The U.S. Small Business Administration is inviting experienced early-stage investment fund managers to apply for licensing as Early Stage Innovation Funds as part of SBA’s Small Business Investment Company capital investment program.
Licensed Early Stage Innovation Funds can receive SBA-guaranteed funding to match their privately raised capital up to a maximum of $50 million. Early Stage Innovation Funds must invest at least 50% of their investment dollars in early-stage small businesses.
“This initiative is intended to promote American innovation and job creation by encouraging private-sector investment in early-stage small businesses,” says SBA administrator Karen Mills. “Early-stage small businesses face difficult challenges accessing capital. At the same time, in this financial climate, venture capital funds are finding it difficult to raise money from institutional investors. By licensing and providing SBA financial backing to Early Stage Innovation Funds, we hope to expand entrepreneurs’ access to capital and encourage innovation as part of President Obama’s Start-Up America Initiative launched last year.”
As part of the Start-Up America Initiative, SBA intends to commit up to $1 billion in SBA guaranteed leverage over a five-year period to selected Early Stage Innovation Funds using its current program authorization.
Closing the funding gap
High growth-potential, early-stage companies commonly experience a gap in the availability of funding between $1 million and $4 million levels. This gap is often referred to in the venture capital industry as the “Valley of Death.” Since January 2006, less than 10% of all U.S. venture capital dollars went to seed funds investing at those levels, and 69% of those dollars went to just three states: California, Massachusetts and New York.
The Early Stage Innovation Fund initiative will target this gap by licensing and guaranteeing leverage to funds focused on early/seed-stage investments.
SBICs are privately owned and managed investment firms that are licensed and regulated by SBA. SBICs use a combination of funds raised from private sources and money raised through the use of SBA guarantees to make equity and mezzanine capital investments in small businesses. There are nearly 300 SBICs with more than $17 billion in capital under management.
A final rule, effective April 27, 2012, was published in the Federal Register at http://www.gpo.gov/fdsys/pkg/FR-2012-04-27/pdf/2012-10120.pdf. It sets forth regulations for Early Stage Innovation Funds with respect to licensing, capital requirements, distributions and capital impairment, among other things.
More information on the Early Stage Innovation Fund initiative and the regulations governing these SBICs may be found at www.sba.gov/inv/earlystage.
