Women, Minorities Still Struggle for Capital
Kent Hoover Washington Bureau Chief
Marian Sabety was a pioneer in social networks, developing Internet technologies for interpersonal interaction back when FaceBook was "still a Harvard student skunk works," she said.
But that and 25 years as a high-tech industry executive weren't enough to win venture capital for her Washington, D.C.-based company, Wyndstorm Corp. Sabety said she pitched her company to more than 200 venture capital firms, "with no nibble."
The problem, she concluded, was her gender. A woman venture capitalist was present at only one of her presentations during 2007 and 2008.
"Even then, she was mute," Sabety said.
"I find it shocking that the VC bastion remains so decidedly male-dominated," she said.
Companies owned by women and minorities have received less than 5 percent of total venture capital investments over the past 40 years, said Sen. John Kerry, D-Mass. They also continue to have a harder time getting bank loans than do similarly situated white male business owners, according to several studies.
Kerry, who chairs the Senate Small Business and Entrepreneurship Committee, held a Sept. 11 hearing on the problems women and minorities face in getting capital for their businesses.
"We're here today to continue to make the case that programs to help women and minorities, and those in depressed rural and urban areas, are still necessary, particularly through the SBA," Kerry said.
SBA's mixed record
The Small Business Administration has been an important source of business financing for women and minorities. Minority-owned businesses received 27 percent of all SBA-backed loans made between 2001 and 2004, according to a January 2008 study by the Urban Institute. By contrast, minorities received only 10 percent of conventional small business loans during this time period.
More than 21 percent of SBA-backed loans went to women-owned businesses, compared with 16 percent of conventional small business loans, according to the Urban Institute.
Minorities and women have not fared so well in the SBA's venture capital program, however. Only 8 percent of investments made by SBA-licensed Small Business Investment Companies in fiscal 2007 went to firms owned by minorities or women. That's down from 26 percent in 1998, Kerry said.
Kerry's committee has approved legislation aimed at encouraging SBICs to invest more money in businesses owned by women and minorities. The legislation, which is part of an overall bill reauthorizing SBA programs (S. 2920), would enable SBICs to increase the size of their funds by $25 million if they invest at least 50 percent of their money in companies owned by women or minorities, or in companies located in low-income areas.
The bill could come up for a vote in the full Senate this month.
The National Association of Small Business Investment Companies supports the legislation.
"Monetary incentives generally have worked in most fields," said Nasbic President Lee Mercer. "One would hope it would work here."
Mercer, however, said it's misleading to compare SBIC minority investment numbers in 1998 with today's numbers. In 1998, there were still 73 specialized SBICs in operation that were required to invest 100 percent of their funds in businesses owned by minorities and women. Congress ended that program in 1996, contending these funds required too much of a government subsidy. Existing specialized SBICs were grandfathered in, but the number has steadily declined over the years to only 16 today, Mercer said.
The same factors that Sabety faced in trying to get funding from conventional venture capital firms also are at work at SBICs. Investment funds tend to do deals that were brought to them or identified by "somebody in their network that they know and trust," Mercer said. Women and minorities tend to be involved in different networks than VCs, who tend to be white males.
Minorities hurt by SBIC rules?
The SBA needs to change its criteria for who is eligible to run SBICs if it wants to increase financing to minorities and women, said C. Earl Peek, managing partner of a black-run investment firm that was rejected for an SBIC license.
Peek's firm, Diamond Ventures LLC, is based in Atlanta and Washington, D.C. It sued the SBA in 2003 over its rejection, accusing the agency of racial discrimination. The case is still making its way through the courts.
Under SBA rules, at least two SBIC principals must have five years of private equity experience. This requirement tends to exclude minorities and women, Peek said, and ignores other relevant experience, such as accounting, banking and economic development.
People with these types of backgrounds have succeeded as venture capitalists, he said, pointing to a recent Kauffman Foundation study that found minority-owned VC firms have realized a 29 percent internal rate of return on investments made after 2001.
The biggest reason why SBICs aren't making more investments in minority-owned businesses, Peek said, is they don't have "managers who have deal-flow relationships in those communities."