Alternative Venture Capital for Small Business

Traditional Venture Capital is a purely private transaction between a venture capital firm (who raises private money to invest in businesses) and the companies they invest in (their portfolio companies). In these situations, the venture capital firm is exclusively out to provide outstanding returns for the individual investors in their venture funds.

Overview:

Alternative venture capital firms, while still in business to generate outstanding returns for their limited partners also incorporate an additional benefit of investing in low-income areas creating jobs, wealth and improving community development.

To achieve this, many of these firms have partnered with the Small Business Administration (SBA) or the U. S. Department of Agriculture (USDA) - who guarantee or subsidize debt instruments to these firms so that they can in turn provide either equity capital or debentures to small businesses in low-income or rural areas.

Since these venture capital firms partner with these governmental departments, there are additional rules and requirements to qualify for these programs - particularly based on location of the investment. Please see each program to determine individual rules and regulations.

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Community Development Venture Capital (CDVC):

According to the Federal reserve Bank of San Francisco, "... community development venture capital (CDVC) recognizes (that venture capital helps facilities business and economic growth) and seeks to use the powerful tool of equity finance, not just to build businesses, but to build businesses that benefit low-income people and distressed communities."

Further, "(CDVCs) look to invest in businesses whose growth has the potential to create good jobs for people with limited job opportunities. This double-bottom line approach means that while traditional venture capital funds and CDVC funds use the same financing techniques, their investment portfolios ultimately look quite different."

To find out more about these programs and companies that participate, please visit the Community Development Venture Capital Alliance's website.

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Small Business Investment Companies (SBICs):

According to the SBA; "The mission of the Small Business Investment Company (SBIC) program is to improve and stimulate the national economy and small businesses by stimulating and supplementing the flow of private equity capital and long term loan funds for the sound financing, growth, expansion and modernization of small business operations while insuring the maximum participation of private financing sources."

Two key provisions here. Not all SBIC funding is in equity. Many times, these firms provide long-term convertible debt or loans. Thus, if your business struggles, you are still required to make monthly payments against the debt. The upside is that most of this financing is interest only in the beginning of the loan or debt - giving the business time to use those funds to grow their business. On the other side, should your business take off, these SBIC firms can convert that debt into equity shares of your company and harvest any upside potential. Second, just like traditional venture capital, these organizations are looking for sound companies with huge market potential and a management team that can realize that potential.

Additionally, the recent American Recovery and Reinvestment Act of 2009 (ARRA) has created new provisions for SBICs making it easier for small businesses to qualify for these programs as well as making it more beneficial for these SBIC organizations to invest in companies in their communities.

Just keep in mind that the SBA does not invest directly in small businesses or other entities nor does it provide debt or debt guarantees to small businesses - to participate in this program - contact a SBIC directly.

To find a SBIC in your area - Use our search tool.

Or, find more information here - Small Business Investment Companies (SBIC).

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The Rural Business Investment Program (RBIP):

The RBIP is a joint initiative between the U. S. Department of Agriculture (USDA) and the Small Business Administration (SBA). This program was created "to promote economic development and job creation in rural areas."

Rural Business Investment Companies (RBICs) only invest where "At least 75% of RBIC investments measured both by dollars invested and number (are) made in Rural Business Concerns (i.e., an Enterprise whose principal office is located outside a standard metropolitan statistical area or within a community with a population of 50,000 or less)." And that, "No more than 10% of investments measured both by number and dollars invested may be in Enterprises whose principal office is located in an urban area (defined by the Census as having a population of 150,000 or more.)" Further, at least of 50% of RBIC investments, "(measured both by number and dollars invested) must be in "Smaller Enterprises," and of those, at least 50% must be in "Small Business Concerns."

To find out more about this program and RBIC who participate, please visit the section of the SBA's website that outlines the Rural Business Investment Program

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The New Markets Venture Capital (NMVC):

This program "seeks to stimulate economic development in Low-Income (LI) areas. Through public-private partnerships between SBA and newly formed NMVC Companies (NMVCCs) and existing Specialized Small Business Investment Companies (SSBICs), the program will meet the unmet equity needs of local entrepreneurs through developmental venture capital investments, provide technical assistance to small businesses, create quality employment opportunities for LI area residents, and build wealth within LI areas."

Some key provisions are (from the SBA website):

New Markets Debentures are deferred interest debentures issued at a discount. This allows prepayment of interest for the first 5 years of its term and therefore requires no payment for 5 years from the date of issuance plus the length of time between the issue date and the next March 1 or September 1, whichever comes first. SBA refers to this period of time as the "stub" period and employs its use so that all New Markets Debentures have common prepayment and maturity dates of March 1 or September 1. A New Markets Debenture issued on March 1 or September 1 would have a full six month stub period.

New Markets Debentures are available only for a 10 year maturity (plus the stub period). The 10 year New Markets Debenture requires semi-annual interest payments during the last 5 years of its term. It does not permit prepayment for a period of 12 months (plus the stub period) after issuance. Thereafter, prepayments are allowable, but only on March 1 or September 1 of each year. The actual period during which you cannot prepay may be from 12-18 months depending on the length of the stub period. The cost of prepayment is the present value of the New Markets Debenture on the semi-annual date chosen for prepayment.

SBA will not pool New Markets Debentures. The Federal Home Loan Bank of Chicago (FHLB) has agreed to purchase all New Markets Debentures and hold them until maturity. The interest rate on New Markets Debentures will be determined by FHLB using a spread over the FHLB's cost of funds as determined on each draw date.

Find a list of NMVC by visiting the section of the SBA's website dedicated to NMVC.

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