Social networks may start out in basements or dorm rooms, but it takes millions of dollars to get them out. Today the Small Business Administration (SBA) has announced a Small Business Investment Company capital investment program to help startups get seed funding from venture capital firms.
Early stage investment fund managers can now apply for SBA-guaranteed funding to match their privately raised capital up to $50 million.
In return, investors must put at least 50 percent of the money toward early stage small businesses. Business size standards vary by industry, but in general, a business is considered “small” when its net worth is $18 million or less and its average after tax net income for the last two years is $6 million or less.
The program is part of President Obama’s Start-Up America Initiative to encourage innovation and job creation in the United States. “Early stage small businesses face difficult challenges accessing capital,” said SBA Administrator Karen Mill in a statement.
Research has shown that:
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 percent of all U.S. venture capital dollars went to seed funds investing at those levels, and 69 percent of those dollars went to just three states: California, Massachusetts, and New York.
Added Mills, “At the same time, in this financial climate, venture capital funds are finding it difficult to raise money from institutional investors.” To encourage investments, the SBA will dedicate up to $1 billion in SBA guaranteed leverage over the next five years to the Early Stage Innovation Funds that they select.
The government agency does not invest in startup companies directly. Instead, the program targets privately owned and managed investment firms, or SBICs, that provide equity capital, long term loans, and management assistance to small businesses and that are licensed and regulated by SBA. Currently there are nearly 300 SBICs with more than $17 billion in capital under management.
For more information on what the rules are and how to apply, click here. The review period will begin in May and the licensing is expected to go through in September.
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