SBICs Are Great Options to Traditional VC Investment
Yesterday I about the toughness of getting an equity investment from traditional VCs. I didn’t mention in that post that there may be an option that you should explore before, or simultaneous to seeking VC funding.
The Small Business Administration (SBA) has a program called the Small Business Investment Company program (SBICs). SBICs are chartered by the SBA much like banks are chartered by federal agencies or state banking commissions.
It is rather interesting to know that SBICs were first authorized by Congress during the beginning of the Space Race in the early 1960s. They were in effect the first venture capital firms that were born in the United States. SBICs bring high-risk capital to private businesses that help create the kind of innovations that took the first man to the moon. Over the years, SBICs were responsible for helping startups like Compaq, Federal Express, Jenny Craig, CostCo Wholesale, and Outback Steakhouse -- along with 100,000 or so other companies that have received debt or equity investments by SBICs.
Traditional venture capital firms are not regulated, but SBICs are. In order to use the SBA SBIC program, SBICs are required to follow a set of “founder friendly” guidelines. An example is ownership. No SBIC can take more than a 49 percent ownership position in a company if they are working with startups. Venture capital firms can take far more. Under the SBIC subordinated debt program, the maximum interest rate is capped at a floating rate that is higher then traditional bank debt but lower than many opportunistic investment or hedge funds may charge.
Like traditional VCs, SBICs tend to take two different strategies for investing. Some focus on a geographic area that is within a certain distance of their offices (usually a day’s drive) while others focus on certain disciplines such as biotechnology, high technology, or material sciences. SBICs raise private equity for their funds. Depending on the model used, the SBA may loan up to approximately 2.75 times the equity raised to the fund to further leverage the fund investor’s returns.
As I indicated in my post yesterday, you want to do your homework before approaching either a VC or SBIC. Learn as much as you can about the fund’s lending or investment profile before you make contact. There are also some SBICs that only invest in minority-owned companies.
The SBA maintains a complete list of all chartered SBICs by state. Another good resource if you chose to seek investment from an SBIC is the National Association of SBICs (NASBIC).
Sam Thacker is a partner in Austin Texas based Business Finance Solutions
Direct Email: sam@lesliethacker.com
Twitter: @SMBFinance
