The uncertain future of a state angel tax credit threatens to undermine entrepreneurial activity in the commonwealth, which already has declined in the last few years, business insiders say.
A local venture capitalist said the credit was critical to attracting investments in startups, and a state official said the credit had pumped millions of dollars of out-of-state investments. But the program’s popularity will provoke its own demise, at least without government intervention, which, a state legislator who supports the credit said, is uncertain, in part because of Gov. Matt Bevin’s call for changes to the tax code.
The Kentucky Angel Investment Act Program allows investors to offset their state income tax bill with at least 40 percent of their investment into startups in certain sectors, including bioscience, energy technology and health.
For example, if a Louisville-based venture capitalist owes state income taxes of $100,000, he can nullify that bill by investing $250,000 into a startup.
Marty McClelland, a Louisville venture capitalist and president of Regent Investment Management, said the credit, first made available three years ago, had made investments in Kentucky startups much more compelling.
Before the credit, Kentucky venture capitalists faced tying up their investments in high-risk ventures with an expectation of a single-digit return, McClelland said. In that scenario, it’s smarter to invest in the stock market, which is less risky, can produce a comparable return and gives the investor much easier access to the capital.
However, McClelland said, the tax credit, which the state has capped at $3 million total per year, pushes the potential return on a startup investment into double digits. Coupled with the intangible benefit of being able to help the local community, the credit makes investments in local startups more compelling, he said.
“It changes the economics of investing in a Kentucky small business,” McClelland said.
He said he understand when people ask why “rich dudes” get tax credits, but it comes down to economics: Without the credit, investors will take their money elsewhere, which hurts Kentucky entrepreneurs and communities because it reduces economic activity.
“Nobody’s getting rich from these kinds of investments that I know of,” he said.
Sean O’Leary, a local entrepreneur and investor, said the credit had helped him get funds for a business — and also had prompted him to make investments.
O’Leary, chief executive of Edj Analytics, said when he sought funding for the venture last year, the tax credit helped him obtain funding more quickly.
“Raising capital is extremely time consuming,” he said.
Startups inherently do not have enough staff or time to devote to raising funds, he said, and getting cash for Edj Analytics in a short period allowed him as an entrepreneur to get back to what he does best: executing a business plan.
The credit also has made investing in Kentucky startups interesting for venture capitalists who live outside of the state, because they can sell their credit…