Two years after the High Growth Small Business Job Creation Act, the impact is real
June 14, 2013, marked an important day for entrepreneurs in South Carolina. On that day, Governor Haley signed into law the High Growth Small Business Job Creation Act of 2013. South Carolina joined the ranks of half the states in the union that have created an important tool for facilitating early-stage capital formation for local startup companies.
Entrepreneurs notoriously have a difficult time finding risk-tolerant forms of capital in the early days of their ventures, and the challenge is even more acute in a state like South Carolina where traditional venture capital has been extremely scarce. Once their own personal resources and friends-and-family investments are exhausted, entrepreneurs have few places to turn for funding.
The primary sources of funding in that infamous early-stage capital gap are angel investors. Angels are individuals who meet income or net worth standards established by the Securities and Exchange Commission who are willing to invest their hard-earned capital in promising but risky early-stage ventures (that don’t fall into the friends-and-family category).
Angel investing has been present in South Carolina for decades, but it hasn’t been prevalent or widespread. We can speculate on several reasons for that, but surely one of those reasons is the inherently risky nature of startup investing since we know that at least half of those startups will fail.
However, we also know that all net job growth in our economy comes from startups – not to mention a significant amount of innovation and wealth creation – so a risk-mitigation tool like an angel investor tax credit can be a significant lever in drawing more risk capital into the market. Hence the angel tax credit programs that have emerged across the country over the last 20 years – including the one enacted here in 2013.
Now, two years later, we have some early data to begin evaluating the impact of the credit program – and the data indicate the tax credit is achieving its intended purpose. Of course, given that the credit was passed halfway through its inaugural year, we’d expect the 2014 numbers to significantly outpace the numbers from the first year of implementation – and in fact that’s just what happened.
In 2013, 24 companies filed and received certification as qualified businesses (those qualified to accept investments that qualify for the tax credit). In 2014, that number more than doubled to 51. Its also important to note that qualified businesses came from only six counties in 2013, but 13 counties were represented by a qualified business in 2014. Across both years, Greenville County leads the way with 25 qualified businesses, Charleston is a close second with 23 and Spartanburg ranks third with eight.
On the investment side, the numbers are even more encouraging. In 2013, 14 investor applications were approved for tax credits, while in 2014 that number grew by more than 500 percent to 86 approved credits. The amount of credits approved more than doubled from $1.4 million in 2013 to $2.9 million last year. The tax credits represent 35 percent of the amount invested, which implies the credits represented nearly $4 million of invested capital in 2013 and more than $8 million in 2014 – a significant and welcome increase in the amount of funding for promising South Carolina startups.
Roughly 30 percent of the invested capital came from out of state. The credit was designed to be transferable in order to attract needed capital from out-of-state angel investors – and it’s good to see startups here attracting attention and investment checks even beyond our borders.
These trends are encouraging signs that more entrepreneurs are aware of the tax credit and putting it to good use creating high-growth-potential companies and more and better-paying jobs. The return on investment for the angel tax credit for investors, entrepreneurs and the state is strong.
But there’s still more room to grow the impact of the credits. With a cap of $5 million in credits, an additional $2 million could be claimed – which would represent an additional $6 million in investments for entrepreneurs in South Carolina who are building the future.
If you’re a potential angel investor interested in how to source and structure early stage investments – and take advantage of the South Carolina Angel Tax Credit, contact us at upstateangels.com or scangelnetwork.com.
