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SBA’s Venture Capital Mistakes Cost Taxpayers $2 Billion

February 27, 2004 /

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Bad investments made through the Small Business Administration’s venture capital program will cost taxpayers nearly $2 billion, according to the White House budget office.

By:
Kent Hoover
The Business Journal of Washington

http://www.nasvf.org/web/allpress.nsf/pages/8473

To stop the bleeding, the Bush administration wants to make major changes to the Small Business Investment Company program. SBICs are private venture capital funds that make loans or equity investments in small businesses with their own money and funds guaranteed by the SBA.

SBICs say they lost money for the same reason conventional venture capital firms lost money: the high-tech collapse and the economic slowdown.

But the president wants to limit the government’s future risk by increasing the SBA’s share of profits in SBIC’s equity investments by 300 percent and charging SBICs a lot more for the use of the government’s money.

The proposed changes would kill the equity investment program if they are enacted, says Lee Mercer, president of the National Association of Small Business Investment Companies.

Private investors would not invest in SBICs because their returns would no longer be worth the risk, he says.

Equity investments — known as participating securities — accounted for nearly half of the $6 billion that SBICs invested in small businesses from October 2001 to January 2004, Mercer says.

Last year, SBICs invested $2.5 billion in 2,610 small businesses. More than 40 percent of this money went to companies fewer than 3 years old, Mercer says.

Conventional venture capital firms, by contrast, rarely invest in start-ups any more.

SBICs’ role in providing venture capital to small businesses that otherwise wouldn’t get it may protect it from the sweeping changes sought by the president.

"I strongly oppose making changes that could severely damage the long-term operation of the SBIC program in the future," says Rep. Don Manzullo of Illinois, who chairs the committee that oversees SBA program.