A Hidden Trove of Small Biz Capital

Question: My business is up and running, with a solid team, a good track record and it just turned profitable. We want to expand and make this grow quickly, but it will take years if we fund it internally. Recently I paid big money to attend a business financing seminar at a local hotel where they talked about government grants. Are these really available?

Answer: Forget about government grants. It won't happen. According to the U.S. Small Business Administration (SBA), the second most frequently asked question at their Answer Desk (after "How do I get a small business loan?") is "How do I get a small business grant?"

The answer is always the same: "The SBA does not offer grants to start or expand small businesses."

Now the good news. I'm going to let you in on one of the best-kept secrets in the cutthroat world of venture financing. It's called the Small Business Investment Company (SBIC) program, and it has provided nearly $30 billion in financing (both loans and equity investments) to 90,000 small businesses since 1958.

While this program is still going strong, it maintains a low profile by design, so the folks who manage the funds that invest in small companies don't get totally devoured by cash-hungry entrepreneurs.

SBICs - some 450 of them nationwide - represent a uniquely successful partnership between Uncle Sam and private investors. Each SBIC - while licensed and regulated by the SBA - is actually a privately owned and managed investment firm that provides venture capital and startup financing to small businesses.

Unlike many venture capital (VC) outlets that demand quick returns, SBICs describe themselves as providers of "patient capital" that small companies need to develop products and foster growth.

Seed money for some of America's most beloved businesses originally came from SBICs, including firms such as America Online, Apple Computer, Callaway Golf, Federal Express, Gymboree, Outback Steakhouse, Staples, Sports Authority and many more.

SBICs also are funding up-and-coming small firms like NetSpend, an Austin, TX-based business that offers debit card processing and marketing services. Two brothers, Roy and Bertrand Sosa who moved their family to Austin from Mexico in 1986, founded NetSpend. They launched the business from their one-bedroom apartment in 1998 with $750. In 2000, several SBICs invested in the fledgling firm, helping fuel a period of rapid growth that landed the company as the National Association of SBICs' Portfolio Company of the Year in 2003.

SBICs have been a marvelous mechanism for catapulting promising small companies into the big time. The government itself does not make direct investments, nor does it select the firms that will be backed. That's all left to the qualified private fund managers. The funds set their own policies and make their own investment decisions.
What the SBA does do is match funds. For every dollar the private funds put up, they are eligible to receive another two dollars from the SBA - a huge boost. Here, the SBA invests alongside private risk-taking investors. And while hardly anyone knows it, this program has made Uncle Sam the largest single investor in U.S. private equity funds.

Each SBIC is free to define its own area of interest. Some specialize in specific industries, geographic areas or personal interests of the fund managers. And while all SBICs will consider applications from socially and economically disadvantaged entrepreneurs, Specialized Small Business Investment Companies (SSBICs) make all of their investments in that area.

Complete information on the program, including guidelines for entrepreneurs seeking funds and detailed listings of all operating SBICs in the country, is available in the "Investment Program" section of the SBA Web site. Go directly to the page at www.sba.gov/inv where you'll find a U.S. map. Click on your state for a list of SBICs. The SBA is currently upgrading this site to add more search capabilities, so you'll soon be able to sort SBICs by investment stage, geographic limits or industry focus.

Another way to locate SBICs is under the member listings of the National Association of Small Business Investment Companies (NASBIC) at www.nasbic.org. NASBIC claims to be the world's oldest, continuously operating venture capital organization.

Yet another organization, the National Association of Investment Companies (NAIC), is geared toward financing for minority-owned business. Visit their Web site at www.naicvc.com.