As you may know, the congress is cutting back the Small Business Association’s SBIC program. The government will meet its committment to existing SBIC’s but will not license new ones.
Tim Oren has a great post on this topic and so I will not go into the details, but instead link to his post. Go read it if you are interested in SBIC’s and venture capital.
To be completely and totally honest (which is the idea behind this blog), I am thrilled about this. As hard as it is to raise venture funds these days, I have never once been tempted to go the SBIC route. I believe the government has no business supplying early stage venture capital when there are so many institutions who are seeking to increase their committments to venture capital right now.
I think the SBIC program was a really good thing in the early development of the venture capital business and acted like a seed investor. But the venture capital business is mature, full of experienced investors, and has become an attractive well understood place for large instituions, both public and private, to invest their capital.
As a result, SBIC’s have been subject to adverse selection. The managers who can raise a fund with insitutional LPs do just that. The managers who cannot, go the SBIC route.
To make matters worse, the SBIC loans the money. So on top of the adverse selection, the government is taking equity risk and getting debt returns. It’s crazy. Now some argue that the government is getting their money out first in a preference position and that is why debt returns make sense. I disagree. Venture capital is a risky business and, as my former partner Bliss used to say, "when they back up the trucks, they take away all the furniture". When things go bad, everyone gets hurt, including the government.
Check out this quote, taken from Tim’s post, by the current SBA Administrator:
The Small Business Investment Company [SBIC] program was reauthorized, but SBA officials will continue to focus on limiting the government’s exposure to losses from this venture capital program. The White House estimates bad investments by SBICs could cost taxpayers $2 billion. Says [SBA Associate Administrator Anthony] Bedell, "We need to stop that bleeding."
As Tim points out in his post, the $2 billion in losses is old news. That was caused by the burst of the bubble, but old news takes its time winding its way through the venture business and the SBA is still feeling the impact of these losses.
The government is selling at the bottom, but so what? That’s when all the investors who shouldn’t be in a market sell. I say goodbye and good riddance. It’s time that the government got out of the venture business anyway.