By KELLY K. SPORS
APRIL 21, 2009, 9:59 A.M. ET
With equity investments in new companies drying up, venture capitalists and angel investors are pushing the federal government to give them financial relief and access to small-business programs traditionally reserved for noninvestor-backed businesses.
The investors' ideas include allowing venture-backed companies to compete for federal research-and-development money reserved for small businesses, creating government-sponsored seed funds to help investors make early-stage equity investments in start-ups and providing new tax credits to equity investors.
But some businesses that traditionally have been served by Small Business Administration programs and loans fear that providing more government aid to equity-backed companies will divert attention from those that really need help.
Equity investors point to President Obama's appointment of Maine venture capitalist Karen Gordon Mills as SBA administrator as a sign that he backs bolstering the agency's support for early-stage investing. At her April 1 confirmation hearing, Ms. Mills signaled she wanted to serve both traditional small businesses and those in the emerging "knowledge economy," such as clean technology and life sciences start-ups.
SBA spokesman Jonathan Swain says Ms. Mills, confirmed on April 2, hasn't yet laid out her agenda for the agency. But he says President Obama appointed her to the job partly because of her background in equity financing and experience with high-growth small businesses. "I think certainly she's going to look and make sure the SBA is working as effectively as possible to help small businesses, and that includes high-impact small businesses," he says.
At a hearing late last month of a subcommittee of the House Small Business Committee, several leaders of venture-capital firms and angel-investor networks testified that the economy had severely hurt their ability to fund small companies in recent months. "Equity investment not only spurs small-business growth but also sparks the development of new products and industries," said Rep. Jason Altmire (D, Pa.).
U.S. venture-capital investments fell 61% in the first quarter, according to a new PricewaterhouseCoopers report. Angel investing dollars fell 26% in 2008, according to the Center for Venture Research at the University of New Hampshire.
"There needs to be a balance" when handling the financial needs of "Main Street businesses and innovation entrepreneurs, and I think the SBA is capable of serving both," says Rich Bendis, chief executive and president of Innovation America, a Philadelphia-based nonprofit that works with investor groups.
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.
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.
Many small-business owners served by the SBA or other programs aren't pleased with the prospect of competing with venture-backed companies for government programs. Karl Kiefer, president and owner of Invocon Inc., a Conroe, Texas, maker of high-tech electronics with 25 employees that has won about $9 million in SBIR contracts since 1991, says competing for SBIR contracts with venture-backed firms could hurt firms like his.
Venture capitalists "can create a competitive posture that would squash us like an ant," Mr. Kiefer says.
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