Industry Watch

Lee Jones (left) with investor Chris LaVictoire Mahai

Rebiotix banks on Minnesota Angel Tax Credit

How the program helps early-stage companies get off the ground, raise more capital

By Dan Emerson
Thursday, September 18, 2014

In 2011, when medical entrepreneur Lee Jones and two partners set out to raise funds for a new startup called Microbix (now Rebiotix), they used one of the newest tools available to finance early-stage companies: the Minnesota Angel Tax Credit (MATC), which the state legislature established in 2010.
The program, which the legislature recently extended for two more years, provides a 25 percent tax credit to eligible angel investors who invest in Minnesota startups. Among entrepreneurs and investors, it’s proven to be one of the state’s more popular recent business initiatives.
The founders of Roseville-based Rebiotix, who are commercializing microbial therapy technology for patients with a type of bacterial infection, targeted investors who were eligible for the angel tax credit but hadn’t yet participated in the program. “We contacted a network of about 40 people we know and asked them to invest,” says Jones, who has been an entrepreneur and executive in both large and small med-tech companies. “Many of them hadn’t heard of the angel tax credit.” 
The entrepreneurs asked prospective angels who qualified to sign up for the program and receive accreditation from the state. They also asked those who invested to “re-invest” the 25 percent credit they received from the state. As a result, Rebiotix raised $4 million, plus another $1 million added by investors re-investing their credit. 
In their pitch to prospective angels, Jones and her partners pointed out that “‘if you reinvest, you are ‘de-risking’ your investment — because the company then has more capital to work with; and, for an investment of $100,000, you get $125,000 worth of stock,’” Jones says. 
Rebiotix used the $5 million in funding to rent an office, staff the company, develop its product, and conduct a Phase 2 clinical trial, which it completed in July.
The extra million it received because of the credit “helped the company go further and gave us more time to get through a major milestone we otherwise wouldn’t have met,” Jones points out. “It made a big difference to our company. And, the shareholders got more value than if they had taken the [tax credit] money and pocketed it.”
One of those Jones contacted in 2011 was investor Chris LaVictoire Mahai, who had previously invested in a medical company formerly led by Jones: Inlet Medical, which was sold to CooperSurgical in 2006. 
Mahai hadn’t been aware of the angel tax credit until she was told about it by fellow investor Irwin Kellen. Jones encouraged Mahai to apply for the credit, which made the prospect of investing in Rebiotix “more attractive,” says Mahai, who is co-owner and managing partner of Aveus, a St. Paul–based consulting firm. She and Jones had been talking about a $50,000 investment, but, because of the credit, Mahai wound up investing a combined total of $75,000 in Rebiotix. 
In August, Rebiotix completed a $25 million Series B funding round. (It wasn’t eligible to use the credit for that round because the credit is only available to companies with less than $4 million or less in funding.) 
Jones says the company will use the additional funds to support “pivotal” clinical research to advance its product closer to commercialization; for research and development on next-generation therapeutic products; for potential new treatment indications; and for general, working capital.
The angel tax credit has been a popular program, judging by how quickly the funds allocated each year by the legislature have been “spoken for.” This year, Minnesota’s $12.2 million worth of angel-investor tax credits was completely allocated as of March 3. An additional allocation of $3 million in credits for 2014 has also been spoken for. In 2013, the state allocated all of its $12.7 million in credits by May 9.
It’s safe to assume that even more businesses would have used the program if more funds had been available, says Daniel Tenenbaum, a principal at the Minneapolis law firm Gray Plant Mooty and co-chair of its Entrepreneurial Services Group. Tenenbaum and two other attorneys at the firm recently completed a survey of investors and entrepreneurs to analyze seed capital raised during the second half of 2013, which included several questions to assess the angel tax credit’s impact.
The survey covered 126 financings reported either by a company or investor, and more than half of the respondents said the angel-tax credit had been part of the financing they were involved in, Tenenbaum says. 
Nearly 58 percent of respondents who used the angel tax credit as part of their financing said the credit made it easier to raise more capital. “Another 22 percent said they don’t think they would have raised any capital at all without it,” Tenenbaum says. 
The survey authors also concluded that investors are often willing to dig deeper in their pockets because of the angel tax credit.
By itself, the credit “isn’t going to make a deal that isn’t investable an investable deal,” Tenenbaum notes. “But what we have seen in many cases is that an investor will write a larger check than he or she otherwise might have written, because their risk is mitigated by the credit.” 
The angel tax credit program would have expired at the end of this year, but this spring, the legislature extended it through 2016 with $15 million in credits available for each of 2015 and 2016. The legislature also modified the program to give businesses owned by minorities and women, or located in Greater Minnesota, more access to the funding: For the first nine months of each year, half of the $15 million allocation is earmarked for such companies. “The vast majority of those using the credit have been in the seven-county metro area,” Tenenbaum says.
As for Mahai, she’s now a big fan of the angel tax credit: “It’s a fabulous program,” she says, “a great example of public-private investing.”