Angel investors have been providing that critical early stage capital more and more in recent years in New Mexico and elsewhere. That’s because, since the recession, venture capitalists are more reluctant to fund new businesses that have yet to transverse the “Valley of Death” – a financial ravine where startups need a small amount of capital to further develop and prove their technologies before larger, institutional investors are willing to step in.
There is a huge amount of risk at that stage, so incentives such as New Mexico’s angel tax credit help encourage individual investors to commit their capital, said Lisa Kuuttila, chief economic development officer for the University of New Mexico, and president and CEO of the Science and Technology Corp., UNM’s tech-transfer office.
“The expansion of that tax credit is really good news for us and the local investment community,” Kuuttila said. “Investors take enormous risks when they back startups, so if they can get a modest benefit tax-wise for taking that risk, it helps to balance out the uncertainties for them to commit to new homegrown businesses. This a great way to help grow our ecosystem.”
The Legislature approved the tax-credit expansion during this month’s special legislative session as part of a package of tax breaks to promote economic development and create jobs. Gov. Susana Martinez signed it into law on June 15.
The state enacted the original angel tax credit in 2007. That law allowed individual, accredited investors, or angels, to deduct up to $25,000 on their state income tax each year for investments of up to $100,000 in new technology startups in New Mexico.
Under U.S. Securities and Exchange Commission rules, accredited investors are defined as individuals with a minimum of $1 million in net wealth, or who have earned at least $250,000 annually for the past two years.
The law expired in 2011, leaving investors without the credit during 2012. The Legislature reapproved it the following year, extending it though 2014, but the credit remained capped at $25,000 annually on up to $100,000 in investments.
This year, the Legislature extended the credit through 2025 and it increased the annual cap to $62,500 on up to $250,000 in investments.
In addition, the Legislature modified a number of other limitations in the law. It raised the previous ceiling of $750,000 for all tax credits collectively approved for angels in a given year to $2 million; it increased from two to five the number of credits, or investment deals, that angels can claim rebates on annually; and it increased the time from three to five years that a credit can be carried forward against state income taxes.
The changes are likely to encourage individual investors to commit more money to more deals, said John Chavez, president of the New Mexico Angels, a group of about 70 accredited investors who pool their resources for investments in local startups.
“It raises the cap so an individual investor who likes an opportunity can put in more money and get a bigger credit,” Chavez said. “I’ve spoken with some high-dollar investors who typically do $25,000 to $50,000 deals and now plan to raise the bar to $100,000. And for lower-dollar portfolio investments, many angels might now do five deals instead of two.”
That could mean a significant increase in available funding for local startups, both in the amount of money a new business could potentially raise and in the number of startups that get funded.
The NM Angels – the state’s most active group of accredited investors – is especially likely to take advantage of the tax credit. Members of that organization invested a total of $9.46 million in 51 deals during the past decade, from 2005-2014. And so far in 2015, the group has committed another $600,000 to two more deals, Chavez said.
But they’re not the only investors who will be encouraged by the credit expansion.
“The credit is being used not only by our investors, but also by others doing non-Angel group deals,” Chavez said. “You don’t have to be a member of our organization to get the credit and we’re not the only group in town.”
Indeed, the High Desert Discovery District (HD3) – a Santa Fe-based business accelerator that provides mentoring and professional support to startups around the state – announced this month the formation of its own angel group, the High Desert Angels.
“We believe there’s a lot of untapped wealth in New Mexico,” said HD3 founder and CEO Michelle Miller. “We’ve attracted angels from all over the state and some from outside, so we want to continue to build that network of investment.”
The group’s formation is unrelated to the angel tax credit expansion, but the incentives it offers will encourage more investment in startups, Miller said.
“It will incentivize and motivate potential and existing angels to get more involved in the startup community,” she said. “New Mexico struggles with access to capital, but we do have a lot of angel capacity in the state.”