back some of its money. There should be some skin in the game.”
“The way things stand it’s impossible to tell before or after a credit is offered whether angels would have done the investment anyway. So you could be just blowing money down the hole,” she continues. “You want to build in provisions that discourage people from just taking their money. We have to move away from subsidizing profit-making ventures. Why not demand repayment?”