LINCOLN — “Angels” persuaded Paul Jarrett and his wife, Stephanie, to move back to Nebraska to launch a company that mails sample vitamins and dietary supplements to people.
Those angels were investors who, encouraged by a two-year-old state tax credit, were willing to sink several hundred thousand dollars into the Jarretts' startup company, Bulu Box.
“It was the tipping point to get us to move from San Francisco to Lincoln,” Paul Jarrett said. “It was the catalyst.”
Bulu Box now employs eight full-time workers and four college interns in a historic brick building in Lincoln's trendy Haymarket area.
This year, state lawmakers are being asked to expand the Nebraska Angel Investment Tax Credit Act in hopes of writing more success stories.
The tax credit, passed in 2011, allows investors who chip in at least $25,000 to obtain a state refund for part of their investment in qualified Nebraska-based startup companies with fewer than 25 employees.
Such investors are called angels because they seemingly swoop in out of nowhere to help entrepreneurs who have a marketable product but lack the money to develop it.
The angel investment act was one of Gov. Dave Heineman's talent and innovation initiatives in 2011. A shortage of capital for high-tech startup companies was identified as a weakness in a 2010 study of Nebraska's economic development efforts.
The governor had sought $5 million a year for the program, but cautious state lawmakers, noting that 75 percent of such startups fail, trimmed it to $3 million a year in tax credits.
But now there are two proposals in the Nebraska Legislature to increase the amount of money available for such investments.
The reason is that demand for credits has outpaced what the state has allocated.
In 2011, 74 applicants sought nearly $5 million in credits for investments. Last year, 138 applicants sought about $4 million.
Interest is even greater this year, with about $2 million of the $3 million fund already earmarked by March 1, according to Joseph Lauber, who coordinates the program for the Nebraska Department of Economic Development.
State Sen. Pete Pirsch of Omaha has introduced a bill to increase the program's funding by $2 million a year, to $5 million. He said he doesn't want Nebraska to go “halfway” to help startup companies.
“It's kind of like the invasion of Normandy: If you're going to do it, do it,” Pirsch said.
The state angel tax credit, Lauber said, “removes some of the risk of investing in some of these early-stage companies.”
“And it's an attractive tool for these companies when they go out seeking investors,” he said.
Paul Jarrett of Bulu Box said he had planned to launch the company in California, until a former landlord of his in Lincoln, his hometown, suggested that he pitch his idea to the Nebraska Angels, a group of angel investors.
They liked his business idea and invested a significant portion of the $550,000 that the Jarretts raised to start the company. Bulu Box signs up subscribers who pay $10 a month for monthly shipments of vitamin and supplement samples. The Bulu Box of products allows customers to try a new vitamin or weight-loss supplement at a low cost before deciding whether to buy it.
Customers appear to like the idea. Bulu Box subscriptions are up 75 percent since the first of the year, Paul Jarrett said.
Jarrett, 31, said he and his wife didn't have the money to create their dream company on their own, and the tax credit made it easier for the Nebraska Angels to take a risk on their venture. The lower cost of doing business in Nebraska, as well as the development occurring in Lincoln's Haymarket area, including a new sports and concert arena, sealed the deal.
“Why not work in a cost-effective place that has a lot of cool things happening?” Paul Jarrett asked.
PitchBurner, which creates software used by universities and other organizations to conduct business contests, is another angel investment act success story.
The company, a spinoff from the software innovation company i2rd of Lincoln, has six employees and is run by 23-year-old Ethan Meyer.
“You hear a lot of talk about brain drain and 'How do we keep young, talented people here?' It's this kind of innovation,” said Joseph Knecht, managing director of i2rd, which has three other startups looking for investors.
Not all angel investments turn into initial success stories like Bulu Box and PitchBurner. However, angels have been credited with helping launch some of this generation's most successful high-tech companies, including Google, Yahoo and Facebook.
In addition to Pirsch's proposal, Legislative Bill 281, Sen. Tom Carlson of Holdrege has introduced a measure to increase funding for angel investment credits. His proposal, LB 475 would increase funding to $4 million a year, a $1 million increase.
During a public hearing last month on LB 281, members of the Legislature's Revenue Committee asked for more information.
Columbus Sen. Paul Schumacher, the committee's vice chairman, said applications for the money don't necessarily mean that the program is successful in creating jobs or long-lasting companies. The tax incentives offered under the angel investment act, he added, are very generous. The state is paying back 35 percent to 40 percent of an investment.
Lauber, the state economic development official, said reports that are due in July will more fully detail how many jobs have been created. But so far, he said, the program has sparked $16.6 million of investment in 43 companies.
Complicating any changes in the angel investment act is the larger debate over state tax policy at the State Capitol.
The governor this year proposed a dramatic tax shift: the elimination of all state income taxes and a broadening of the state sales tax base by taxing several types of now-tax-exempt purchases.
Although the governor's idea was shot down as impractical and damaging to business, it has spawned a comprehensive review of state tax policy. One matter under review is whether the Legislature hands out too many tax incentives on a piecemeal basis rather than a coordinated basis. Another question: What is the cost-benefit analysis of such tax breaks?
Some have questioned whether new business incentives, such as bolstering the angel investment program or granting tax credits for wind energy, should be put on hold pending the outcome of the tax study.
Kearney Sen. Galen Hadley, chairman of the Revenue Committee, has said that if necessary, the committee will consider advancing new tax incentives during this year's legislative session, although the tax study won't be completed until December.
But, he added, “we don't want to look foolish by passing a bill this year and rescinding it next year.”
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