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The impact of angel investor tax credits

Paul Clark
Paul Clark
Last updated: June 4, 2024
Venture south fallback

The skeptic from the first post in this series was arguably given useful supporting evidence in August when several prestigious professors published an NBER working paper called Investor Tax Credits And Entrepreneurship: Evidence from US States. (Downloadable from here:

This paper has two key propositions:

  1. Angel investor tax credits increase the number of angel investors and angel investments.
  2. But this increased activity has no impact on measures of entrepreneurship like job creation.

This paper was a serious piece of scholarship, and so deserves a thorough review and detailed reply. For now, we’ll simply pass along their conclusions:

The first proposition is that angel investor tax credits increase angel investing. The effect is not trivial: tax credits lead to 18.5% more angel investments (p.14); they lead to 31% more individual angel investors (p.1); and they lead to increases in number of angel investments, angel-backed firms, and unique angels in ranges of 27.6-32.3% (p.15). It’s also these are not just the same old investors just cutting a few more checks: “the programs induce entry of new angel investors” (p.15). Tax credits do exactly what (some of) their proponents aim at: increasing the number of angel investors.

The second major proposition is that this increased angel investing activity has no impact on entrepreneurship. As the paper states: “We find that the policies have no significant effect on a plethora of entrepreneurial activity metrics, including young-firm employment, job creation, startup entry, successful exits, and patenting.” (p.2).

Yikes. Go on: “Across a broad array of outcomes, we consistently find that an insignificant and economically small impact of the policy.” (p.19) and “Overall, we do not find evidence that angel tax credits significantly impact state-level entrepreneurial activity.”

Yikes again. So what’s going on here?

On the face of it, this seems like a pretty unlikely proposition: the whole point of angel investing is to help fledgling companies grow. As practitioners in the space that make angel investments and closely monitor the portfolio companies, including their employment levels, we can attest that in our experience the South Carolina angel credit is leading to more investments in more companies and to more jobs. One day we will try to reconcile this paper with our experience.