By LAUREN WALKER
Capital News Service
LANSING — A new state tax credit designed to encourage the development of startup companies in one of Michigan’s fastest-growing industries is now available.
Paul Brown, vice president of capital markets at the Michigan Economic Development Corp. said there has been exponential growth in the number of technology startups, but limited access to early-stage capital meant Michigan lost some of them to states with more funding sources.
The Small Business Investment Tax Credit promotes access to capital for early-stage companies by offering a 25 percent personal tax credit on investments in young Michigan-based technology companies.
While the tax credit was modeled after other states’ in the Midwest including Wisconsin, Ohio and Minnesota, it offers less credit to investors, Brown said.
However, he said the appeal for technology seed companies to root themselves in Michigan soil goes beyond the tax credit.
“We don’t need to have a credit that is a higher percentage than other states because we already have a competitive advantage with the large number of incredibly talented engineers, students and the higher education that spends a lot of money on research and development,” he said.
Skip Simms, president of Ann Arbor SPARK, an organization that promotes business expansion, said that the effects of the credit are unknown because of its newness, but ideally the credit will act as a catalyst for releasing more private equity.
He said that the credit encourages potential investors to provide more capital. Those investments will draw the attention of people wanting to grow their business, he said.
Charles Bisgaier, president of ProNAi Therapeutics, said access to capital has been a concern for his pharmaceutical company, which is in the clinical stage. He said that the credit may be the necessary catalyst to attract investments.
ProNAi Therapeutics, in Ann Arbor and Kalamazoo, does research and development of cancer therapeutic agents.
“Any incentive for any businesses which are starting up is valuable,” he said.
“It’s extremely hard to raise money these days. You’re relying on investors who have had profitable investments in the past to reinvest money and the economy has been pretty bad,” he said.
“There haven’t been returns in the investment funds so investors are reluctant to invest,” he said.
ProNAi recently received preliminary qualification for the tax credit program.
The Michigan Strategic Fund can certify up to $9 million in credits and each investor can receive a maximum of $250,000 in credits per year. If each investor received the maximum, 36 investors could receive the credit in one year.
Brown said that 18 investment groups have registered with the Michigan Strategic Fund to receive the credit and more than a half dozen businesses were qualified.
Brown said the response of technology-based startups and investors was expected and that he hopes the entire $9 million will be allocated to companies this year.
“It’s always the first year of any new program — it takes a while to get awareness in the community,” he said.
“I would be very impressed if we were able to use the full $9 million in the first year, and then in years two and three,” he said.
Simms said he believes that the program will serve as a valuable incentive to promote the entrepreneurial culture in Michigan.
Rick O’Connor, chief executive officer of Knowledgewerks in Bloomfield Hills, said that by targeting seed companies, the credit will have positive results for the technology industry.
The company consolidates news from around the world to help businesses make informed decisions.
Knowledgewerks has received preliminary approval for the program.
“The hardest money to get is seed capital. It’s like propagation; one of the basic strategies of it is to be prolific,” he said.
“If I’m a plant, I don’t generate a couple of seeds, I put millions of seeds out there and some of those seeds fall on fertile ground and sprout and take hold and reproduce,” he said.
© 2011, Capital News Service, Michigan State University School of Journalism. Not to be reproduced without permission.
By LAUREN WALKER