Tax credit spurs business investment

The Minn. “angel” tax credit offers a tax break to small business investors.

by James Nord

Before Ph.D. student Kin-Joe Sham graduated from the University of Minnesota in 2009, he had already co-founded a medical device company. Now, OrthoCor Medical is the first of at least six companies eligible for the state’s “angel” tax credit, which went into effect July 19.

The credit allows investors in eligible Minnesota-based, high-tech companies to receive a 25 percent income tax break of up to $125,000 per investor. More than $50 million in credits is available in yearly segments until the law expires, and $11 million can be claimed in 2010 alone.

At least 35 companies have already applied, and the Minnesota Department of Employment and Economic Development expects to disburse all the credits, spokeswoman Kirsten Morell said.

John Dinusson, OrthoCor’s CEO and president, said he has been following the tax break for several years and immediately applied when it became available.

“My investors are thrilled,” he said. “If you put $100,000 into my company, you get $25,000 back at the end of the year if you qualify.”

The company is in the middle of fundraising and has several interested investors, he said.

Individual venture capitalists must provide at least $10,000 and investor pools must finance at least $30,000 to be eligible for the credit.

OrthoCor’s product, a brace designed to reduce knee pain, was perfected almost entirely by a University engineering class beginning in 2007. It’s slated to be released in the fall.

Sham requested to be a part of the project while working toward his electrical engineering Ph.D. because he didn’t want to work for a large company, he said. OrthoCor’s initial investor eventually requested Sham’s help co-founding the company.

For the past two years, Sham has been running the company’s internal operations and readying the brace for its eventual FDA approval, he said.

The credit is designed to persuade companies like OrthoCor to remain in Minnesota by offering an incentive to attract investors during initial development stages when small businesses are most vulnerable, said Sen. Kathy Saltzman, DFL-Woodbury, who co-authored the tax credit.

In the 2009 Small Business Survival Index, a list compiled by the Small Business & Entrepreneurship Council, Minnesota ranked 43rd in terms of “friendliness” toward entrepreneurs.

The University’s troubles

University administrators have also joined the ranks of legislators like Rep. Tim Mahoney, DFL-St. Paul, who are excited by the prospect of increased business investment.

“I’m god-awful ecstatic about it,” Mahoney said. “I think it’s fabulous.”

For instance, the credit will aid the University’s Office for Technology Commercialization significantly, Vice President for Research Tim Mulcahy said.

The OTC evaluates research submitted by University professors and decides whether the ideas can be marketed commercially. It also considers whether a technology is “transformative” enough to form the basis of a company, or if it should simply be licensed to an existing firm.

But excitement over the positive economic prospects the tax credit could affect didn’t stop Mahoney from criticizing the University’s progress in producing commercially viable technology.

The processes involved in licensing technology or spinning off a company are too complicated, and the University is too risk-averse when examining technology to base a business on, Mahoney said.

As a result, he said, the University is not starting enough new companies.

From fiscal year 2008 to fiscal year 2009, the OTC produced three startups and 11 companies prominently used University technologies, according to an OTC report.

Mahoney said he expects a “reasonable number” of startups each year.

“I think we’re doing the right thing,” he said. “Could we do it better? Yes. Are we going to do it better? Are we striving to do it better? Yes, but I don’t think you throw the baby out with the bath water is the bottom line here.”

Ideally, he said the University would produce two to three startups each year.

Companies are screened extensively to protect limited University assets, he said.

Other fundamental factors are ultimately used to measure potential investor interest, such as whether the technology can be patented or if there is significant competition in the market, Doug Johnson, director of the Venture Center in the OTC, said.

The University has limited resources to put into startup companies, Mulcahy said.

“Before you make that kind of investment, you want to be darn sure that your evaluation of its potential is reasonable.”

To fix the perceived situation, Mahoney said there are a number of options he’s considering

“Hell, I’d even look at privatizing [the OTC],” he said, although it’s too early to know anything for certain.

As long as the University takes more risks and learns from its mistakes, it’s the Legislature’s duty to “not beat the living snot out of them,” he said.

Mahoney and Mulcahy, who have worked together in the past, originally had an argument over the OTC’s progress via MedCity News ,an Internet news publication.

Although they eventually made amends, arguments like this could be headed off by a piece of legislation passed shortly after the tax credit, which created the Minnesota Science and Technology Authority, Saltzman said.

Like the investment credit, the Authority was created to increase the number of technology jobs in the state.

An advisory committee (of which Mulcahy is a part), would also meet and discuss the role of technology in the state’s economy, Saltzman said.

“We have all the players at the table,” she said, “and instead of pointing fingers, we want to point to the future.”