Tax-credit online marketplace creates connections for more deals

Indiana’s entrepreneurial community has high hopes that a new online tax-credit marketplace will help attract more out-of-state investment in Hoosier startups.

Last month, the Indianapolis-based not-for-profit TechPoint launched the Indiana VCI Marketplace—a first-of-its-kind tool for connecting potential buyers and sellers of Indiana’s Venture Capital Investment tax credit.

“That’s such a great opportunity. Out-of-state investors will be able to sell those tax credits to Hoosiers who have a tax liability,” said Jenny Massey, the Indianapolis-based national director of site selection and incentives for Chicago-based Sikich LLP.

“I totally expect to see an increase in out-of-state venture capital activity in Indiana because of this.”

The tax credit itself, which serves as an incentive to invest in Hoosier startups and small companies, has been around since 2003.

But the Legislature tweaked the program. Since July 1, 2020, investors have had the ability to sell their VCI tax credits—making the program more appealing to out-of-state investors who don’t pay Indiana taxes.

As an example: An out-of-state firm or individual invests $1 million in a Hoosier startup and receives a VCI tax credit worth 25% of that investment.

The investor then sells that $250,000 tax credit for $200,000 to an Indiana taxpayer, who can use the credit to reduce his or her state tax liability.

But until now, there hasn’t been a central marketplace to facilitate these transactions. So it hasn’t always been easy for out-of-state investors to monetize their VCI tax credits.

The buying and selling of VCI tax credits has taken place mostly through informal channels and personal networks. Often, the burden of making those connections has fallen on the small business that received the investment.

“Your ability to do that successfully is going to be dependent on how sophisticated you are and who you know,” said John McDonald, the managing entrepreneur at Indianapolis-based venture studio Next Studios.

McDonald is also a board member at the Indiana Technology and Innovation Association, a tech-industry group that lobbied for the creation of a marketplace.

Experienced and well-connected founders have so far had an advantage over greener entrepreneurs in brokering VCI tax-credit transactions, but the marketplace now helps level the playing field, McDonald said.

How the marketplace works

Potential VCI tax-credit buyers and sellers can signal their interest in deals by completing an online form at techpoint.org/vci-marketplace. (VCI tax credits must be worth at least $10,000 to be eligible 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 deal. TechPoint initiates an email introduction 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 paperwork with that agency.

TechPoint has committed to making introductions within 10 days of receiving deal queries.

The organization is not involved in setting the terms of deals and it does not charge any fees for handling the transaction.

“Both the reach and the velocity should be very attractive compared to the old method,” said TechPoint CEO Ting Gootee, who came up with the idea for the marketplace. “A lot of people recognize the value and need for it.”

TechPoint was the natural entity to run the marketplace for several reasons, Gootee said.

The organization exists to support and grow Indiana’s tech sector, and it’s already plugged into a network of entrepreneurs and investors.

“It makes sense for us to do it because we have the knowledge base, we have the investors … and we’re not looking to monetize this,” she said.

Having a not-for-profit such as TechPoint run the marketplace makes a lot of 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 operator would want to charge a transaction fee and do a certain volume of transactions in order to make money from the marketplace, Kirk said. “I’m excited that Ting and the rest of the TechPoint organization have decided to go down this path.”

The marketplace launched with one potential seller and 20 others who signaled interest in either buying those tax credits or learning about future transactions, TechPoint said.

The marketplace platform was built to be scalable, Gootee said, and it could handle up to thousands of potential buyers and sellers as interest and awareness grows.

It’s also possible that the marketplace will become a searchable database at some point. Right now, it exists only as a portal for submitting information to TechPoint.

“This is our initial product,” she said. “Based on market demand, we’ll keep an open mind to how this may evolve to the next phases.”

Demand increasing

VCI tax credit transfer activity is modest 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 have occurred through August this year.

The VCI program has also seen substantial increases in out-of-state investment since 2020.

From 2006 to 2019, IEDC data shows, about 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.

(The numbers reflect planned investments because they are based on proposals investors must submit to the IEDC before investments are made. Investors then have two years to make those investments and receive VCI tax credits.)

“We are encouraged by the out-of-state investment interest we’ve seen already since 2020 with [the] addition of transferable tax credits, and we are hopeful that TechPoint’s new VCI Marketplace will lead to even better utilization of this offering,” IEDC Senior Vice President of Community Affairs Mark Wasky told IBJ via email.

The IEDC said it hasn’t set any specific goals regarding growth of out-of-state participation in the VCI program.

But the new marketplace is just one piece of a bigger picture when it comes to startup 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 that had been in place since 2005.

That $12.5 million cap was reached in 2017 and 2019-2021. In 2018, 94.6% of available credits were awarded. This year, the state is on pace to hit the expanded cap, with 55.8% of available VCI tax credits awarded through Aug. 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 publicize the marketplace. But he also noted that it will take time for the news to spread widely among out-of-state investors.

“Right now, it’s an awareness issue,” McDonald said. “It’s new even here in Indiana, to people in the know.”

Still, marketplace proponents are bullish on this new tool.

Massey said the marketplace and the VCI tax credit in general help Indiana compete.

She estimated that about half of U.S. states have some version of a VCI tax credit, though specifics vary from state to state.

Indiana’s new VCI marketplace, she said, will only boost the state’s appeal. “I have zero doubt that this is going to be good for the economy in Indiana.”•