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Tuesday, March 22, 2011

Misguided Nebraska Senators question angel tax credit benefit due to business risk

The legislative debate over the Nebraska Angel tax credit is instructive for Alabama because we will probably have some of these same issues raised when the (hopefully soon to be introduced) Alabama angel tax credit is debated.

Nebraska Senators question 'Angel' tax benefit -
Lincoln Sen. Danielle Conrad, who led a legislative study last year on how to improve the “economic ecosystem” for entrepreneurs, said Nebraska has done well attracting larger businesses but needs to be just as aggressive helping innovators capitalize on a good idea or a new invention.

But Schuyler Sen. Chris Langemeier questioned whether the state should spend $3 million on such tax benefits when it is cutting spending elsewhere.

He called LB 389 “a slot machine.” Research shows that up to 75 percent of such projects fail.

“I’m not against this. I just don’t think today is the day to make this investment,” said Langemeier, who drafted an amendment to kill the bill.

Senator Langmeier is probably a very smart and hardworking individual, but his comments are laughable.  There are no doubt risks for the success of an angel investor tax credit, but the good Senator is missing them.  Calling an angel tax credit proposal a "slot machine" simply because many small businesses eventually fail completely misses the point...and the point IS that 25% of them succeed (by his statistics).  Of those succeeding, some are also going to succeed in a large way and that is exactly what makes the entire process profitable for entrepreneurs, investors and the State.   If the Senator's reasoning were followed then no one should ever start a new business.

Nonetheless, to a certain extent he is exactly right, because the law of large numbers is critical to angel investing just as in casinos*...only he has the parties wrong because in an angel tax credit the State is playing the role of casino, not player.  *(meaning, like individual bets, it takes investment in a lot of individual companies to normalize the overall portfolio return) In fact, based on some table napkin math, the State stands to create a tremendous capital multiplier by increasing the creation of high growth startups (see prior posts).   The only real limitation on the upside is the State's ability to keep supplying potential investors with high quality candidate companies able to appropriately use investment capital and that is a risk worth talking about and trying to mitigate, but that is for another post.

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