In the summer of 2004, a soon-to-be Harvard dropout named Mark Zuckerberg picked up a $500,000 angel investment from PayPal co-founder Peter Thiel. By the end of that year, Zuckerberg’s social networking site Facebook passed one million users, and the rest is one big wall post of history.
That’s the kind of story tech startups and the angel investors behind them dream about. With the recapitalization of Arizona’s tax credit for angel investments, investors are seeing some progress.
Arizona’s Angel Investor Tax Program was introduced in 2005 on the heels of the social networking boom. The Arizona Legislature initially approved to incentivize investment in early-stage bioscience and technology companies with $20 million in available credits. By 2015, that sum of money had been exhausted and went empty until last year when Gov. Doug Ducey approved H.B. 2191, a plan to pump $2.5 million into it every year until 2021.
Now, new data shows that the tax credit program is paying off, resulting in business and job growth and more than $1 billion in economic output from the 213 small businesses involved in the program.
“The Angel Investor Tax Credit has changed Arizona’s startup culture because it gets investors off of the sideline and more interested in pursuing Arizona ventures, providing capital we’ve lacked in the past,” Arizona Technology Council President and CEO Steven G. Zylstra said. “It has also caused more outside investors to pay attention to Arizona and look into the incredible innovation we have to offer.”
Since the program’s introduction, roughly $420 million in early-stage capital has been raised from companies that benefited from the $20 million in tax credits in the first nine years. The program as a whole has led to a total economic output of $1.3 billion and tax revenue totaling $44 million, according to a 2016 economic impact study from the Arizona Commerce Authority.
The Angel Investor Tax program gives a tax credit of 35 percent over a three-year period for investments related to bioscience and rural businesses, and a 30 percent tax credit for technology businesses. This is partly what’s fueling new tech businesses to open their doors as illustrated in numbers released earlier this year depicting major job growth in technology-related roles and a listing of more than 2,100 tech companies in Arizona as seen on AngelList.
“We do feel that since the credit is effective at accelerating innovation in our state by
attracting additional investment in startups, the resulting growth of our technology sector will attract more established companies here as well,” Zylstra said.
The tax program is still available through 2021 for companies that conduct research, development, manufacturing or marketing for bioscience. They must be engaged in pharmaceuticals, bioinformatics, nutraceuticals, bioengineering, or biomechanics within the fields of homeland security, defense, agriculture, plant or human health, or the environment.
Businesses can be involved in other states, but should be based here in Arizona. Zylstra points out that the Arizona Technology Council will be putting a major focus on re-upping the program during the 2020 legislative session, extending it for 10 more years.