Editor’s note: The following commentary appeared on CenterMaryland.org on February 17, 2016.
By Donald C. Fry
When it comes to startup companies and innovation, Maryland has a strong array of promising young stars.
Vasoptic Medical, Inc., which is developing an easy-to-use, portable imaging device to help primary care doctors detect eye damage occurring from diabetes, is just one good example.
Vasoptic, like many young innovative companies, doesn’t lack for strong ideas and drive. But, as is true for many start-ups in an industry sector or market with significant growth opportunity, raising capital to hire great talent, keep the lights on and the dream alive is often a pressing worry – especially in the early going.
“Fundraising is the most critical and time intensive activity we do,” said M. Jason Brooke,the CEO and general counsel for Vasoptic.
When it comes to raising money, such rising young stars often turn to what are commonly referred to as angel investors.
Such investors are typically individuals or families with the financial means that are willing individually, or collectively, to pony up significant cash to get in early on an innovative company that has a product, service or idea with a lot of potential. They serve as a financial life bridge, so to speak, between cash from family and friends to the big time investment of venture capital firms.
Of course, most young companies don’t have a track record of revenue and success, and so these angels shoulder plenty of risk. If a company flames out, the angel’s investment does too. It happens more often than the big success stories.
And so these angels are increasingly looking for incentives or other upsides that might help mitigate risk, Brooke said.
Legislation has been introduced before the Maryland General Assembly to add a new incentive to the mix in the Maryland tax structure.
The proposed legislation, the Angel Investor Tax Credit bill, would provide a nonrefundable tax credit equal to 50 percent of an investment made by a qualified investor in a qualified innovation business.
Under the proposed bill, the credit would be capped at $50,000 for an individual investor and $100,000 for a married couple or small business or “pass-through” entity making the investment. The legislation was introduced last year but the bill regrettably wasn’t passed.
The Greater Baltimore Committee once again strongly supports passage of this legislation as a smart move to improve Maryland’s business climate.
There’s a strong body of research that suggests that new and young businesses contribute disproportionately to job growth nationwide. Indeed innovative young companies are a key to the health of Maryland’s economy, job growth and its attractiveness as a state to locate a business, live and succeed.
One of the upsides of the proposed legislation is that the tax credit would not be limited to any one industry. This will allow flexibility so the credit can be available no matter what the changing innovations are and thus ensure hot new companies get the support they need.
A number of other states have put angel investor tax credits in place. In fact, 29 states have passed similar legislation. Of those, 22 saw an increase in entrepreneurial activity within the first two years of the program, according to a study published in the Small Business Institute Journal.
Conducted by researchers at the University of Arkansas at Little Rock, the study found that preliminary research suggests “angel investor tax credits do provide an incentive to increase early stage investment in high growth potential new ventures …”
This in turn, the authors wrote, should lead to higher paying knowledge-based jobs and ultimately an increase in tax revenue.
If the study authors are right, Maryland stands to gain in job growth and tax revenue in the long term by passage of this legislation.
Kelly Keenan Trumpbour sits on the board of the Baltimore Angels, an angel investor group that funds innovative young companies in the state and elsewhere.
She notes that angel investors today are very strategic about where they’ll put their money – not just in terms of the type of companies they invest in, but the location of the company as well.
Such investors are not only looking for young companies with big potential, but ways they can minimize or spread the significant risk they are taking.
The proposed tax credit, Trumpbour notes, could serve to recruit new angels to invest in Maryland companies and spur additional dollar investments from angel investors already active in the state.
To underscore the point, an Angel Investor Tax Credit is an important step for Maryland to strengthen its “start-up eco-system,” Trumpbour said.
Vasoptic’s Brooke also believes a tax credit would be a “significant factor” to spur angel investors to put more dollars behind young Maryland companies.
While Silicon Valley and Boston have reputations as hotbeds for angel investor activity, places like Wisconsin, Minnesota and Kentucky are seeing strong growth in entrepreneurial activity thanks to angel tax credits they’ve enacted, Trumpbour said. Maryland could too, she believes.
The bottom line: an Angel Investor Tax Credit has strong potential to draw more angels to Maryland, open up investing in young companies, and spur start-up activity and jobs. And let’s not forget some of the young companies backed by angel investors will one day become solid success stories with long-term futures.
And so Maryland needs to get in the game with the other states that understand and appreciate what a vital role angel investors have in the economy. Let’s give these angels the credit they are due.
Donald C. Fry is the President and CEO of the Greater Baltimore Committee. He is a frequent contributor to Center Maryland.