iBIO News

Back to Article list

Illinois Tax Break Puts Startups in Arms of the Angels

January 09, 2012

Entrepreneurs and angel investors are flocking to a new tax break aimed at stoking investment in startups.

Nineteen companies have used the credits to help raise $8.7 million since the law took effect a year ago. Nearly 60 companies that hope to raise money have qualified for the credit, which their investors can use to reduce their individual income taxes.

Entrepreneurs say the credit, worth up to 25% of an individual's investment, is helping them raise money. It's also leveling the playing field for startups in Illinois compared with rival states, such as Wisconsin and Indiana, which long have had such programs.

“It pushed some people who were on the fence into making the investment, and it allowed some people to invest a little more,” says Andrew Cittadine, CEO of Chicago-based Diagnostic Photonics Inc., a medical-technology spinoff from the University of Illinois that has raised $1.3 million. “Without (the credit), we might have just raised a little less or it might have taken a little longer. That last hundred thousand makes a difference in the life of a startup.”

The tax break comes as “angels,” or individual investors, are playing an ever-bigger role alongside traditional venture funds, says Bill Gantz, a veteran biotech executive who runs PathoCapital LLC, a Northbrook personal investment fund. While angel funding is hard to track, the formation of new groups such as Wildcat Angels, Hyde Park Venture Partners and Firestarters Fund is a clear indication that it's on the rise in Chicago.

The angel credit is seen as one of the few friendly moves by a state that's been attacked as hostile to business since it raised income taxes 66% last year.

“It makes you competitive, and you're seen as an investor-friendly state,” says Ron Kirschner, president of Skokie-based Heartland Angels Inc., which made two investments last year that qualified for the credit.

'WE NEEDED IT'

Two dozen other states have tax-credit programs, says David Miller, CEO of iBIO, an Illinois life-sciences trade group, which pushed for the credit. “We needed it,” he says.

Still, Illinois has some catching up to do. It's offering about $10 million a year in tax breaks, compared with $20 million in Wisconsin and $12.5 million in Indiana. Since Indiana launched its program in 2004, 250 companies there have raised $166 million.

And Illinois will have to do more to make entrepreneurs aware of the credit. While $10 million was available last year, just $2 million was doled out to investors.

“We didn't really start registering companies until May,” says Warren Ribley, director of the Illinois Department of Commerce and Economic Opportunity, which administers the program. “It exceeded our expectations. My concern in 2012 is whether we'll run out of credits.”

The program is aimed at companies developing new technologies in industries ranging from life sciences and software to manufacturing. Of the 58 companies that have qualified, 21 are in biotech or health care and 15 are in software. Most are in the Chicago area.

The tax credit is a sweet deal for investors, who must be Illinois residents and hold the investments for three years. On a $100,000 investment, an investor receives $25,000 in tax breaks that can be used over five years.

“It's not the reason to make an investment, but it limits your downside (risk),” says John Flavin, managing director of Woodridge-based investment firm Flavin Ventures LLC.

GETTING DEALS DONE

Investors pushed to complete some deals by yearend to qualify for the credit this year, says Ira Weiss, a professor at the University of Chicago's Booth School of Business and an angel investor in Hyde Park Angels. He also launched Hyde Park Venture Partners, a $25-million fund.

Guy Turner, a partner at Hyde Park Venture Partners and an investor in Hyde Park Angels, says the credit prompted some investors in a recent deal to put up $15,000 instead of $10,000. “The impact is real.” Click Here to read article on Crains Chicago Business