Why N.J. is giving its angel investors a 10% tax break

Angel investors are rich people with a high tolerance for risk. They get in early on promising new ventures that either fizzle out or hit it big.

New Jersey wants its angels to lay their chips on more Garden State startups. That’s why it passed the Angel Investor Tax Credit Act, which Governor Chris Christie signed into law Thursday.

“Ideally it becomes an attraction for startup companies,” said State Sen. Fred Madden (D-Gloucester), a co-sponsor of the bill. “We’re trying to stay on the forefront of what we believe are the jobs of the future.”

The new law offers a 10 percent tax credit to New Jersey angels who invest in local tech companies with fewer than 225 employees. The credits are limited to $500,000 per investment.

The tax breaks are capped annually at $25 million.

Katherine O’Neill heads up the Jumpstart New Jersey Angel Network, the state’s largest network of angel investors.

The group’s 40-plus members have invested $33 million since 2004, with more than half going to early stage companies in New Jersey, according to O’Neill.

She says the group is “delighted” about the new law.

“It’s going to incentivize some of our members to take that extra risk,” O’Neill said. “But it’s still a very risky area.”

New Jersey now becomes one of about two-dozen states to offer similar incentive programs, which have been called into question lately. Since early-stage companies tend to employ few workers, the job creation benefits of public subsidy-via-angel investment are less than stellar.

Still, a 2010 study from the Harvard Business School found that angel-backed startups are more likely to succeed. Sen. Madden, the co-sponsor of the New Jersey law, says that seeding the next Google would be the dream scenario. The benefits are admittedly a ways down the road. 

Pennsylvania considered enacting a similar program in 2011 but the state legislature did not pass the bill.

Update:

So how many angel investors are there in New Jersey?

Here’s the best we could find for you. Anand Sanwal is the CEO of venture capital research firm CB Insights. He writes:

In NJ, we have 800 angels. Some are groups whose membership maybe several hundred. That is why getting to the # of individual angel investors is hard as they often invest under the aegis of a group.

The University of New Hampshire has a Center for Venture Research. Their latest report has some national numbers.

The number of active [angel] investors in 2011 was 318,480 individuals, a substantial growth of 20% from 2010.

I asked Sanwal about that national figure. He believes even 250,000 angels may be “overstated.”