Running dry: if funding for small business investment companies dries up, who will suffer?

Entrepreneur, August, 2005 by Crystal Detamore-Rodman

MARIA CIRINO was on the second round of fundraising for her Waltham, Massachusetts-based information security service company, Guardent Inc., when her capital search led her to Boston-based Axxon Capital. A Small Business Investment Company, or SBIC, Axxon uses its own capital, plus funds borrowed from the federal government, to provide equity capital to entrepreneurs outside traditional investment circles.

Though Cirino had already experienced success with mainstream investors--she raised $25 million in her first fundraising round--she was so impressed with Axxon's extensive contact network that she included the SBIC in her subsequent, $5 million round of financing. It was also important to Cirino that Axxon focused on investing in women- and minority-owned companies. "There is too little focus on helping women and minorities start companies," says Cirino, whose business was eventually purchased by VeriSign Inc., an infrastructure and security services provider in Mountain View, California.

That was a few years ago. Today, the SBIC Participating Securities Program, which provides up to $2 for every $1 of private capital raised by venture funds licensed by the SBA, is fighting for its long-term survival. The program has been suspended by Congress, meaning it cannot license any new funds until the next fiscal year, which begins Oct. 1, 2005. To make matters worse, President Bush's 2006 budget proposal doesn't request funding for the program, which would effectively kill an initiative that provided over $1.5 billion in venture capital to small businesses last year.

The program suspension is in response to projected investment losses of as much as $2 billion in recent years. SBIC supporters, however, argue that the program's 11-year history is insufficient for making accurate predictions about its long-term performance, particularly when the U.S. economy was stalled in a recession for much of that period.

While small-business advocates worry that suspending the program will hinder the ability of women and minorities to access venture capital, early stage companies in general will face greater obstacles to funding, says Sheryl Marshall, founding partner of Axxon Capital. "A lot of great companies only need smaller amounts of capital," she stresses. Axxon's investment range is $500,000 to $3.5 million--below the average of many traditional VC funds.

Even with SBICs, certain entrepreneurial segments are still underfunded, and eliminating the program would only add to the capital shortage, says Cirino, now senior vice president of VeriSign. Says Cirino, "I certainly think it would be a big loss."

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