Join our Waitlist for Expert Advice!

Why the SBA's Early-Stage Innovation Fund Won't Help Startups Access Capital (Opinion) One of the SBA's biggest investment programs to launch this year may fall on deaf ears as the venture-capital community swoons from years of lousy returns.

By Peter S. Cohan Edited by Dan Bova

Opinions expressed by Entrepreneur contributors are their own.

Why the SBAs Early-Stage Innovation Fund Wont Help Startups Access Capital (Opinion)The Small Business Administration's $1 billion matching program aimed at supporting young companies will kick in this year. But the question is, will the venture capital community on which the program relies be eager to participate.

Last year, President Barack Obama announced the creation of "Startup America," the White House's sweeping public-private effort to bolster high-growth companies. As part of the effort, the SBA unveiled two $1 billion programs that attempt to help small businesses and entrepreneurs by matching private venture investments. In the first program called the Impact Investment Fund, the SBA will match the private capital invested in startups located in economically distressed areas up to two to one. The second, Early-Stage Innovation Fund, offers to match private investments one for one and caters to early-stage companies outside of the startup hot spots of California, Massachusetts and New York.

The SBA is trying to compensate for what it considers to be market failures: Businesses in distressed communities and startups often struggle to raise funding. To that end, the agency is selling bonds and investing the proceeds in startups if they can raise capital from private investors. Although all this sound peachy in theory, after digging into some of the details, it now seems as though the SBA's efforts -- while harmless enough -- likely won't help businesses much after all.

Why not? The answer is simple: The returns to venture-capital firms have barely kept up with the rate of inflation. And as a result of this terrible track record -- which clearly doesn't compensate investors for the risk of betting on a private company someday becoming the next Facebook -- venture capitalists are loath to throw their hats into the ring.

The companies that are being targeted by these SBA programs are unlikely to provide venture investors with that kind of return. If they were that compelling, the startup's founders wouldn't need any assistance from the government. The private-capital market would be more than delighted to pour money into it.

And that's the big challenge that these SBA programs present for company founders. They create the illusion that private investors will be enticed by the opportunity for the government to provide capital next to their money to invest in the startup.

But the reality is that if these startups are good enough to attract any private capital, they are good enough to raise all their capital privately. And if they are not good enough to raise 100 percent of their capital privately, then a government match will not alter the private capital providers' decision-making process.

In short, a startup seeking to raise capital needs to provide an overwhelmingly compelling argument to private capital providers that it can pass two tests with flying colors:

  1. It is targeting a market opportunity that is currently very small but will become enormous in the next five years.
  2. Its CEO has the industry knowledge, vision, recruiting skills and ability to meet ambitious performance targets that will lead that startup to be the dominate player in that emerging market. If a startup can do that, it will easily raise capital to finance its growth. And if it can't, no SBA sweetener will make any difference.

How have various SBA programs helped improve your company's access to capital? Leave a comment and let us know.

Peter S. Cohan

President of Peter S. Cohan & Associates

Peter Cohan is president of Peter S. Cohan & Associates, a management consulting and venture capital firm. He is the author of Hungry Start-up Strategy (Berrett-Koehler, 2012) and a full-time visiting lecturer in strategy at Babson College in Wellesley, Mass.

Want to be an Entrepreneur Leadership Network contributor? Apply now to join.

Editor's Pick

Starting a Business

She Started a Business With $300 After Getting Laid Off. It Made $300,000 in Year 1 and Became a Multimillion-Dollar Company.

Bobbie Racette wanted to revamp the virtual assistance space — and provide job opportunities for underrepresented communities at the same time.

Business News

Can Anyone Beat Microsoft at AI? The CEO of Salesforce Thinks His Company Can.

Salesforce CEO Marc Benioff calls Copilot "the new Microsoft Clippy."

Starting a Business

How to Find the Right Programmers: A Brief Guideline for Startup Founders

For startup founders under a plethora of challenges like timing, investors and changing market demand, it is extremely hard to hire programmers who can deliver.

Business Ideas

63 Small Business Ideas to Start in 2024

We put together a list of the best, most profitable small business ideas for entrepreneurs to pursue in 2024.

Franchise

McDonald's Launched a Happy Meal for the 30th Anniversary of a Classic '90s Sitcom — But There's a Catch

The promotion is only available in one country, so fans elsewhere are turning to resale platforms like eBay to buy the collectible toys.

Business News

'Not Yet Fully Autonomous': Tesla's Optimus Robots Stole the Show — But Were They Actually Controlled By Humans?

Musk said the $20,000 to $30,000 robot could perform household tasks like mowing lawns and putting away groceries.