SSBCI PROGRAM PROFILE:

VENTURE CAPITAL PROGRAM 

May 17, 2011 

State Small Business Credit Initiative (SSBCI) 

U.S. Department of the Treasury 
US Department of Treasury

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VENTURE CAPITAL PROGRAM 

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What is a Venture Capital Program?

A Venture Capital Program provides investment capital to create and grow start-up and early-stage 

businesses. State Venture Capital Programs often take one of two forms: a state-run venture capital 

fund (which may include other private investors) that invests directly in businesses; or a fund of funds, 

which is a fund that invests in other venture capital funds that in turn invest in individual businesses. 

Many factors, particularly resources and available talent, inform a state’s decision on which form to 

choose. For example, a state may choose to invest in a large venture fund that agrees to reinvest in that 

particular state an amount equal to that invested by the state, as opposed to trying to attract that same 

talent to a smaller fund capitalized with state money. 

What are the Investment Characteristics? 

Like all credit programs, a Venture Capital Program can be tailored to meet a state’s objectives. The 

table below describes key investment characteristics that should be considered when designing a 

Venture Capital Program. 

Characteristics Description 

What kinds of businesses 

are eligible to 

participate? 

• Determined by each state and may target specific industries, regions 

and/or types of businesses, depending on the state’s objectives. 

• Under SSBCI, should target an average business size of 500 employees 

or less, and should not exceed a maximum business size of 750 

employees. In practice, small businesses are typically much smaller than 

500 employees. 

• Corporations, partnerships, and sole proprietorships are eligible, 

including non-profits and cooperatives. 

• SSBCI Policy Guidelines provide specific guidance on certain businesses 

who are prohibited from participating in this program. 

What sizes of 

investments are eligible? 

• Under SSBCI, must target an average principal amount of $5 million or 

less and cannot exceed $20 million on any individual loan. In practice, 

the average small business investment is less than $5 million. 

What types of 

investments are eligible? 

• Typical businesses for investment have the potential for fast growth and 

can create an exit strategy for the equity investors. All stages of venture 

capital financing are eligible, including seed/angel, early stage, 

expansion and mezzanine financing. 

• Investment types are typically equity and hybrid investments, such as 

preferred equity and subordinated debt. 

How can investment 

proceeds be used by 

eligible businesses? 

• For any business purpose, including, but not limited to: start-up costs, 

working capital, business procurement, franchise fees, equipment, 

inventory, as well as the purchase, construction, renovation, or tenant 

improvements of an eligible place of business that is not for passive real 

estate investment purposes. 

• Restrictions apply to refinancing and other uses; please refer to the 

SSBCI Policy Guidelines for additional details. 

Who negotiates the 

terms of the investment? 

• Terms are negotiated between the business owner and the venture 

capital fund, based on the fund’s valuation of the business. 
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Characteristics Description 

What are the program’s 

strengths? 

• Provides risk capital to emerging businesses before they meet typical 

lending credit criteria. 

• Programs aim to attract other investors and help cultivate an industry of 

private risk capital investors. 

How Does a Venture Capital Program Work? 

State Venture Capital Programs take one of two forms: 1) a state-run venture capital fund with other 

private investors, which invests directly in businesses; or 2) a fund of funds, which is a fund that invests 

in other venture capital funds, which in turn invest in individual businesses. In a fund of funds structure, 

other private investors may co-invest either at the level of the fund of funds or at the level of the 

venture capital fund. 

Operating Mechanics Description 

What kinds of funds are 

eligible to participate? 

• Funds that invest in eligible companies, as determined by the state. 

• SSBCI recommends that states screen funds to demonstrate sufficient 

venture capital investment experience and financial and managerial 

capacity to participate. 

Who originates deals in 

this program? 

• In a state-run venture capital fund, the state fund conducts deal 

sourcing. 

• In a fund of funds structure, the venture capital funds in which the 

state’s fund of funds has invested conduct deal sourcing. 

• In both cases, the day-to-day fund management is typically outsourced 

to a professional firm. 
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Operating Mechanics Description 

Who has responsibility 

for investment 

decisions? 

• In a state-run fund, the state fund makes the investment decisions. 

• In a fund of funds structure, the venture capital funds make the 

investment decisions in eligible businesses. 

How are investments 

monitored? 

• In a state-run fund, the state actively monitors all of its investments. 

• In a fund of funds structure, the state provides high-level monitoring of 

aggregate performance of its portfolio, with monitoring of a small 

amount of data on each venture capital investment; in this model, the 

venture capital funds actively monitor individual investments. 

What kinds of fees may 

be charged? 

• Under the standard venture capital model, the general partners receive 

a 2% annual management fee based on assets under management and 

a 20% carried equity interest on any capital gains. 

What is the term of an 

investment? 

• The standard life of most venture capital funds is 12 years. 

• Individual fund investments are typically for 3 to 7 years. 

What leverage 

requirements exist? 

• Under SSBCI, each OCSP approved by Treasury must individually 

demonstrate a minimum private financing ratio of 1:1 over the lifespan 

of the SSBCI program. 

• States must demonstrate a plan that creates a reasonable expectation 

that the approved programs, when considered in sum, will result in 10:1 

leverage over the lifespan of the SSBCI Allocation Agreement or 

Allocation Time Period. 

What is the state’s 

liability? 

• Venture funds are typically limited partnerships or limited liability 

companies (LLCs), in which the state’s liability would be limited to funds 

invested or committed. 

Who are the Key Stakeholders and What are Their Roles? 

The stakeholders in a Venture Capital Program are: the state, the venture capital funds or fund of funds, 

a fund manager or general partner, and an implementing agency/entity, if assigned by the state to 

manage the program. Implementing entities may include a specific department, agency, or political 

subdivision of the state, or an authorized agent of, or entity supervised by, the state. 

Stakeholder Role

What is the role of the 

state? 

• Markets the program in their region or community. 

• In a state-run venture capital model, the state sources and originates 

investments in small businesses. 

• In a fund of funds model, the state selects venture funds in which to 

invest and responds to capital calls. 

• In each model, the state verifies the eligibility of portfolio companies, 

obtains assurances of eligibility from each business, and that proceeds 

will be used for acceptable business purposes. 

• In each model, the state provides high-level monitoring of fund 

performance and individual investment performance against a small set 

of performance criteria. 
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Stakeholder Role

What is the role of a 

venture capital fund? 

• A venture capital fund makes and manages portfolio company 

investments. 

• A fund of funds selects venture capital funds in which to invest and 

make disbursements when capital calls are issued. 

What is the potential 

role of an implementing 

agency/entity? 

• Acts on behalf of the state to run the Venture Capital Program. 

• Assists in marketing the program in their region or community. 

• May also operate other credit support programs. 

What Kind of Operating Model is Needed to Manage a Venture Capital Program? 

Venture Capital Programs using a fund of funds model may have lower operating costs for the state than 

other credit support programs due to less involvement in investment decisions and low portfolio 

monitoring requirements. Essential knowledge and experience that states need to set up a fund of funds 

include: analysis of venture funds in which to invest; and some operational and administrative 

experience. States may acquire these skills through the use of a qualified analyst or small team of 

analysts to serve as fund managers, reporting to a board of directors, to be consulted in selecting 

venture capital funds and responding to capital calls. State-run funds generally have higher operating 

costs than fund of funds due to resources required to attract top talent to staff capable management 

teams, conduct business analyses, monitor individual investment performance, and, in some cases, 

provide direct technical assistance to businesses in which the fund has invested. 

How Does a Venture Capital Program Help to Achieve a 10:1 Private Financing Ratio? 

To be eligible for federal funding, a state should reasonably demonstrate that, when considered with all 

other SSBCI programs of the state, such programs together have the ability to generate private lending 

of at least 10 times the new federal contribution amount, also known as the private leverage ratio, by 

December 31, 2016. Eligible private lending includes all loans or investments from a private source to an 

eligible borrower or eligible portfolio company, whether occurring at or subsequent to loan/investment 

closing, as well as any new infusions of cash by the owners of the eligible portfolio company. As an 

example, if a state-sponsored Venture Capital Program expects to make 20 venture capital investments 

to businesses with the aggregate investment profile shown below, the resulting projected “allocation 

time period private leverage ratio” would be 10:1. This calculation would be derived as follows: 

a. SSBCI Funds used under the Participating State’s Venture Capital Program $1,000,000 

b. Other Private Equity Investment at Closing of SSBCI-Supported Transaction $3,000,000 

c. Other Private Transaction-Level Debt at Closing of SSBCI-Supported Transaction $3,000,000 

d. Subsequent Private Sector Investment resulting from SSBCI Support $4,000,000 

e. Total Private Financing ( b + c + d) $10,000,000 

Private Leverage Ratio (e to a) 10:1 

Where Have Venture Capital Programs Worked Well? 

State-run Venture Capital Programs exist in at least 37 states. Most target early stage investments in 

companies that align with state development priorities. In the mid-1990s, Oklahoma launched a fund of 
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funds program that uses tax credits to raise funds. These funds are invested in established venture 

capital firms that invest in potential Oklahoma growth companies. Variations of this model have been 

established in other states, such as Arkansas, Iowa, Michigan, Oregon, Ohio and South Carolina. Key 

features of the Oklahoma program were discussed in an SSBCI conference call on Venture Capital and 

are summarized below. This information is not drawn from Oklahoma’s SSBCI application. 

Who Can You Contact With Questions on Venture Capital Programs? 

Treasury has posted policy guidelines and application materials on its website, available here: 

http://www.treasury.gov/ssbci. Questions may be asked via phone (202-622-0713) or via email at 

SSBCIquestions@treasury.gov. 

Highlights from Oklahoma’s Venture Capital Program 

• Overview: Oklahoma’s Venture Capital Program is supported by Cimarron Capital Partners, an 

organization that manages private equity, angel, and venture capital investments. Oklahoma uses 

the program to generate a larger, more robust angel investor network. 

• Fund Start-up Timeline: In Oklahoma, it takes several months to organize an angel investor training 

event, and one year to lay the foundation for a fund program. 

• Impact and Size of Funds: The size of venture capital funds may depend on the region, and can 

range from $50 million to a number of local funds seeding at levels under $5 million; Oklahoma’s 

model seeks to seed funds each starting at $500,000. 

• Staffing: In Oklahoma, a fund manager finds funds based on established criteria, and then presents 

proposed fund investments to a state-appointed Board, which approves or declines the investment.