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Friday, June 19, 2009
It’s time for a stimulus package for venture capital
MHT's Efrain Viscarolasaga: Tech companies may have to wait for stimulus funds
MHT's Doug Banks: 10 Women to Watch in tech
MHT managing editor Rodney Brown on NECN: 22 tech companies give back to community
For more than 50 years, the U.S. government has acted as a venture capital fund-of-funds, through its Small Business Investment Company (SBIC) program, investing in regions and opportunities not well served by the traditional venture market.
Plenty of well-known companies have received SBIC funding, including FedEx Corp., Whole Foods Market Inc. and Staples Inc. The program has historically had two flavors: debenture (debt-oriented) SBICs designed to fund cash-flow-generative, later-stage companies, and the Participating Securities (PS) SBICs, designed to fund earlier stage, (typically) loss-making growth ventures. While the debenture program is still active, the PS program lost its mojo during the dot-com boom/bust, suffering sufficiently big losses that the federal government (under President Bush) effectively shuttered that variant — and, while they were at it, dramatically reduced SBA’s overall budget.
The Obama administration would appear to have a different view. While the SBA’s budget — but for the SBA-related stimulus funds — has not yet been restored to its pre-Bush levels, Obama’s selection of Maine resident Karen Mills — a former venture capitalist — to head the SBA is suggestive of a revisit of government support of venture capital.
All over the country, venture and individual investors are scaling back investment, attending to their portfolio rather than focusing on new deals. The same goes for institutional investors — the key suppliers to venture capital funds — who have lost 30 percent to 40 percent of the value of their public stock market portfolio, and so find themselves over-allocated to VC and private equity. Early-stage VC-backed companies have historically been a critical source of innovation and, simply put, may not be able to find the resource to develop the next generation of companies that will create the jobs that will help drive our economy forward again.
For the past six years, I’ve served as president of CEI Community Ventures (CCV), one of only six New Markets Venture Capital (NMVC) funds in the US. The NMVC program — an early-stage equity program overseen by the SBIC division — was a Clinton Administration-era program designed to drive early-stage capital into underserved communities in this country, in CCV’s case, in Maine, New Hampshire and Vermont. A challenging program given its narrow geographic focus, CCV put this equity to good effect, funding nine companies that include two standout technology companies — Concord, N.H.’s Nanocomp Technologies Inc. and Portland, Maine’s Foneshow Inc. Originally intended to fund 12-to-18 targeted VC funds, the NMVC program had its funding deleted in a 2003 Omnibus bill. However, in mid March, the bipartisan congressional duo who originally advocated for the program re-introduced a new bill to re-fund the program. NMVC’s clear alignment with the Obama Administration’s focus on rural and urban markets and on access to capital — coupled with Mills’ familiarity with the program through her involvement with CCV — suggests that it ought to get a warm reception.
Entrepreneurship is at the heart of our economy. Without risk funding as fuel, the VC-backed race cars that drive innovation and growth will not run. Demand for capital (equity and debt) has not gotten smaller while supply has. Without support from the federal government, this country stands to lose a generation of innovation, jobs and entrepreneurship that is at the heart of our country’s culture and story. Whether it’s finding the cure to cancer, the next renewable energy advance or the technology infrastructure that will help drive health care costs down, reliance solely on large corporations’ R&D investment just won’t cut it.
Finally, for those of you concerned that the government is not well qualified to be a player in this end of the capital markets, do some homework on Karen Mills. Having worked with Mills for the two years prior to her appointment and reading her recent statements on the importance of risk capital, I’m seeing glimmers of her intent to address this capital gap and I’m very confident in her capacity to figure out the right model. She’s smart, she’s VC experienced, and she’s got an informed point of view on how to grow economies through industry clusters and cross agency collaboration. I think she’ll get it right.
Michael Gurau is the managing general partner of Clear Venture Partners, a New England venture capital fund-in-formation. You can reach him at mg@clearvcs.com.
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