Venture-capital companies, including at least a handful in Colorado, are asking the federal government to reconsider its decision to scale back investing money with venture capitalists.
The U.S. Small Business Administration in 2004 stopped granting new licenses to venture-capital funds under a public-private partnership called the Participating Securities Program. Firms with existing licenses can continue to draw money from the SBA until 2008.
The program had allowed venture funds that raised $10 million or more to receive a two-to-one match from the federal government, supplementing money raised from private or institutional investors.
Five Colorado-based venture-capital companies are currently operating funds involved with the program.
“It will have a profound effect,” Kirk Holland, a general partner with Vista Ventures, said of the funding freeze. “We will have to go and fill that gap.”
Holland said the change could make it more difficult for Vista to offer additional financing to existing companies in its portfolio. He said it would also make it more difficult to raise money for a new investment fund.
Holland asked Gov. Bill Ritter to examine the issue after Ritter’s appearance Thursday at the Executive Leadership Forum, a quarterly gathering of chief executives of Colorado-based companies.
Ritter encouraged Holland to draft a letter detailing the issue.
Tom Clark, executive vice president of the Metro Denver Economic Development Corp., said a lack of financing for venture-capital funds could crimp Colorado’s economic growth.
“The oil that lubricates the innovation process is venture capital,” Clark said. “When you hear about a freeze like that, it gives you a significant jolt.”
Clark said local companies could now be increasingly reliant on out-of-state venture capitalists, who often have deeper pockets than their local counterparts. That could result in the out-of-state funds relocating successful startup companies from Colorado once the firms grow to a certain size, he said.
Congress halted the Participating Securities Program after some of the participating funds suffered massive financial loses during the economic downturn this decade, said Dennis Byrne, an official with the SBA in Washington, D.C.
Byrne said a similar program, called the Debenture Securities Program, continues to provide investment capital to venture funds focused on later-stage or cash-flow-positive companies. However, some venture investors prefer the big-risk, big-reward style of investing in early-stage companies.
“It was losing taxpayers money,” Byrne said of the discontinued program.
The government estimates the program lost $2.7 billion since its inception in 1994, according to the SBA’s website.
Lee Mercer, president of a venture-capital trade group, said the federal government discontinued the program at a time when savvy investors were beginning to reinvest capital with startup companies.
“The government locked in losses by withdrawing the program,” said Mercer, who heads the Washington, D.C.-based National Association of Small Business Investment Companies.
Staff writer Will Shanley can be reached at 303-954-1260 or wshanley@denverpost.com.
