Nothing Small About It SBA Launches Ambitious New Direction
By W. Todd Roberson
Small businesses seeking financing can now look to YouTube for content. That’s right: you can get up to speed on the new Small Business Administration (SBA) horizons by simply logging on and learning.
This is the “new look” SBA. Founded in 1953, the SBA is retooling its message and its approach for a modern audience. Some like it. Some really don’t. However, with investments lagging in small business, the new look administration is hopeful its ideas will gain momentum.
Karen Mills, a member of President Obama’s transition team (and heiress to the Tootsie Roll fortune) heads the SBA. The new direction of the organization reflects the business-life experience of Mills, a successful venture capitalist and proponent of what are generally known as “business clusters.”
Changing landscape
The American Recovery and Reinvestment Act of 2008 (the “stimulus bill”) authorizes significant changes in the way the 338 federally sanctioned Small Business Investment Companies (SBICs) can support small enterprises. In a nutshell, firms supported by venture capital (VC) now qualify for SBA guaranteed loans, grants and assistance. In other words, VC firms can now tap into federally guaranteed funds double the base of capital they have to invest in emerging enterprises.
The SBA also has raised the amount that VC firms can invest in any one business to 30% of the total capital under management. For favored small business owners this translates into less time pounding the pavement to find financing – a great advantage in a period of severe credit contraction. Time, after all, even in a new age, is money.
Note the word “favored” above. Herein lies the rub. Critics note that truly “small” firms generally do not interface with venture capital. (The current definition of “small” at the SBA is $18 million or less in net worth.) One direct and immediately observable effect of the SBA’s foray into working with VC firms is the increase in the lobbying outlays by the National Venture Capital Association (NVCA): from $500,000 in 2005 to over $2 million in 2008.
Critics suggest an alternative: simply lower business taxes on the nation’s entrepreneurs. In fact, studies by the Ewing Marion Kauffman Foundation (a think tank associated with American entrepreneurship) find no correlation between long-term job creation and early-stage association with venture capital. The correlation, however, is striking between VC involvement and government and university (read: quasi-government) grants.
Cluster connections
Another plank of the new SBA strategy is the concept of “business clusters,” which means capitalizing on an economic region’s core competencies to revive ailing industries. Mills, a resident of Maine, was instrumental in state and federal funding of studies to promote a shipbuilding cluster, a 400-year-old tradition in Maine. Similarly, in July 2009, Mills kicked off SBA involvement in an automotive/robotics cluster at Oakland University in Michigan. The cluster would be supported by small grants, technical assistance and beefed-up SBA-backed loans to VC-supported start-ups meeting the cluster inclusion definitions of the SBA. These definitions can be quite loose on what’s considered small.
All of this sounds perfectly reasonable, but the inherent contraction in the cluster concept is easy to spot. The SBA’s stated goal of the program is to “build 21st century industries.” Yet one could argue that it is simply propping up dinosaurs when what is needed is diverse organic growth. (Note that the shipbuilding industry in Maine is 400 years old and the automotive industry in Michigan is only slightly younger.)
Research into the success of the shipbuilding cluster in Maine yielded plenty of publicity, government grants and university studies. What it did not yield, however, is any evidence of job creation, long-term economic dynamism or sustainable new enterprise.
Jury still out
Overall, critics of the new SBA contend that: they no longer represent truly small businesses; and they favor existing and politically connected industries and trade groups. Lloyd Chapman, president of the American Small Business League and vocal critic of the new-fangled SBA says, “Donald Trump and his daughterr could start a VC firm and qualify for SBA designation as an SBIC.”
The NVCA sees it differently, suggesting that the new rules simply encourage capital formation at small firms. Critic Chapman goes on to note that firms considered small by the SBA include the largest recipient of federal small business contracts: Textron. (Textron currently has over 40,000 employees and more than $10 billion in revenue.)
Some small business people have serious reservations about the new SBA, and time will tell if the new rules truly work in their favor. Sounds like the stuff that makes good drama. Perhaps we’ll soon see the video on YouTube.
Author: W. Todd Roberson is a Senior Lecturer of Finance and the Coordinator of Undergraduate Recruitment at the Indiana University Kelley School of Business Indianapolis. He can be contacted at wtrobers@iupui.edu
Nothing Small About It