Let’s Get It Started
The Startup America Partnership Deconstructed
On January 31, senior administration officials announced a new public-private partnership—the Startup America Partnership. The initiative reiterates the administration’s keen focus on small-business innovation, entrepreneurship, and access to capital. With organizational funding from the Kauffman Foundation and the Case Foundation, the initiative was introduced by an all-star cast that included: Steve Case, chair of the partnership; Kauffman President Carl Schramm; National Economic Council Director Gene Sperling; Chairman of the Council of Economic Advisers Austan Goolsbee; Secretary of Energy Stephen Chu; Secretary of Commerce Gary Locke; and SBA Administrator Karen Mills.
The partnership reflects the president’s new innovation-driven economic competitiveness agenda. It is designed to coordinate and cohere a variety of existing and emerging (i.e. not yet funded) public- and private-sector efforts focused on supporting strategic sectors (energy, advanced manufacturing, information technology, etc.) and small, high-growth ventures with capital and counsel. The capital portion of the announcement started with announcements that partners such as IBM and Intel would commit stated dollar amounts to supporting and/or investing in emerging growth companies. Intel Capital’s $200 million commitment to new companies as part of this initiative is arguably nonnews; in 2009—the nadir of the downturn—Intel Capital invested $327 million in 107 investments.
Of greater note was Mills’s announcement that SBA was repurposing it’s existing Small Business Investment Company , or SBIC, debenture program to create two $1 billion matching fund commitments ($200 million per year for each program for five years) to risk equity venture funds seeking early stage capital and to growth equity funds interested in addressing underserved communities and/or clean energy ventures. Debenture SBIC funds (a debt-like form of risk capital) have long been available to proven growth capital funds capable of uncovering established businesses with cash flow that can support regular interest payments. What’s new in the announcement is the twin focus on underserved communities and on clean energy ventures. The former program, on the other hand, seems a bigger deal; debenture SBICs have not generally been used to support early-stage VC as these emergent ventures—typically loss making in their early years—cannot support regular interest payments.
As it happens, I’ve managed a debenture SBIC focused on early-stage VC since 2001 and so I viewed this prospective commitment to early-stage debenture SBICs with great interest. The basics of the SBIC program are that SBA matches a VC fund’s capital either 1-to-1 (in the case of the early-stage version) or 2-to-1 in the case of the growth equity. The difference is that early-stage ventures usually back companies with very young technologies or business plans with very limited revenue and early losses while growth equity supports more established businesses that have meaningful revenue and good cash flow from profits.
For this latter fund type, private capital-matched by SBA support–can afford to pay interest on the loans the SBIC fund offers the target company. In the case of early-stage funds, they don’t have cash flow to support debt service. For the debenture fund structure that I manage, SBA does a neat trick by “over-matching” the private capital my fund raised (e.g. matching the $5M private capital the fund raised with $7.5M of SBA matching funds) and then retaining a portion of that match ($2.5M) as pre-paid interest for the early years of the fund (years one through five); after companies funded in early years have had some breathing room to grow, they can presumably afford to carry interest payments that come due in the second five years. SBA’s Startup America Innovation Fund plans to do a 1-to-1 match rather than the 1.5-to-1, pre-paid match structure I described for the fund I manage; to address the “loss-making companies can’t service debt in early years” problem, SBA plans to allow funds to use their private capital to service the debt throughout the life of the fund—something that has not been possible in the current SBIC debenture programs.
The beauty of the debenture program is that SBA will accept a low interest return for its commitment, leaving private investors with the upside of gains made in excess of SBA principal and interest. Given the government’s apparent disinclination to resuscitate the equity version of the SBIC program (so-called Participating Securities SBIC—see my column “It’s time for a stimulus package for venture capital” in Massachusetts High Tech, or MHT), this is a pretty creative way to leverage public capital to get new private capital flowing into small, high-growth businesses.
Startup America also announced partners and support for entrepreneurship education and mentorship. As noted by MHT in its February 3 piece about Techstars joining the Startup America Partnership, the principals behind this program understand the value of mentorship and—as with IBM and Intel—are referencing entrepreneurship support organizations like Techstars, Mass Challenge, Jumpstart America, and Network for Teaching Entrepreneurship that have existing programs that the Startup America Partnership will highlight (and, perhaps, encourage foundation and other capital to support) as part of this initiative. In all likelihood, participation in this partnership will be little more than public- and private-sector showcasing—events, web, and other forms of promotion and exposure for these organizations, presumably increasing their profile and thus their ability to raise capital and provide more services. While not new, per se, this is not a bad thing.
I’ve got great hopes for Startup America. While many would (and have) understandably characterize it as a lot of fanfare without much new resource, I’m confident that the importance of small business to this president coupled with the commitments of Case and Kauffman will have us looking back a few years down the road and concluding that it was more than just a high test press conference and website.
SBA’s Administrator Mills is fond of noting that a substantial majority of net new jobs created in this country are driven by small businesses. If so, then capital to fuel small-business growth—in the context of a contracting private-sector VC market—could be transformative in terms of net new jobs. Moreover, small technology businesses are responsible for some of the most innovative developments in the last half century; the Google and Facebook mentions in the president’s State of the Union are both companies seeded and accelerated with venture capital. So SBA’s proposed new programs give us a twofer: jobs and innovation. You go, SBA!
Michael Gurau is the managing general partner of Clear Venture Partners, a New England venture capital fund-in-formation. You can reach him at firstname.lastname@example.org.
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