SBIC... Got Equity? (Venture Capital for Small Business)

Did you know that the U.S. Small Business Administration funds Venture Capital firms to help small businesses access qualified investors? In fact, we are one of the largest ‘fund-of-funds’ in the United States! We call it the Small Business Investment Company program (SBIC).

An SBIC is a privately owned company that’s licensed and regulated by the SBA to fund small businesses in the form of debt and equity. Those SBICs use their private funds, along with SBA-guaranteed funding, to invest in small businesses. SBICs provided early funding to iconic companies like Apple, Tesla, Whole Foods, Intel, FedEx and Costco!

Each SBIC has its own investment profile in terms of targeted industry, geography, company maturity, and the types and size of financing they provide. There are a few universal requirements of small businesses seeking this funding, such as being a small U.S. business in an approved industry. SBICs typically target mature, profitable businesses with sufficient cashflow to pay interest.

According to Dan Nicolas of Main Street Capital, a prominent Houston SBIC, candidates usually arrive at SBIC funding through the help of a catalyst such as buying out previous generations of ownership, a business divorce, or someone looking for growth capital. Like most business transactions, it is important to know your numbers, but Nicolas says that managerial diligence is just as important. Nicholas says that the ideal candidates know their business inside and out, have a clear vision of what the next 3-5 years look like, and have some skin in the game in the form of equity.

In 2018, Main Street provided debt and equity capital to support a strategic acquisition by a multi-generation, family-owned small business. The transaction enabled the company to become the largest manufacturer in its industry while allowing the company’s existing management team to maintain majority ownership of the business. Main Street’s strategic and financial support have been instrumental in helping the Company grow and improve operational efficiency over the last three years.

As of September 30, 2020, there were 302 licensed SBICs holding $19 billion in private capital and $11 billion of outstanding SBA leverage. For the same year, these SBICs reported $5 billion in financing to just over 1,000 small businesses, creating or supporting an estimated 92,000 jobs. During this period the SBA licensed 26 new SBICs with another 46 SBICs in the review pipeline.

If you are interested in SBIC funding, contact the SBA at [email protected] - we can help you get started!

Written in collaboration with Abigail Gonzalez of the Houston SBA