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STRATEGY

Tough Timing for Proposed Return of SBA's VC Program

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August 9, 2005--After freezing the Small Business Association's venture capital program in December due to poor performance, Congress is weighing legislation that will give the program a second chance.

A revised version of the Small Business Investment Act introduced by Congressman Don Manzullo (R-IL) would change the way loans are made to small-business investment companies (SBICs), allowing the government to avoid the roughly $2.7 billion of losses the program had generated previously. The proposed legislation would require interest to be paid on the loan regardless of an SBIC's profitability and would increase the SBA's share of profitable SBICs.

The proposed return of the SBA's venture capital arm comes at a time when the short-term investment horizons were on the decline and the IPO market has been less active than in previous quarters. A study by Thomson Venture Economics and the National Venture Capital Association saw one-year and five-year investment horizons decline, but ten- and twenty-year horizons remained steady.

Some good news for venture investors could be found in the relative strength of venture-backed merger and acquisition volume in the second quarter of 2005. Over the course of the quarter, 75 companies were acquired, with 32 reporting a combined value of $4.4 billion and an average disclosed value of $136.7 million. This $136.7 million average was the highest since the first quarter of 2001.

The second quarter marked a substantial decline in deal values in the software industry, typically the predominant sector. Although software reported the largest number of deals closed, 10 of the 23 deals reported just $509.9 million in combined value. Software's $51 million average deal size was the third lowest across all sectors, followed only by healthcare services and business products and services.




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