Potential investors in Indiana startups may be even more inclined to take the financial leap if a Republican-backed bill clears both chambers of the Legislature.
Rep. Jerry Torr, R-Carmel, introduced House Bill 1008, which would increase the maximum venture capital tax credits from $500,000 to $1 million, suspend the application fee and simplify the application process. On Wednesday the legislation was referred to the Committee on Commerce, Small Business and Economic Development.
In introducing the bill, Torr argued that the state’s current budget constraints limit the General Assembly’s ability to provide funds for economic development.
Indiana Secretary of Commerce Mitch Roob is squarely behind the measure. He mentioned Indianapolis-based Angie’s List, ExactTarget and Scale Computing as among the scores of companies that have attracted out-of-state investments.
“Quite candidly, our preference is that the money come[s] from Indiana,” he said. “And the reason for that is those [out-of-state] investors occasionally want to move those companies outside Indiana.”
Since the inception of the state’s Venture Capital Investment Tax Credit in late 2003, a total of 208 companies have taken advantage of the incentive to raise $138.4 million in private capital. Of those, 20 companies have reached the maximum award amount of $500,000 in tax credits.
Indiana doles out the tax credits to promising companies, which in turn dangle them in front of potential investors as a way of sweetening the pot. The incentive is meant to entice speculators to gamble on unproven high-tech ventures they’d otherwise pass over in favor of more certain bets.
Allowing investors to write off 20 percent of a $2.5 million investment on their state taxes has proven to be a nice motivation, said Bruce Kidd, senior vice president of Indianapolis-based Walker Information and a former director of small business and entrepreneurship at the Indiana Economic Development Corp.
But increasing the credit to $1 million, which would push the maximum investment to $5 million, is even better, Kidd argued.
“There were several times when a particular company hit $500,000 of credits,” he said. “Frankly, that wasn’t really enough for some of these early-stage, but high-potential companies that were raising millions of dollars. It really is a catalyst for larger investments.”
To receive the tax credits, young companies apply to the IEDC for certification. If deemed sufficiently innovative, they receive tax credit vouchers. Then, during fundraising, companies pass the vouchers along to their investors, who claim the credits.
Raising the credit to $1 million now only will benefit a small percentage of companies, because most aren’t raising $5 million in this economy, Kidd said. Those that do typically are life sciences firms that need more startup capital than, say, software companies.
Even so, those that take a chunk of the credit now can always come back for more if the amount of the credit is raised, he said.
“This isn’t cash, this is deferring taxes, if you will,” Kidd said. “So it’s taking away some revenue from a tax base, but the upside is far greater because it’s a non-cash credit.”
Roob is hopeful the bill will pass and is galvanized by the Republicans’ majority in both the House and Senate.