The Early Stage Innovation Fund has now approved its first license for government guaranteed loans. The Small Business Administration said the North Carolina venture capital fund will use the debt of loans to accrue equity investments. It is part of a plan to channel more investment capital to entrepreneurs, small businesses, and startup companies.
The Innovation Fund was established to assist more companies that may have been overlooked by other venture capitalists. The fund will have $200 million of debt financing set aside for venture funding annually for the next five years. The Small Business Association is hoping this will diversify investment usually given to tech startups in areas like California, Massachusetts, and New York. The money will be more readily available for those companies or investors who are broadening their capital in younger companies across the U.S.
“If you can have the government basically help in that process by standing side by side with those limited partners, you’re going to be able to have at the end of the day a larger fund, which is a net positive,” states Mark Heesen, president of the National Venture Capital Association. He remarks that the Innovation Fund will help with private funds that have recently taken a hit as raising money has become more difficult.
The first recipient of the Innovation Fund’s resources is Hatteras Venture Partners located in Durham N.C. Clay Thorp, a partner in the fund, said Hatteras will be investing in life-sciences businesses, “where National Institutes of Health funding is very high, but venture capital flows are quite low.” The Hatteras fund has $88 million from various private investors and will be loaned an additional $37 million from the Innovation Fund.
The Innovation Fund is based on the Small Business Association’s Small Business Investment Company Program. The program first guarantees loans to the venture capitalist companies or funds. Then start-ups and small businesses borrow from those said companies. The benefits are then funneled back into the venture funds’ investors because any accrued profits increase the original investment’s returns. Thorpe notes that though his company was hesitant at first, after analyzing the data, it became clear benefits were easily accessible. “It will make a very bad fund awful, but even a mediocre fund will do O.K., and it will make a good fund great,” he went on to say.
Mandelbaum, Robb. “S.B.A. Signs Its First Venture Capital Fund to New Investment Program.” Small Business, Business Day. The New York Times. 1/22/13.