PBJ 11/18/2007

November 18, 2007

Investor Tax Breaks Gets Mixed Reviews

By Mike Sunnucks, Phoenix Business Journal

A state tax break for private equity firms, venture capitalists and individuals investing in Arizona technology startups is getting mixed reviews from the companies it aims to benefit.

The Arizona Angel Investment tax incentive, launched in July 2006, allows the Arizona Department of Commerce to hand out $20 million in tax breaks through 2011 for investments in qualified biomedical, technology and rural startups. The program’s goal is to attract more investment and nurture technology firms in Arizona.

Forty-three startups have qualified to date, with the Commerce Department approving $1.68 million in tax breaks for investors — 8 percent of the $20 million pool. Agency spokesman David Drennon said investments in qualified firms total $7.8 million, which eventually could bring the tax credit total up to $2.5 million.

The state law defining the program keeps the names of the private equity firms and other investors benefiting from it confidential, Drennon said.

A number of the 43 companies that applied and qualified for the program are pleased with it.

“This tax credit is just another incentive to invest with us,” said Aaron Bare, CEO of CareerTours LLC in Scottsdale. Bare said his Web-based employment-services firm is raising $1 million from angel investors, and he believes the majority of those funds will qualify for the state credits.

Others are not as happy with the program, or have yet to see investments resulting from the state investment incentive.

Sean Tierney, chief operating officer of Tempe-based JumpBox Inc., voiced frustration and disappointment with the program. He said the Commerce Department was slow to respond to investor and company inquiries.

“The intention is good, but the execution is terrible,” said Tierney, whose company specializes in software applications.

Kristin Walters, a principal of Digital Kids LLC, said her educational digital media company has not received any investments under the angel program despite being one of the 43 companies approved.

Nest Energy Systems, a solar energy company in Prescott, also has received no state-sanctioned funding since being approved for the program, said Vice President Tom Lederle.

Drennon said the ADOC did not receive funding to staff the new program, but tries to be responsive to applicants and investors. He said the state has received 129 investor applications and approved 91.

Some other companies in the program say they have reaped benefits:

  • Executives at e-learning company Interactive Alchemy Inc. said they recently received a $3 million round of angel investments and believe many of those dollars will qualify for tax credits.
  • Kinetic Muscles investors have received $200,000 worth of state tax credits, said Chief Operating Officer Ed Koeneman.
  • Biotech firm H-Chek Inc. received $75,000 via the program, company officials said.
  • Bill Colone, CEO of Arizona Heart Innovative Technologies LLC, said his Phoenix medical device company has received “almost $1 million” in investments under the program. “I am not sure if the program has helped our business, but it did assist with the fundraising effort,” he said.
  • OpenTech Alliance, a Phoenix IT company, has received $140,000 in investments via the angel incentive. CEO Robert Chiti said meeting the state qualifications gives additional exposure to his company, and legitimacy to potential investors.

Companies must meet financial benchmarks and have operations in Arizona to qualify. Biotech firms cannot qualify if they are involved in embryonic stem-cell research or cloning.

Some businesses approved for the program said it is more appealing to individual investors than to larger private equity and venture capital firms.

Michael Stowell, chief financial officer of Ethix Media LLC, and Michael Weintraub, CEO of Mindset Marketing Solutions, both said the state tax credit is most suited for individual investors. Private equity firms rarely fund Arizona companies.

Stowell said two individual investors qualified for the tax benefit and invested in his software company.

By the Numbers

The Arizona Angel Investment Program offers state tax credits to investors in qualified technology, biotech and rural Arizona startups.

Available investment tax breaks through 2011: $20 million

Qualified companies: 43

Total investments reported: $7.8 million

Tax credits authorized: $1.68 million

Tax break applications from investors: 129

Approved tax break applications: 91

Source: Arizona Department of Commerce

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