Indiana’s entrepreneurial community has high hopes that a new online tax credit marketplace will help attract more out-of-state investment into Hoosier startups.
Last month, TechPoint, an Indianapolis-based nonprofit, launched Indiana VCI Marketplace, a one-of-a-kind tool to connect potential buyers and sellers of the Indiana Venture Capital Investment Tax Credit. Indiana.
“It’s such a great opportunity. Out-of-state investors will be able to sell these tax credits to Hoosiers who have a tax obligation,” said Jenny Massey, Indianapolis-based National Site Selection and Incentives Manager for Chicago-based Sikich LLP.
“I fully expect to see an increase in out-of-state venture capital activity in Indiana because of this.”
The tax credit itself, which incentivizes investment in Hoosier startups and small businesses, has been around since 2003.
But the legislature tweaked the program. As of July 1, 2020, investors have the ability to sell their VCI tax credits, making the program more attractive to out-of-state investors who do not pay taxes in Indiana.
For example: an out-of-state business or individual invests $1 million in a Hoosier startup and receives a VCI tax credit worth 25% of that investment.
The investor then sells this $250,000 tax credit for $200,000 to an Indiana taxpayer, who can use the credit to reduce their tax liability.
But until now, there was no central market to facilitate these transactions. It has therefore not always been easy for foreign investors to monetize their VCI tax credits.
The buying and selling of VCI tax credits has taken place primarily through informal channels and personal networks. Often the burden of making those connections falls on the small business that has received the investment.
“Your ability to do this successfully will depend on how sophisticated and knowledgeable you are,” said John McDonald, chief entrepreneur at Indianapolis-based venture capital firm Next Studios.
McDonald is also a board member of the Indiana Technology and Innovation Association, a tech industry group that has lobbied for the creation of a market.
Experienced and well-connected founders have so far had an advantage over greener entrepreneurs in negotiating VCI tax credit deals, but the market is now helping to level the playing field, McDonald said.
How the market works
Potential VCI tax credit buyers and sellers can signal their interest in the offers by completing an online form at techpoint.org/vci-marketplace. (VCI tax credits must be worth at least $10,000 to qualify for sale.)
When a tax credit becomes available for sale, TechPoint sends an anonymized notice to potential buyers, who can then notify TechPoint of their interest in the transaction. TechPoint initiates an introduction email between the seller and the highest bidder.
Once the parties agree on a deal, they contact the Indiana Economic Development Corp., which administers the VCI tax credit program, to complete the paperwork with that agency.
TechPoint is committed to making presentations within 10 days of receiving RFPs.
The organization is not involved in defining the terms of the agreements and does not charge any fees for processing the transaction.
“The range and speed should be very attractive compared to the old way,” said TechPoint CEO Ting Gootee, who came up with the market idea. “A lot of people recognize the value and the need for it.”
TechPoint was the natural entity to manage the marketplace for several reasons, Gootee said.
The organization exists to support and grow Indiana’s tech sector, and it’s already connected to a network of entrepreneurs and investors.
“It makes sense for us to do this because we have the knowledge base, we have the investors…and we’re not looking to monetize that,” she said.
Having a nonprofit like TechPoint run the market makes perfect sense, said Indianapolis attorney Jeff Kirk, a partner at Taft Stettinius & Hollister LLP who leads the firm’s venture capital group in Indiana.
A for-profit trader would want to charge transaction fees and trade a certain volume in order to make money from the market, Kirk said. “I’m thrilled that Ting and the rest of the TechPoint organization have decided to go this route.”
The marketplace launched with one potential seller and 20 others who expressed interest in purchasing these tax credits or inquiring about future transactions, TechPoint said.
The marketplace platform was designed to be scalable, Gootee said, and it could handle up to thousands of potential buyers and sellers as interest and awareness grows.
It is also possible that the market will become a searchable database at some point. Currently, it exists only as a portal to submit information to TechPoint.
“It’s our first product,” she said. “Depending on market demand, we will keep an open mind on how this might evolve into the next phases.”
Demand is growing
VCI tax credit transfer activity is small but has grown in the two years since state law began allowing such transactions.
According to IEDC data, two VCI tax credit transfers took place from July to December in 2020. The following year, 19 such transactions took place. And 22 transactions took place until August of this year.
The VCI program has also seen substantial increases in out-of-state investment since 2020.
From 2006 to 2019, according to IEDC data, approximately 5% of planned VCI investments, or $31.2 million, came from out-of-state investors. In 2020 and 2021, 22.5% of planned VCI investments, or $28.1 million, came from out-of-state investors.
(Figures reflect planned investments as they are based on proposals that investors must submit to IEDC before investments are made. Investors then have two years to make these investments and receive VCI tax credits. )
“We are encouraged by the out-of-state investment interest we are already seeing since 2020 with [the] the addition of transferable tax credits, and we hope that TechPoint’s new VCI marketplace will lead to even better use of this offering,” Mark Wasky, senior vice president of community affairs at IEDC, told IBJ by email.
IEDC said it has not set specific goals for growing out-of-state participation in the VCI program.
But the new market is just one part of a bigger picture when it comes to seed funding, Next Studios’ McDonald said.
For one thing, state law limits the amount of VCI tax credits that can be granted in a single year. This year, the legislature set the cap at $20 million, up from the $12.5 million cap in place since 2005.
This cap of $12.5 million was reached in 2017 and 2019-2021. In 2018, 94.6% of available credits were granted. This year, the state is close to reaching the expanded cap, with 55.8% of available VCI tax credits granted through August 31.
McDonald said his organization plans to lobby the General Assembly to raise the cap again next year.
He said he has full confidence in TechPoint’s ability to build market awareness. But he also noted that it will take time for the news to spread widely among out-of-state investors.
“Right now it’s all about awareness,” McDonald said. “It’s new even here in Indiana, for those in the know.”
Still, market proponents are optimistic about this new tool.
Massey said the market and the VCI tax credit in general help Indiana compete.
She estimated that about half of US states have some version of a VCI tax credit, although the details vary by state.
Indiana’s new VCI market, she said, will only make the state more attractive. “I have no doubt this is going to be good for Indiana’s economy.”•