As business leaders and government agencies process the ramifications of the sweeping $3 billion tax bill passed by the Minnesota legislature this week, startup founders and investors are celebrating the return of the Angel Tax Credit, a program designed to stimulate investments in emerging Minnesota businesses by providing a 25% credit to investors (up to $125,000 per person).

The legislature approved $5 million in credits per year for 2023 and 2024 with half of that funding each year reserved for minority and women-owned businesses as well as businesses based in Greater Minnesota. In 2022, 47% of the investment dollars from the program reached those groups, according to the Minnesota Department of Employment and Economic Development.

“The program has helped level the playing field and reach a broad variety of founders,” said Neela Mollgaard, DEED’s executive director of small business development.

Proponents of the program had hoped for a higher level of state funding this year. By comparison, North Dakota has a $30 million matching program for startups similar to Minnesota’s Angel Tax Credit.

“It’s less than other states, so we should improve on it the next go-around, but it’s nice that it runs for two years so we don’t have to fight for it next year,” said serial entrepreneur Ping Yeh, an advisor to several med tech startups who advocated for the Angel Tax Credit at the state Capitol earlier in the session.

“It’s a classic case of don’t let perfection get in the way of progress,” said Mickayla Rosard, a partner at Groove Capital in Minneapolis, by way of celebrating the bill’s passage—with a few qualifiers. “The governor has high ambitions to really put Minnesota on the map for innovation. We’re also sitting on an historic statewide budget surplus. But when you actually look at our programming, we’re a lagger when it comes to policy and tax incentives to support startups. If Minnesota wants to be a leader in this space, perceptions matter, but policies also matter.”

In 2022, demand far exceeded the $5 million allocated by the state, and angel tax credits were exhausted by May. Funding for the program has not been consistent since its 2010 inception and some years, there’s been no funding at all. Mollgaard acknowledged, “it makes it challenging for investors when we don’t have consistency.”

Groove Investment Group found a 63% decrease in investment activity year-to-date, since the Angel Tax Credit has not been available, compared to the same time frame in 2022 when the Angel Tax Credit was available.

“I appreciate that the legislature was able to get something passed. Yet, it does make it unclear whether Minnesota is committed to driving innovation and economic growth for the state,” said Aimee Garza, founder and CEO of CoraVie, a Minneapolis-based medical device startup that has benefitted from the Angel Tax Credit.

Garza pointed out some sobering statistics: According to statistica.com Minnesota ranked 14th with $2.27 billion of venture capital investments in the U.S. in 2022. In a Crunchbase report, Minnesota ranked 21st with $143 per capita of VC investment. The national average is $300 per capita.

“I get investors telling me all the time that CoraVie should relocate to another state because there is access to more capital and resources to build my business,”  Garza said. “Organizations like Mayo Clinic and Medical Alley are trying to change this and put Minnesota on the radar as a destination for medical technology, innovation, and economic growth.  But we need everyone paddling in the same direction toward the same vision if we’re going to be successful. I want to believe that we can make Minnesota a magnet for investment.”

Overall since 2010, 554 businesses have benefitted from Minnesota’s Angel Tax Credit. In 2022, the program certified 48 startups, which received more than $20 million in investment funding. Last year, 40% of the angel tax credits went to out-of-state investors, which is a good sign, Mollgaard said. “We want to bring in more out of state dollars to help Minnesota businesses grow and succeed.”

The Angel Tax Credit application process for 2023 opens on May 30.