With R&D Spending Down at Big Companies, Legislators Help Angels, Startups Pick up the Slack

If big company R&D is down, what alternative is there but to stoke the fires of small company innovation?

Seems like such an obvious statement. And yet who is providing the kindling?

The Obama Administration stepped up this year and last year with billions of dollars for cleantech development. A lot of the money went to projects and to larger entities, such as utilities that agreed to deploy smart meters. I’m not critical of this fact. Just pointing out the shot in the arm wasn’t a pure play small company technology boost.

That’s why news out of Michigan today struck me. The Michigan Senate, meeting in a lame duck session, approved a tax break for angel investors by a 34-0 vote. (The House already signed off on the measure, which, by the way, was sponsored by a Democrat.)

Michigan is not the first state to adopt such a measure this year. Minnesota, Illinois, Connecticut and Virginia have similar efforts. There is even similar talk in the U.S. Congress.

The Michigan bill gives angels a 25% tax credit over two years, with a maximum of $250,000 per year and per investment, according to Crain’s Detroit Business. The credit runs through 2013 and was supported by the Michigan Venture Capital Association.

Gov. Jennifer Granholm is expected to sign the bill into law, Crain’s reports.

So why did this catch my eye? I had a conversation with Robert Ackerman, managing director of Allegis Capital, this morning and he zeroed in on a fundamental transformation of the American economy: the shift of R&D from big companies to small companies over the past several decades.

In 1981, 70.7% of industrial R&D took place at companies with 25,000 employees or more, Ackerman pointed out. That fell to 37.6% by 2005.

At the same time, companies with fewer than 5,000 employees accounted for 39.6% in 2005, up from 10.5% in the early 1980s.

It is a remarkable transition that changes the innovation calculus of the country. Some criticize angel and venture tax breaks as redundant. Angels, they claim, would have made the investments anyway, or may claim credits on investments they already made.

Michigan lawmakers obviously disagree and hope the breaks will help small company investors.