Dream of Business Growth Realistic For Few When SBA Involved; Venture Capital Not Available to Blacks, Women and Hispanics

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Despite the census reports of growth statistics of black, Hispanic, and women owned businesses, they cannot get venture capital financing through SBA. Senator Kerry has asked SBA for answers and a program of outreach, but SBA has not replied in two months. U.S. Appeals Court has pending ruling on discrimination in venture capital program and release of key records.

Black-owned businesses are the fastest growing business in the country with 45% growth rate for the five year period ending 2002, according to a recent Census Bureau report. The study found that Hispanic-owned businesses increased by 31% -- three times the national average for all businesses – while women-owned businesses grew 20% in the same period.

But, if access to capital is the lifeblood of growth and expansion, these businesses will hit a wall when seeking growth capital from one of the U.S. Small Business Administration’s key growth capital finance programs: The $5 billion-a- year Small Business Investment Company (“SBIC”) program.

In April, Sen. John Kerry of Massachusetts, the ranking Democrat on the Small Business Committee, asked SBA Administrator Hector Barretto what the agency plans to do to increase underwriting of minority- and women-owned businesses. To date, SBA has ignored the senator’s inquiry.

SBA’s reports for the past five years show that all minority-owned businesses receive less than 5% of all dollars, with women-owned businesses receiving less than 2% of all dollars.

Kerry says statistics compiled by SBA show “there has been a consistent and significant decline in the number of SBIC financings to minority- and women-owned firms.” He expressed his concern about the trend to SBA in April 2004 and says he is “disappointed the agency has not made progress in addressing the trend.”

One firm, Diamond Ventures of Atlanta, challenged the fact that SBA has no more than one black management team, and that less than five of 500 licensed teams are owned and controlled by Blacks, Hispanics or women, in a discrimination lawsuit (Diamond Ventures v Hector Barretto and U.S. SBA, 03-1449, U.S. District Court, DC Circuit). The licensed teams are supposed to assist SBA in meeting its congressionally mandated obligation to provide venture capital for small businesses.

An Expert studies led by Dr. Tim Bates (“Minorities and Venture Capital, A New Wave in American Business”) for the Kauffman Foundation supports the conclusion that minority- and women-managed venture funds tend to invest successfully in minority- and women-owned businesses. The data suggest that members of those groups are most likely to invest in those groups.

Ironically, SBA terminated funding for all of its Specialized and Minority Enterprise Small Business Investment Companies (SSBIC and MESBIC’s) over 10 years ago, aggravating the paucity of qualified venture capital managers who are dedicated to investing in women and minorities. Bates authored a blistering report entitled “Is the SBA a Racist Institution”, when SBA asked him to study the SSBIC and MESBIC programs prior to closure.

Diamond Ventures sued SBA in U.S. District Court in 2003 to turn over its management team profiles of applicants to and licensees in the SBIC program. SBA denies liability and has defied court orders to turn over the data. In a recent appeal of the court orders from District Court Judge Gladys Kessler, U.S. Appeals Court Judge Thomas Griffith questioned if SBA had a right to appeal not turning over (relevant) records in a lawsuit while in violation of a court order to do so (Diamond Ventures, LLC V SBA, U.S. Appeals Court 05-5258, D.C. Circuit). Moreover, Judge Griffith stated that SBA is appealing the order to turn over the data “because it did not like what the judge balanced” in ordering the release of the data. The Appeals Court ruling is pending.

Aside from the legal proceedings, SBA’s own Inspector General found serious fault with the agency's review and consideration of Diamond's application prior to the case being filed, concluding that SBA managers did not use appropriate policies, procedures and criteria in processing Diamond's application nor even in rejecting it evidencing bias towards the firm’s black managers.

In its lawsuit, Diamond Ventures maintains that, "SBA has arbitrarily, capriciously, with ill will and upon racial and a discriminatory basis concluded that key members of the management team lacked the necessary skills to manage a SBIC by not reviewing their managerial credibility and background fully on the same and similar basis as others who were approved and licensed in the same period who had the same or similar qualifications with firms clearly denoted."

"Diamond Ventures' long-term goal is to join efforts with other firms to finance inner-city, underserved, and women and minority-managed firms that parallel the success of firms such as FedEx, Intel, and others that have all were financed by SBA's SBIC program," said Joshua Rose, Diamond's attorney.


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Jon Wilson
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