'ANGELS' CAN EARN TAX BREAK

BYLINE: Chad Graham, The Arizona Republic

Patrick Gilbert continues to search for a $2.5 million cash infusion into the Phoenix technology company he launched in 2004, but he has discovered that many Arizona investors are focused on another sector.


"People here want to invest in real estate. It's a market that a lot of people know or think they know," said Gilbert, president and chief executive officer of 4SmartPhone, which provides mobile workplace service via smart phones.


To help get their attention, Gilbert has applied for a new program the state began offering one month ago that gives investors in small technology companies a tax break.


If approved, he can guarantee those investors a 30 percent state-backed tax credit over three years provided they meet qualifications and make and investment of between $25,000 and $250,000.


The credit increases to 35 percent over three years for people who invest in that same dollar range in biotechnology or companies located in rural Arizona.


So far, 10 companies are undergoing the approval process, but "we've been swamped with calls" from companies that plan to apply or have questions as they fill out the application, said David Drennon, spokesman for the Arizona Department of Commerce.


Supporters of the tax credit hope that it will financially edify young Arizona technology companies that are struggling in the marketplace, said Sen. Barbara Leff, a Paradise Valley Republican, who introduced the legislation for the program.


"In the past, companies have had to leave (Arizona) because there just hasn't been enough early money available," she said. "We have invested quite heavily in the past few years on university research. It's a shame to see those investments, when they're ready to be commercialized, go to another state."


The program is targeting what are known as "angel investors." Flush with cash and business savvy, they typically invest thousands of dollars into start-up companies.


That's in contrast to venture capitalists who typically invest millions into more established companies, using money from institutional sources.


Angels are an increasingly important source of money to start-up firms in the U.S.


In 2005, they pumped $23.1 billion into 49,500 ventures, according to the Center for Venture Research at the University of New Hampshire.


Nearly 55 percent of angel deals last year were made in the seed and start-up stage, according to the group.


Venture capitalists allocated 6 percent of the deals to these stages. During the past decade, they "have never invested more than 15 percent of the deals in the seed and start-up stage," the group determined.


Only time will tell if the angel investor tax credit will increase the number of cutting-edge technology companies in the Valley.


Even if that happens, it would be unlikely that the credit alone can create a wave of high-wage jobs to counter the Valley's low-paying service jobs.


"On the margin (the program) will help investment," Valley economist Elliott Pollack said.


"Whether that investment actually produces more jobs is something you can't quantify. But will it get more money into these companies on the margin? Yes. Will these companies actually produce? That remains to be seen."


Still, Arizona needs to do everything it can to grow additional companies that are in knowledge-based industries, said Phoenix lawyer Quinn Williams, a member of Gov. Janet Napolitano's Council on Innovation and Technology.


"The technology companies in Arizona have a higher per capita income and are able to secure additional private equity from the venture-capital industry," he said.


"We need to have more companies started so that we have more opportunities to grow."


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Send me an angel


In 2005, the Arizona Legislature established the Small Business Capital Investment Incentive Program, also known as the angel investor tax credit.


Objective: To expand early stage investments in targeted small businesses in Arizona by providing tax breaks to investors.


Program length: Between July 1, 2006, and June 30, 2011, administered on a first-come, first-serve basis.


How it works: Companies must be approved by the Arizona Department of Commerce. . Investors must prove their investment was made in a qualified company. If they qualify and invest between $25,000 and $250,000, they can get a 30 percent tax break over three years. The credit increases to 35 percent if they invest in a bioscience company or a business located in a rural part of the state.


Information: www.azcommerce.com


-- Chad Graham