What does your growth-minded small business have in common with Apple? Not much, perhaps, but here’s one thing: The multi-gazillion dollar tech company got early funding from a unique type of investment firm called a Small Business Investment Company – and so could you.
SBICs are high-powered but low-profile backers of small businesses, pumping over $4 billion into small, growing firms, as well as some early-stage startups in the past year alone. They’ve been around for 54 years (surprise!) but most capital-seeking small businesses and startup entrepreneurs have never heard of them. So what gives?
For one thing, SBICs deliberately fly below the radar to avoid being inundated with funding requests. But SBICs are still on the lookout for high potential small businesses to invest in, and the amount of money available to small companies via this channel has skyrocketed 85 percent in the last two years, setting all-time records. Not only is this an increasingly important funding source, it’s also an innovative, time-tested structure that marries some of the best features of private equity money with government guarantees.
SBICs are a unique kind of funding source. They are privately-owned and managed investment firms that are like a combination of a bank, venture capital firm and angel investor. Unlike VCs, however, SBICs see themselves as longer-term investors, and often portray themselves as the “patient money” alternative to venture firms seeking a quick exit.
In part, that’s because of how they’re structured. For one thing, SBICs are licensed and regulated by the U.S. Small Business Administration (SBA). And the money they invest in small businesses – through equity investments, loans or both – comes from purely private sources plus capital raised with the help of SBA guarantees. Today there are 301 operating SBICs, with a total of $18 billion in capital under management. That’s not chicken feed.
The SBA backing has helped entice record levels of private capital to SBICs, and into small businesses – about $1 billion in the past 12 months. SBICs invest in a wide range of small business types, including established firms with less than $1 million in revenues, as well as early-stage companies just underway. Because the SBA licenses them, SBICs must invest exclusively in small firms, with at least 25 percent of investments directed to businesses with under $2 million in after-tax income. Investments must be debt, equity or a combination of the two.
Some SBICs specialize in certain industries, while others invest more generally. Keep in mind, however, that this isn’t typically seed capital for launching a business from scratch. Most SBICs look for small but growing firms that are at least mature enough to make current interest payments on any debt.
A few SBICs are also linked into the White House Startup America Partnership program (https://www.whitehouse.gov/economy/business/startup-america) that’s been marshaling public and private resources to support startups for the past several years. (The author’s firm, BizBest (www.BizBest.com), is a Startup America member and featured startup resource.)
There’s a state-by-state directory of licensed SBICs on the SBA website at this address: http://www.sba.gov/content/sbic-directory. Or visit the main SBIC page at www.SBA.gov/INV and look for the “Small Business Owners & Entrepreneurs” section for more information and resources. That’s where you’ll find step-by-step guidance on seeking SBIC financing for your small business.
Research and identify SBICs that might be a good fit for your business. Check the directory listed above, as well as the Small Business Investor Alliance (www.sbia.org) and National Association of Investment Companies (www.naicpe.com) websites.
The SBIC Directory offers a wealth of information on each SBIC, including its preferred investment size, type (i.e. loans, equity, debt with equity, etc.) and stage (early, expansion, later, etc.). The directory also provides details on industry and geographic preferences of individual SBICs.
Once you’ve identified target firms, take steps to present them your business plan. But don’t go in cold. Since they receive hundreds of plans yearly, you will benefit greatly from a personal reference or introduction to the particular SBIC fund manager being targeted. Check the firm’s website for names, or search LinkedIn to see if you have any mutual connections you might leverage. Or talk to accountants, attorneys, executives in your industry and other colleagues to try and arrange an introduction. Time spent will be well worth it.
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