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The Minnesota Legislature has thrown down the gauntlet. Worried the state is losing border-jumping biotech companies lured by Wisconsin’s angel investor credit, Minnesota has passed one of its own. Now, investors in small, high-tech startup companies can get the same kind of tax credit in either state.  Will the Gopher State snatch away Wisconsin’s advantage?

Even without its new tax credit, Minnesota surpasses Wisconsin in many ways in the biotech field. In particular, it’s a national leader in the development of medical and surgical equipment, the sector that dominates its biotech industry. A recent analysis by the Biotechnology Industry Organization (BIO) named Minnesota one of three leaders in the field along with California and Massachusetts (pretty lofty company in the biotech world).

(illustration by adrian palomo)

While Wisconsin was not named a leader in research and testing by BIO, Madison has still garnered a national reputation as one of the country’s strongest biotech cities. Its biotech industry is smaller than Minnesota’s but more diversified: It was one of the few places in the nation BIO found had above-average employment concentrations in all the biotech sectors it studied – from agriculture products and medical research to pharmaceuticals and medical devices.

The biotech industry has helped to soften the economic downturn for both Wisconsin and Minnesota. “The upper Midwest is a real hotbed of (biotech) activity,” says Patrick Kelly, BIO’s vice-president of state government relations. But they’re not the only states luring high-tech business with angel credits, he says. In the past five years, about 20 states have implemented them. The biotech race is on.

Bryan Renk, executive director of Wisconsin BioForward, a biotech industry group, says Minnesota’s new angel credit may cause Wisconsin to step up its game. “It’s going to make us more competitive,” he says. While Minnesota has more biotech jobs, according to Renk, Wisconsin has greater research prowess and a more educated workforce.

The angel investor program is very similar in both states. Both now offer the tax credits to investors in small companies that have received little or no other investment (at rates of 25 percent of the angel investment). Both cap the total credits awarded to investors in a business at $1 million. One difference: while Wisconsin’s credit is tightly worded to favor high-tech industry (particularly biotech), Minnesota’s  leaves the door open to give credits to investors in manufacturing or even mining as well as high-tech industries.

The valley of death

The credits are designed to address what observers have labeled the “valley of death,” a period in the lives of young biotech and other high-tech companies when most collapse for lack of funding. The valley yawns after a company is sustained by early seed money (from personal savings, friends, family or other investors) but before the business is big enough to attract venture capital, according to Dale Wahlstrom, CEO of the BioBusiness Alliance of Minnesota.

He says his organization identified about a half-dozen Minnesota biotech companies in recent months that jumped the Wisconsin border, presumably to take advantage of tax credits. Renk offers a similar assessment, saying several companies have moved recently to the state, enticed by angel money.

“The Wisconsin angel tax credit has gotten a lot of publicity, and it’s been very successful in creating an environment for investment,” Wahlstrom says. “But at the end of the day, it’s only an incentive.”

BIO finds that states, despite facing tight budgets, are still adding the angel credit incentives. Kelly says biotech companies are expensive to form and need the help. A decade ago, he says, “Venture capitalists were bending over backwards to throw money at you, but those days are long gone.”

Wahlstrom doesn’t think Wisconsin and Minnesota should see each other as antagonists in a biotech battle. But state legislators who create the angel credits rarely think regionally, according to Kelly. “It’s very hard when you start talking to state legislators about programs benefitting other states,” he says.

Observers, however, are beginning to see the Minneapolis, Madison, Chicago and Indianapolis corridor as a region strong in biotech – to the benefit of each state. “You need to have these clusters to attract attention nationally and internationally,” Kelly says.

Does Minnesota need angels?

Even without angel credits, investment was flowing to Minnesota biotech companies. Since 2006, largely due to being a national leader in developing medical equipment, Minnesota companies raked in $1.65 billion in venture dollars. In the same period, Wisconsin companies took in just $295 million, the BIO report says.

Wisconsin, however, has enjoyed more investment in academic research. The state spent $760 million on academic bioscience research and development in 2008, more per capita than the national average. Minnesota spent $509 million on academic R&D.

It’s enjoyed hotter job growth in biotech than Wisconsin. Between 2001 and 2008, the jobs grew about 16 percent in Wisconsin, matching average growth nationally. But in Minnesota, the industry didn’t jog; it ran. Jobs there grew about 30 percent.

In 2008, almost twice as many people were employed in Minnesota’s biotech industry (40,165) as in Wisconsin’s (24,694). Minnesota also leads in the number of Biotech patents issued to its companies and researchers since 2004: 4,608 versus Wisconsin’s 2,187. New medical instruments dominated Minnesota’s patents whereas Wisconsin’s were more diversified.

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