Small Business Administration

Small Business Administration Office of Investment and Innovation Small Business Administration SBIC and d SBIR Programs P Ellen Kim Jeff Finkelman ...
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Small Business Administration Office of Investment and Innovation

Small Business Administration SBIC and d SBIR Programs P

Ellen Kim Jeff Finkelman Ahson Wardak

January 2011

Importance of High Growth Companies Net new job creation (1994-2006)*

Gazelles

All other 10%

96%

90%

4% Companies

ƒ S Smallll fifirms create t ttwo outt off every three net new jobs in the U.S. economy ƒ A specific ifi subset b t off th these smallll businesses, “high-growth firms”, accounts for a disproportionate share of jjob g growth ƒ “High-growth” firms have different needs, face different barriers, and require q different p policies than the traditional “Main Street” small business

Jobs Created

* SBA study says that High Impact firms account for “Almost all” net job growth during the period.  We have assumed this  is 90% or above. Source: SBA Office of Advocacy, “High Impact Firms, Gazelles Revisited,” June 2008

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Small Business Administration

Background & Context

Early Stage Funding Gaps

• Angel investing down 44% • State Funds cut back  State Funds cut back • Traditional self financing options       (credit cards, home equity) far less available

Source: Kauffman Foundation, NVCA, UNH Venture Research Center

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Small Business Administration

Background & Context

• Venture down 37% in 2009 • More risk averse More risk averse • Only 725 first‐time deals in 2009

Increasing SBA SBA’ss value to High Growth Companies “Main Street” Capital

Contracting

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High Growth (“Gazelles”)

Loan Programs Loan Programs

SBIC program SBIC program

Government  Contracting and  Business Development Business Development

SBIR Program

Counseling

Small Business Administration

SBDCs, SCORE,  Entrepreneurial Training

Background & Context

Small Business Administration Office of Investment and Innovation

The Small Business I Investment t t Company C Program P Meeting the Capital Needs of American Small Business

Program Overview

The SBIC Life Cycle

Program Performance

Table of Contents Program Overview: - The SBIC Program in Brief - Companies that have been funded by SBIC - Our Results in FY 2010

The SBIC Life Cycle

Program Performance

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Small Business Administration

SBIC Program

The SBIC Program g in Brief

SBIC Program

The SBIC Program is a multi‐billion dollar, government‐ sponsored investment fund created in 1958 to bridge the sponsored investment fund  created in 1958 to bridge the  gap between entrepreneurs’ need for capital and  traditional sources of financing: • Th The program invests long‐term capital in privately‐ i t l t it l i i t l owned and managed investment firms licensed as  Small Business Investment Companies (SBICs) • F For every $1 an SBIC raises from a private investor,  $1 SBIC i f i i the SBA will provide $2 of debt capital, subject to a  cap of $150 million • Once capitalized, SBICs make debt and equity  investments in some of America’s most promising  small businesses, helping them grow

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Small Business Administration

Our Results in Fiscal Year 2010

SBIC Program

The SBA issued $1.17 billion in new commitments to SBICs

$2.05 billion in financing dollars were invested in small businesses 1,331 small businesses were financed, 29% of which were in low‐to‐ moderate income areas or in minority or women‐owned moderate income areas or in minority or women owned businesses businesses An estimated 46,130 jobs were created

…all at ZERO cost to taxpayers… 8

Small Business Administration

SBIC Program

Table of Contents Program Overview

The SBIC Life Cycle -

SBIC Leverage Products and Investment Criteria Phase I: The Application Process Phase II: The Licensing Process Phase III: Portfolio Monitoring

Program Performance

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Small Business Administration

SBIC Program

SBIC Leverage g Products Regular Debenture

Discounted Debenture

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Amount:

Typically 2x (but up to a maximum of 3x) the capital  raised from private investors

Term:

10 years with principal payment due at maturity NO prepayment penalty NO prepayment penalty

Interest:

Semi‐annual payment based on a spread above the 10‐ year Treasury bond

F Fees:

1% 1% commitment fee; 2% drawdown fee i f 2% d d f Annual fee due semi‐annually

Uses:

Investments in “small businesses” as defined by the  SBA Office of Size Standards and federal regulations SBA Office  of Size Standards and federal regulations,  generally in later stage and “buyout” transactions.  Real  estate and project  finance generally prohibited.

Small Business Administration

SBIC Leverage g Products Regular Debenture

Discounted Debenture

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SBIC Program

Amount:

Typically 2x (but up to a maximum of 3x) the capital  raised from private investors

Term:

5 or 10 years with principal payment due at maturity NO prepayment penalty NO prepayment penalty

Interest:

Semi‐annual payment on 10 year bond only; based on  spread above 10 year Treasury bond

F Fees:

1% 1% commitment fee; 2% drawdown fee i f 2% d d f Annual fee due semi‐annually for 10 year bond only

Uses:

The discounted debenture is appropriate for debt and  equity funds with an investment focus on “small equity funds with an investment  focus on  small  businesses” in low‐to‐moderate income areas or those  providing energy‐saving  products or services. 

Small Business Administration

SBIC Program

SBIC Investment Requirements q Instruments SBICs may invest using: SBIC    i t  i ‐ Loans ‐ Debt with Equity features ‐ Equity

SBICs may invest: SBIC    i t ‐ In businesses located  anywhere in the U.S. or its  territories

SBICs may not invest: ‐ More than 10% of the  proposed total fund size in a  single company without SBA  approval

SBICs may not invest: ‐ In businesses with over 49%  of their employees located  outside the U.S.

Use of Proceeds

Control

SBICs may not y invest in: ‐ Project Finance ‐ Real Estate ‐ Financial Intermediaries

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Geography

Small Business Administration

SBICs may: y ‐ Control small businesses for  up to seven years, a limit that  may be extended with SBA  approval

Size SBICs must SBIC   t invest in Small  i t i  S ll  Businesses, defined as: ‐ Businesses with a tangible  net worth