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New Early Stage Fund Solicitation Creates Exciting Opportunities For Fund Managers, Investors

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New Early Stage Fund Solicitation Creates Exciting Opportunities For Fund Managers, Investors

By Karen Mills, Former SBA Administrator
Published: June 6, 2013 Updated: June 6, 2013

All across the country today there are promising startups looking to scale their businesses and to bring innovative, game changing ideas to market. The ability of these businesses to access long-term, patient capital is critical to their success and to the growth of the American economy.

However, today only six percent of venture capital is going to early stage rounds of between $1 and $4 million, creating a Valley of Death for many new businesses.

Compounding this lack of early stage capital is the fact that 70 percent of venture capital goes to just three states: California, New York and Massachusetts. And 40 percent of all venture capital goes to just one region: Silicon Valley. That is up from 30 percent in the late 1990s, according to a study by PricewaterhouseCoopers and the National Venture Capital Association.

There are enormous opportunities for investors and venture capital funds to finance innovative early stage firms outside of these traditional start-ups hubs.  The market is less crowded and the field is ripe with outstanding entrepreneurs with experience across a broad array of growth industries. I get to meet these entrepreneurs every week when I travel around the country and visit their businesses.

At the U.S. Small Business Administration (SBA), we recently launched an Early Stage Fund to help fill market gaps, spur private sector investment and to help firms avoid the Valley of Death—and we are opening a new solicitation for the Fund beginning in the Fall. As part of this new round, we have increased the amount available for investment from $150 million to $200 million.

Here’s how it works: We provide a 1-to-1 match with private capital, capped at $50 million. Funds participating in the program must deploy 50 percent of total capital in early stage companies (companies that have never achieved positive cash flow from operations in any fiscal year). There is a minimum private capital raise of $20 million. All investment decisions are made by the private fund managers.

We have allocated up to $1 billion in SBA-guaranteed leverage commitments over five years to the Early Stage Fund. The Fund operates through our Small Business Investment Company (SBIC) Program. Our SBIC program is authorized to commit up to $3 billion annually in funds, making the SBA one of the largest participants in its space.

In Fiscal Year 2012, our SBIC program had its third consecutive record-breaking year. Investment funds licensed as SBICs provided more than $3 billion in growth capital to over 1,000 small businesses, a 17 percent increase from FY 2011 and an 83 percent increase from FY 2010. In FY 2012, the SBA also licensed 30 new funds, including a record 27 Debenture SBICs.

A key factor driving the success of the program has been ongoing efforts to streamline its operations. In 2009, it took 14.6 months to get an SBIC fund licensed. Today, it takes only 5.4 months, a 60 percent improvement in licensing times.

If you want to learn more about our Early Stage Funds and the new solicitation, or to read more about the SBIC program, go to www.sba.gov/inv.

 

 

About the Author:

Karen Mills

Former SBA Administrator

Karen Gordon Mills is the Former Administrator of the U.S. Small Business Administration. The SBA helps both Main Street and high-growth small businesses get access to capital, counseling, federal contracts, disaster assistance and more.

Comments:

"Valley of death" paints a vivid picture what an entrepreneur faces. 40% goes to silicon valley indicates another problem not mentioned here, most likely they are internet startups, that are not capital intensive like other fields.

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