A couple of weeks ago, the National Advisory Council on Innovation and Entrepreneurship, a council of entrepreneurs, innovators, investors, university and economic development leaders that provides policy recommendations to the White House and the Secretary of Commerce, released a report with eight specific recommendations for improving access to capital for high growth companies.
Young high potential companies need funds to create and fill jobs. And it's the nation's fastest growing young companies that create a disproportionate number of our nation's jobs. In fact, the top-performing 1 percent of young firms generate roughly 40 percent of new jobs. If the Obama administration and Congress agreed to these recommendations, it would create lots of jobs across the U.S.
Here are just a few of the recommendations from the report, two of which I've personally seen work in Greater Cleveland:
1) A 30 percent refundable tax credit for members of accredited angel groups for investments in U.S.-based startups. This credit would be refunded in the first fiscal year the investment is made.
We have a similar program in Ohio. Called Ohio's Technology Investment Tax Credit, it gives the state's individual investors a tax credit of 25 to 30 percent the amount they invest in Ohio's technology-based startups which have qualified with the state.
I've seen its benefits first hand. Steve Spoonamore is CEO of ABSMaterials, a company selling a swelling glass that absorbs toxins in water. He says this program helped him raise a $2.4 million Series A investment round, which included money from several individual angel investors. "There are always people willing to step into the 'Valley of Death,' but you increase that pool with things like the Ohio tax credit. It's been critical."
Steve is just one of nearly 600 tech-based Ohio startups that have attracted $146 million from angel investors since the state's tax credit program started in 1996. These investments helped companies hire talent, purchase equipment, and pay for development activities. And, as the companies made progress, the angel investors received an immediate return on their investments -- $36 million in the form of tax credits.
Encouraging angel investment is not only good conceptually, but there's precedence for its ability to increase funding for innovative companies. In British Columbia, where a similar program was instituted, 80 percent of angel investors who received the credits increased the amount of their investments. Ultimately the program also benefited taxpayers, with every $1 of angel tax credits resulting in $1.41 of additional tax revenue from the recipient companies.2) 100 percent exclusion on corporate income tax for qualified small businesses on their first taxable year of profit and 50 percent exclusion on the following two years of profit.
The idea behind this recommendation is that if a fast-growing company is able to avoid all its corporate income taxes for a year and pay at 50 percent of its regular rate the next two years, it can invest that precious cash into the business and grow more quickly. Imagine a young company being able to afford to double its sales staff as a result of not needing to pay corporate taxes during this critical first year. This not only creates jobs more quickly, but has the potential to create more revenues and more profit, with the impact then being multiplied due to the 50 percent reduction in taxes for the next two years.
3) Reducing the time it takes for SBIR/STTR grants to be approved from the current average rate of six to 12 months, to three months.
Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR) grant programs are administered by the federal Small Business Administration and represent grant funds for companies to further research ideas they have and their applicability into a market.
Again, I've seen what these grants can do for fledgling companies in my own backyard.
MesoCoat is a nanotechnology material-science company that is fast becoming a world leader in metal protection and repair through their breakthrough 'high-speed' cladding process and 'life-extending' nanocomposite materials. The company has received several SBIR awards from the Department of Energy and Department of Defense to help commercialize their coating, which could replace the carcinogenic and toxic hexavalent chrome coatings and expensive carbide coatings that the U.S. Army and other industries use to protect metals against corrosion. Since receiving the funding, MesoCoat has signed a co-op agreement with one of the biggest global players in the oil and gas industry to develop their proprietary high-speed cladding process.
Beyond the technical progress it allows, what's even better about these government grants is that they don't need to be repaid and don't dilute ownership in a company. It's simply money companies need to continue developing cutting-edge technologies. And when an entrepreneur is working feverishly to get a new technology through the commercialization process, time really is money. Speeding up the process to know if you have up to $1 million on the way just makes sense.