In response to recent arguments that the SBA should be abolished, Charles H. Green for the small business finance newsletter Coleman Report answered, "Of course not, silly goose."
There was some pretty inflammatory rhetoric Ray Hennessey published this week on Entrepreneur.com. He suggests, “It’s high time to eliminate the SBA altogether.”
I agree with some of the assertions makes (there are problems at the SBA); I don’t agree with his conclusions. “The SBA’s loan programs are designed to fund businesses that can’t find funding elsewhere,” he writes, while suggesting private equity and venture firms raise billions of dollars to fund the good ideas.
I’m not sure what Mr. Hennessey is smoking, but only a very small percentage of small businesses in the U.S. are likely to have a scalable enough model to gain the interest of a private investor or venture firm. It seems naïve to suggest that a new dry cleaner or hardware store would have any luck at convincing a venture firm to invest in their Main Street business. Equity investors are looking for companies that can scale quickly and return large profits with the influx of some extra cash.
The SBA, banks and other small business-focused lenders fill an important financing niche to the very businesses you and I consider small businesses.
Is he suggesting that any business that isn’t interesting to a private equity investor or venture firm is a bad business?
In fairness to Mr. Hennessey, he’s spent his career writing about Wall Street and the IPOs (initial public offerings) of the sexiest of the sexy startups. His resume doesn’t say much about spending time working in the Main Street businesses that provide 70 percent of the jobs in our country and are those the equity markets aren’t really interested in.
Green calls Mr. Hennessey an “ideological bully.” I tend to agree.
Mr. Hennessey does point out that lumping sexy tech startups, Main Street businesses and larger small businesses into the same category just doesn’t make sense. Nevertheless, labeling the company that presses my shirts as unworthy of credit because a venture firm is likely uninterested in funding their company is kind of shortsighted — can we even say ridiculous? Remember, 70 percent of jobs in the U.S. are in the very businesses Mr. Hennessey seems to disdain.
The SBA does have some problems, but guaranteeing (it’s local banks that really do the lending) too much capital to Main Street doesn’t happen to be one of them. The smallest small businesses are still struggling for capital as banks remain anxious about lending to them. Does that imply they are bad companies or their ideas are bad ideas? Heavens no. It does suggest that the way we approach lending to Main Street needs to be re-evaluated to better serve that segment of the small business borrower market.
Mr. Hennessey suggests the SBA has a horrible track record and funds risky ventures. He must have missed Deborah Gage’s piece in the Wall Street Journal a little less than a year ago. “[T]here is evidence that venture-backed start-ups fail at far higher numbers than the rate the industry usually cites,” she says. “About three-quarters of venture-backed firms in the U.S. don’t return investors’ capital, according to recent research by Shikhar Ghosh, a senior lecturer at Harvard Business School.”
Although venture capitalists like to laud their success rates, “The National Venture Capital Association estimates that 25 percent to 30 percent of venture-backed businesses fail,” she writes.
What’s more, the likelihood the average small business would be interesting to an equity investor is only around 2 percent. They just don’t have the potential to scale big enough to make investors the rate of return they need to tie up their money.