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The Venture Capital Infusions

Federal incentives mean more money for VC firms--but what do they mean for you?

This story appears in the August 2009 issue of Entrepreneur. Subscribe »
The Venture Capital Infusions

It's not often that America's get $2 billion in federal funds set aside just for them. But that's what happened when President Obama signed the American Recovery and Reinvestment Act this February.

Better known as the stimulus bill, the ARRA changed the rules for a little-known SBA program that loans money to qualified VC firms called Small Business Investment Corporations, or SBICs. SBICs, which are licensed by the SBA as federally funded VC firms, can tap SBA funds to supplement the venture capital they've raised privately, taking twice as much federal money as they've raised on their own, up to a limit.

The 50-year-old program pays for itself through fees and loan payments by the SBICs. The program has loaned more than $50 billion over the years to companies including Apple, FedEx and Outback Steakhouse.

All of the funds given to an SBIC must be used to fund small businesses, which the SBA defines as companies with no more than $18 million in net worth, or $6 million in after-tax income in the prior two years. Any business fitting this description can approach SBICs for funding. Within this pool, some of the funding each SBIC gets must go to "smaller" businesses, which the SBA defines as having no more than $6 million in net worth and an after-tax profit cap of $2 million.

Another plus to the program: the SBA makes sure a diverse group of venture firms are included in the SBIC pool, so there are VCs interested in funding small businesses in virtually every sector and funds focused on every investment stage--from startups needing seed capital to mature companies seeking money for growth initiatives.

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