Serving Underserved Populations and Markets Proves Key to Maximizing SSBCI Capital
New Ventures Update
Date: March 15, 2022
In mid-November, the U.S. Department of the Treasury (Treasury) released the state, U.S. territory, and District of Columbia (collectively, “states”) application materials for how states intend to deploy the State Small Business Credit Initiative (SSBCI) Program dollars. What was evident from Treasury’s capital allocation to the states and the application materials were two key items: (1) many traditional venture firms will easily run afoul of the current conflict of interest terms set forth in the November materials; and (2) Treasury is highly focused on capital deployment to underserved markets and populations. What also became clear was that states that maximize capital deployment to traditionally underserved populations and markets have additional opportunities to access capital as part of Treasury’s Incentive Funding Allocation.
The Core of the SSBCI Program
The State Small Business Credit Initiative Program is a federal program instituted by Treasury that seeks to deploy up to $10 billion in small businesses and startups through a variety of funding mechanisms. The SSBCI Program has four main buckets of capital: (1) $6.5 billion Main Capital Allocation; (2) $1 billion Very Small Business Allocation; (3) $1.5 billion SEDI Allocation to socially and economically disadvantaged individuals (“SEDI-owned businesses”); and (4) $1 billion Incentive Funding Allocation. The two core tenets of the SSBCI Program are rooted in promoting equity through expanded access to capital, economic resiliency, job creation, and increased economic opportunity, and by catalyzing private investment, with an acute focus on SEDI-owned businesses seeing an uptick in capital investment. Treasury is focused on expanding opportunities to underserved communities lacking in capital and building financial ecosystems that support entrepreneurs and small businesses.
Of the $10 billion of total capital allocation under the SSBCI Program, states have been initially allocated capital under the Main Capital Allocation (which includes the state-sponsored venture capital program, in addition to other capital programs), with an opportunity to receive additional monies for investment in SEDI-owned businesses. Further, Treasury has allocated an additional $1 billion in incentive funding for jurisdictions that demonstrate robust support for SEDI-owned businesses. This effectively means that states that excel at capital deployment to SEDI-owned businesses get an additional bite at the apple from the Incentive Funding Allocation pool.
The $1.5 billion SEDI Allocation is to be allocated specifically to (1) small businesses that have faced barriers to access to capital, markets, and the networks they need to grow their businesses because of certain statuses or membership in certain groups, including membership in a group that has been subjected to racial, ethnic, or cultural biases over the course of American history; and (2) small businesses in Community Development Financial Institution (CDFI) Areas, which are generally low-income, high-poverty geographies that receive insufficient support for the needs of small businesses, including minority-owned businesses.
Further, Treasury will allocate the $1 billion in additional incentive funding to the states that most effectively delivered robust support to these groups, assisting in the promotion of lending and venture capital investment for small businesses run by diverse founders or that operate in geographic areas that have traditionally lacked access to capital.
Stimulating Private Investment
The SSBCI Program is designed to catalyze $10 of small business investment for every $1 of SSBCI funding, which requires states to clearly identify how the federal funds will be used under the SSBCI Program. All states, territories and tribal governments must describe in their applications for federal dollars the causes and results in new investment throughout the state and must clearly show how the SSBCI funds are being utilized for small businesses and startups that would traditionally lack access to such capital. Overall, Treasury is seeking to show clear connectivity between the deployment of SSBCI capital and transformative impact on communities receiving such capital.
Partnering for Success
This requirement places the states in a unique position. In addition to properly deploying the Main Capital Allocation to constituents, states that maximize their deployments to SEDI-owned businesses are also eligible for at least their portion of the Incentive Funding Allocation. However, the unique opportunity for states to become action and thought leaders and top performers across the United States by thoughtfully and strategically maximizing their deployment of SSBCI Program funds to SEDI-owned businesses to capture their entire portion of SEDI-focused funding also allows them to capture 100% or more of their allocation of the Incentive Funding Allocation, with the ability to outperform other states and capture those underutilized SEDI-focused dollars as well. Further, by truly succeeding in the capital deployment of the SEDI Allocation and the Incentive Funding Allocation buckets, states have the opportunity to deploy new areas for jobs, innovation, tax base, and population retention that previously were dramatically underserved both as to markets and the population within those markets.
In order to best accomplish this, states will need to partner with local, intimately knowledgeable partners who fundamentally understand and can work with and within the ecosystem to maximize the benefits to that state as a whole.
Maximizing deployment into SEDI-owned businesses creates a triple net positive for the states. First, by deploying capital in amounts greater than would be required to satisfy the baseline requirements of the SSBCI Program, the state can maximize generation of new capital investment and access to the SEDI Allocation. Second, by deploying capital to other credit support programs (OCSPs) with strong relationships with SEDI-owned businesses, the state will not only achieve the objectives of promoting equity and access to capital, but also will take a colossal step forward within the state to close wealth gaps. Third, by focusing deployment to OCSPs focused on investing into SEDI-owned business, the state can get access to an additional $1 billion in incentive funding for further economic development and has the ability to pull in additional incentive funding reallocations from states that it outperforms.
To comply with the terms of the SSBCI Program, the OCSPs that the states select should be able to demonstrate, at a minimum, that $1 of public investment from the SSBCI Program will result in at least $1 of private funding brought by the OCSP. The state must prove causation and results in reporting on the metrics of the SSBCI Program, so working with OCSPs that have a proven track record of funding businesses, particularly SEDI-owned businesses, will be crucial to the states’ plans.
Simply put, the states’ successful deployment of capital under the SSBCI Program will hinge largely on their partnering with OCSPs who have knowledge of how to raise capital, how to deploy it in CDFI Areas and in SEDI-owned businesses, and who are trusted investors and partners within the investment SEDI communities. By working with OCSPs who are able to accomplish these items, the states can create a triple net positive outcome, promote equity and capital access, maximize investment into SEDI-owned businesses to further close the wealth gap, and become nationwide leaders in promoting SEDI-owned business investment, which could generate further access to capital or attraction of additional SEDI-owned businesses to that state.
Please contact Lindsay Karas Stencel with any questions.
New Ventures Team Expands
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Lindsay Karas Stencel
Layla Dotson Lumpkin