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SBA sending venture capital to poor neighborhoods
By Bankrate.com

IPO disappearing actOne legacy that Bill Clinton left to small businesses in low-income neighborhoods is a new Small Business Administration program to foster business development. The SBA says that the New Markets program could lead to investment of $15 billion in rural and inner city areas.

New Markets actually includes two distinct programs: a venture capital outreach program designed to foster equity investment in small businesses located in the inner city and economically depressed rural areas and a grant program to finance third-party programs to nurture and develop small businesses.

"These new programs will help Americans in the most economically distressed areas of the country," said SBA Administrator Aida Alvarez when the programs were announced in January. "It is a great opportunity for minorities and women and other entrepreneurs who have not yet shared in our nation's great economy."

But the initiative's long-term survival is not a sure thing. Although the SBA is moving forward this month with the New Markets program, President George W. Bush has asked the Office of Management and Budget to review these and other last moves of the Clinton White House. Bush's new budget also eliminates future funding for New Markets and other SBA programs, a move that has raised some eyebrows on Capitol Hill.

Venture capital for economically stressed areas
The New Markets Venture Capital (NMVC) program is similar to the SBA-guaranteed loan program, except its arena is venture capital, not bank loans. The program will provide $150 million in government guaranteed funds, to be managed and invested in qualifying small businesses by registered companies, known as NMVC companies.

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It is also similar to the SBA's Small Business Investment Corporation (SBIC) program, which seeds venture capital firms. The difference between an SBIC and an NMVC company is the target audience.

NMVC companies are specifically mandated to work with companies in poor economic areas. The program is designed to "encourage equity deals in low-income areas where venture capitalists don't go," says Peter Gibbs, deputy director of the New Markets Venture Capital Program. In addition, Gibbs says NMVCs will be more patient investors, requiring a lower return than what large, commercial VCs usually demand.

The goal of the NMVC program is to give businesses in economically depressed areas a shot at venture capital. That will help the companies, but will also help communities improve their collective economic lot.

"The New Markets Venture Capital program is designed to make it more attractive to invest in these communities," Administrator Alvarez said in January. "It will ensure that the opportunity to stimulate job growth, neighborhood revitalization and economic development of America's untapped new markets is not lost."

The deadline for companies to apply for NMVC status is May 21. Under the program, qualified VCs will receive funding from the program, which they in turn must invest in small companies in low-income areas.

Private investment -- and expertise -- also required
Although these venture capital companies receive government backing, each must raise at least $6.5 million in investment capital on their own. The SBA's goal is to authorize between 10 and 20 NMVC companies. These specialized VC firms will provide government-guaranteed, long-term funding. Provided that program adheres to its original schedule, NMVC companies should begin accepting investment applications by small businesses starting in October, Gibbs says.

One interesting twist in the NMVC program is a requirement by the SBA that NMVC companies not only provide equity investments, but also technical assistance. They must raise funds to provide at least $1.5 million in technical assistance funding.

Such technical assistance will help small companies get up to speed with technology and improve their chances of succeeding, Gibbs notes. "The technical assistance is a major difference between the New Markets program and traditional venture capital," he says.

New business network
The other part of the New Markets initiative announced by Clinton last January is the BusinessLINC. LINC stands for Learning, Investment, Networking and Collaboration. The goal of BusinessLINC is to "strengthen small businesses in distressed communities," says Marty Gold, BusinessLINC's program manager.

The program will do that by giving funding (grants and cooperative agreements) to public/private partnerships to work with and help develop small businesses. "Through BusinessLINC we are encouraging large businesses and other organizations to work with and mentor small businesses," Gold says.

For example, an SBA Small Business Development Center on an Indian reservation and a nearby Chamber of Commerce may apply for a BuinessLINC grant to establish a mentor program for entrepreneurs on the reservations. The small companies would be matched to larger, established businesses in the area to get advice.

BusinessLINC has been funded with $7 million. Companies wishing to apply for grants had until late March to file, and the hope is that approved projects will get under way by the end of the year, Gold says.

Jenny C. McCune is a contributing editor based in Montana.

-- Posted: May 14, 2001


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