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March 05, 2003
Congress Cuts Funding for New Markets Venture Capital Program
by William Baue
The New Markets Venture Capital program, which provides entrepreneurial expertise and equity
capital to small businesses in low-income regions, received the Congressional ax.
SocialFunds.com --
The federal budget recently approved by the U.S. Congress in the FY2003 Omnibus Appropriations Act
cut funding for Round II of the New Markets
Venture Capital (NMVC) program. The NMVC program, which the U.S. Small Business Administration (SBA) administers, supplies funding
for venture capital firms that provide equity capital and entrepreneurial expertise to small
businesses in economically distressed communities.
 "The elimination of funding for needed
economic development programs like the SBA's New Markets Venture Capital is one of the reasons I
voted against the FY2003 Omnibus Appropriations Act," said Senator John Kerry (D-MA). As a member
of the Senate Committee on Small Business and Entrepreneurship, Sen. Kerry authored the December
2000 law that established the NMVC program.
"At a time when our economy is suffering,
those funds would help spur investment in promising small companies--small companies that create
jobs in areas where conventional venture capitalists are unwilling to take a chance," said Sen.
Kerry. "Breaking this promise to the small-business community, which has been waiting in good
faith for the SBA to offer that money for a second round of investments, is unfair and should be
reversed by this Administration."
The conference committee on the Omnibus Appropriations
Bill added the provision that cut NMVC program funds only after the Senate and House had considered
the bill, according to the Community Development
Venture Capital Alliance (CDVCA). The CDVCA is the trade association of venture capital funds
that finance businesses in low-income areas. Congressional supporters of the NMVC program didn't
know that the Omnibus Appropriations Act cut the program's funding until after the bill passed into
law, according to the CDVCA.
"We were shocked that funding for the program was rescinded,"
said CDVCA President Kerwin Tesdell. "This program would have delivered a direct stimulus to the
economy in the form of much-needed equity financing for fast-growing businesses. And it would have
done so in distressed urban and rural areas of the country to create jobs and economic opportunity
where they are most needed."
Round II funding would have provided seven new NMVC firms
with $70 million in equity to invest in some 210 companies. This would have added almost 5,000 new
jobs and maintained more than 7,000 existing jobs in economically distressed regions.
Round I funding called for $150 million in guarantees for unsecured corporate bonds
(debentures) and $30 million in technical assistance grants. The qualifying NMVC companies match
these funds dollar-for-dollar through private sector investments. The SBA has conditionally
approved Round I funding for six companies, including Maine-based CEI
Community Ventures Fund, Phoenix-based Southwest Development Fund, and the Oak Ridge,
Tennessee-based Southern Appalachian Fund.
Ohio-based Adena Ventures, which provides equity investment and
operational assistance to small businesses in the central Appalachian region, is the first and only
company currently operating with SBA-approved NMVC funding.
"We are off to a very strong
start, both with our investment activity and with our operational assistance program," Adena
President and Chief Operating Officer Lynn Gellermann told SocialFunds.com. "We believe that Adena
and the New Markets Venture Capital program will have a significant impact in the central
Appalachian region."
Thus far, the $34 million venture capital enterprise has provided
professional services to 16 companies in central Appalachia, over 90 percent of which are in
low-income areas. Adena has also invested equity capital in three companies located in low-income
areas: two software companies and a healthcare services company. The latter, Vested Health, balances its constituents' interests by
controlling employer premiums while offering consumers greater control over the employment health
plans.
Martinsburg, West Virginia-based Butterfly.net, one of the software companies Adena invested
in, has developed so-called "grid" technology that allows multiple computer users to interact
together simultaneously. Butterfly.net created a stir last week when it announced its agreement
with Sony
(ticker: SNE) to host Playstation2 online gaming through a grid of IBM (IBM) servers.
Such
innovative deals would not have been possible without the leverage of NMVC funding, which has now
disappeared.
"We will urge Congress to replace this funding and to continue the program,"
promised Mr. Tesdell.
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