How States Incentivize Startups — and How Startups Should React
Exciting stories, great profit margins, transformative technology, great jobs, and economic development — these are just a few of the reasons why lawmakers have sought to create a mecca for startup businesses within their borders. Marketing their neighborhoods as Silicon Alley (Manhattan and Brooklyn), Silicon Hills (Austin), and Silicon Beach (Southern California), they seek to emulate the same buzz that we’ve seen coming out of the Bay Area for the past 30 years.
While we have yet to see whether a manufactured startup environment can match one birthed organically, policymakers would certainly like to claim ownership of a success story. Whether it be a Silicon Lake, Mountain, River, Forest, or Marsh, legislators are making efforts through incentives and programs to entice startups, incubators, and investors. For entrepreneurs to take full advantage, they’ll need to get ahead of the game.
How Lawmakers Approach Startup Incentive Programs
Nevada provided Faraday Future, a startup that builds electric vehicles, incentives valued at more than $200 million. While these types of tax deals are enticing, they don’t do much to improve the broader startup environment and are quite rare. After all, throwing state resources to help boost startups — traditionally having high failure rates — has the potential of creating significant political exposure for lawmakers.
The average initiative may end up drawing fewer headlines, but your burgeoning company is going to want to keep an ear out for what’s happening at your nearest capital city. To mitigate risk and leverage complementary resources, several startup-incentive bills have incorporated the infrastructure of local state universities. Proposed legislation and existing programs typically come in the form of direct incentive funding, indirect incentive advising programs, or a combination of both.
StartUp NY, created in 2013 with S 5903, allows startups that partner with New York state colleges or universities to operate tax-free for 10 years and “gives businesses direct access to advanced research laboratories, development resources, and experts in key industries.”
Also created in 2013 and spurred by HB 858, Hawaii’s HI Growth Initiative created a $6 million program to support and provide guidance to the state’s entrepreneurial ecosystem, partner on research, and network Hawaii’s high-growth businesses. The program boasts $20 million raised in follow-on investments from private investors and 1,500 statewide participants. With the introduction of HB 2288 and SB 2817 in 2016, efforts are already underway to provide a more sustainable source of money to this program.
Ohio HB 203 would create the Startup Ohio Initiative, through which universities and partnering enterprises in the seed or early stage of business development would collaborate in tax-free areas near campuses. Additionally, $100 million of General Revenue Fund dollars would be transferred into a Ohio Venture Capital Program Fund.
There are a few notable incentive bills this legislative session to create a friendlier startup atmosphere without the guidance of local universities. Tennessee SB 2539, for example, seeks to provide angel investors a tax credit worth 33 percent of their investments in high-growth small companies. Illinois SB 773 takes a less direct approach with the establishment of the Illinois Economic Development Corporation, which will develop and implement economic programs to provide expertise and financial assistance to startups.
How Startups Should Think About Incentive Programs
It’s not reasonable to expect a startup company, between cold-emailing Mark Cuban and editing lines upon lines of code, to “work a bill” through the chamber, but a lot could be at stake for your startup amid legislation seeking to tear down your business model or providing programs with favorable incentives. For either situation, it is in a startup’s best interest to follow legislation. Here are a few considerations for staying on the cutting edge of pro-startup policymaking:
1. See what’s already available:
Peruse your state’s small business administration website. If it doesn’t already have a special fund or program dedicated to supporting high-growth companies, there may be various resources for any small business. You may find fundingmatching programs, grants, or other incentives that could help keep your doors open just long enough to get in front of the one investor that changes everything.
2. Get to know the players:
Startup-incentive bills are often first referred to committees that handle small business and/or economic development issues (depending on the state). Develop relationships and lines of communication with the chairs of those respective committees. Not only are these influential lawmakers the gatekeepers for relevant legislation, they could become your biggest champions and begin to look out for your best interest.
3. Do it yourself:
You may be surprised to find out most sponsors of startup-incentive legislation have little or no background in the subject, and many don’t even sit on a germane committee. It’s unlikely these well-intended lawmakers will be able to carry the water for an initiative that is frequently shackled to a hefty fiscal note. Educate these bill sponsors on your needs and success stories from other state programs. You might just find out you’re the best authority on the subject. State legislation often poses both risks and opportunities to new businesses. By closely following legislation and keeping an ear to the ground, entrepreneurs can better position themselves — and their companies — for success.