One of the most popular programs on television today is also one of the most educational regarding the risky nature of venture capital investing. The show is called Shark Tank, and involves a very simple yet ingenious format where five wealthy investors listen to business proposals by aspiring entrepreneurs and then decide whether or not to invest their own money into the venture.
Now what if I told you that Arizona had its own version of the Shark Tank, except that in our version it was bureaucrats that determined which ventures to support and then gave tax credits to “qualified” investors? We do, except ours is called the Angel Investment Tax Credit Program. Under our version, wealthy investors apply to receive tax credits for making investments into “qualified” small business, as determined by the Arizona Commerce Authority (ACA). Since the tax credits go to the investor and not to the entrepreneur, the investor benefits regardless if the business succeeds or not.
Subsidizing investor risk is a really bad deal for taxpayers, but that has not stopped advocates from introducing HB 2011, legislation that will greatly expand the size of the Angel Investment program. The main argument in favor of expansion is that good ideas have a hard time finding investors and thus need the extra incentive. Often proponents will try to point to Angel Investment “success stories” where a qualified business has flourished after receiving an influx of venture capital.
Upon closer examination none of these arguments hold merit. The reality is that if a good idea exists, it will attract venture capital regardless of any tax credits provided by taxpayers. This is nothing more than ‘found’ money for the investor.
Arizona taxpayers subsidizing the investment risk of good ideas is the best case scenario for the program. Then there is the worst case scenario—tax credits flowing to investors who put money into bad ideas that should have never made it out of the starting block. These could be proposals that initially appeared be a good investment but over time failed due to poor strategy, management or implementation. Or taxpayers could be subsidizing the worst pitches in Shark Tank history—that is up to the ACA to decide.
It is simply not true that wealthy investors need additional taxpayer assistance or that the government is better at determining “qualified” venture capital investments than the private sector. Additionally, as Shark Tank has proven, there are already private sector solutions for attracting venture capital. Arizona should get out of the venture capital business and reject HB 2011.