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Maryland to auction tax credits in March

by contributor Michael Schoeck | Published November 29, 2011 at 2:11 PM

In an effort to raise at least $70 million to fund startups in Maryland, the state will auction off tax credits to national and regional insurance companies on March 15.

Other states, such as Kentucky and Michigan, have similar incentive programs designed to provide seed capital for companies within their borders. In Maryland's case, the state needed some way to boost the $6 million per year in financing it's had available to nurture homegrown companies. For example, the Maryland Venture Fund Authority has a projected $18 million available over the next three years for seed capital.

"Maryland has plenty of high-tech businesses and a significant dealflow but lacks capital for the early-stage market," said Frank Dickson, director of the MVFA.

Maryland on Aug. 31 established a seed and early-stage venture capital platform, InvestMaryland. It recently announced that it will auction up to $100 million in premium insurance tax credits in March to underwrite it.

Dickson explained the insurance tax credits are available to insurance companies that make qualified contributions to InvestMaryland. He said the insurers have to be conducting brokerage activity in Maryland to be eligible.

According to the prospectus for investment solicitation, the Maryland tax credits will be issued starting in 2015. If insurance companies elect to bid 70 cents on the dollar minimum, the state will pay a remainder of $30 million to keep the tax credit pool at $100 million.

Dickson said that, regardless of how much is amassed through the sale, 67% of proceeds would be earmarked for investment with venture capital firms which would then distribute the money to Maryland startups.

The remaining 33% would go into the MVFA's account for its own direct investment into Maryland companies.

A $1 million minimum bid is required to participate in the auction. The MVFA has set a Feb. 1 bid deadline ahead of the March 15 auction. Dickson said there is no maximum bid limiting insurance companies.

Prior to the auction, Dickson said the MVFA would begin soliciting applications from VC firms to participate in the InvestMaryland program, starting Jan. 1.

Dickson said MVFA also expects to announce the retention of a financial advisory or pension consulting firm to assist with the VC firm selection within the first few weeks of January.

According to MVFA's website, VC firms have a May 1 deadline to participate in the state's early-stage investment platform before the program takes effect July 1.

According to Jack Biddle, a partner at Novak Biddle Venture Partners, a Bethesda, Md.-based VC firm, the state has never had a shortage of VC capital or dealflow in its health, security and technology sectors.

"Early-stage capital is generally always difficult to come by, but just because it's hard doesn't mean there isn't any," Biddle said.

Dickson and Biddle noted that the state's Department of Business and Economic Development has been in existence since 1996 as a seed-stage investor before the creation of MVFA but only served on a limited scale.

Richard Kohr Jr., a principal at Columbia, Md., investment bank Evergreen Advisors LLC, said he thinks the platform will draw primarily VC firms with angel-type investing experience and not larger national VC investors such as New Enterprise Associates and Grotech Ventures, which have offices in Chevy Chase and Hunt Valley, Md., respectively.

"There are a few attributes the platform has which will draw investors with biotech interest and willingness to gain a presence in early- and seed-stage startups," Kohr said, noting the presence of the Howard Hughes Medical Institute in Chevy Chase, Johns Hopkins University School of Medicine in Baltimore and Walter Reed National Military Medical Center in Bethesda.

In addition, Kohr and Biddle pointed out that cyber security companies having been spawning technology startups in the state thanks to the presence of quasi-government defense agencies such as U.S. Cyber Command and the National Security Agency, both of which are based in Fort Meade, Md.

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