22 April 2009

More SBA Funding for Startups? Maybe...

I had coffee this morning with my father and his friend, Fritz Keefner. Fritz is an interesting cat, and led an interesting career before retiring...he was on Wall Street, then got involved in collateralized lending to small businesses in the 70's, then was one of the first venture investors in Colorado in the 80's.

Anyway, one of the topics we discussed was the concept of diverting some of the bailout money away from the huge investment banks and toward small, innovative businesses.

I think it's a great idea-- i.e., since the governmental wallet is already open, and since those in my generation (and later generations) are going to be paying for the bailouts for decades to come anyway, why not tack on a bit more to create jobs, innovation, and stimulus at the entrepreneurial level?

Anyway, proving that the entrepreneurial DNA runs through my family and friends like the Force in Star Wars, my wife sent this article to me today regarding an idea she's hatching for a business.


Two paragraphs stand out:

"In December, Innovation America and the National Association of Seed and Venture Funds pitched to members of the Obama transition team a plan to create a government-funded $1 billion seed fund that would shore up angel-investing groups and regional early-stage equity investment programs, which provide equity investments to start-ups. He says the new administration seemed receptive to the idea, but hasn't moved forward on the proposal."

Although I think that it probably has a tiny chance of actually happening, it's an encouraging sign that they're out their pitching it.

The other interesting paragraph is this:

"Michael Gurau, president of CEI Community Ventures, a Portland, Maine, venture-capital fund on whose board Karen Mills served, says he would like to see the SBA put more emphasis on equity investments, such as increasing funding for the federal SBIC program, which aims to bolster venture-capital funding for start-ups.

Proponents of increasing federal assistance for small, equity-backed companies say it is high-growth start-ups that create the most jobs. According to the National Venture Capital Association, venture-capital firms account for only 0.2% of all financing, but 10% of all U.S. workers are employed by a company that was once venture-backed.

The association is pushing Congress to pass legislation allowing venture-backed companies to compete for contracts through the Small Business Innovation Research program, or SBIR, which requires that federal agencies give 2.5% of their research-and-development budgets to small, independently run businesses. Venture-backed companies don't generally qualify for the program now."

Their are a couple take-aways here. One is about increasing SBIC funding; I'm hugely in favor-- to me that's a no-brainer. The other is whether VC-backed companies can qualify for SBIR.

Overall I think that would be a net positive (especially if overall funding were incread), although the downside is that the "hot" VC backed companies would crowd out the traditional SBIR firms, which are often pursuing more in-depth, long-term research....much of which never pans out, but some of which occassionally turns into major new breakthroughs...

Either way these discussions are encouraging for entrepreneurs, who are facing a tough fund raising environment.

What do you think? Contact me at nathan venturearchetypes.com.

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