- Treasury funding could lead to $1BN-plus decade impact in Tennessee
- Initiatives span Equity and Debt capital recruitment, could mobilize Angels
- Elements include largely unprecedented Tech, Seed & Multi-fund initiatives
- Likely co-investor VCs and credit backers are being scouted
CHAMPIONS of accelerating economic development by strengthening state businesses and entrepreneurial ecosystems remain optimistic Tennessee will soon be awarded up to $117MM via the U.S. Treasury's State Small Business Credit Initiative 2.0 (SSBCI).
If Tennessee's recent SSBCI proposal is accepted by Treasury, and the state and its allies meet their objectives, the overall effort would mean $1 Billion or more in directly trackable financial and economic impact in Tennessee during the coming decade.
That rough-cut estimate of $1BN-plus impact represents solely the total of Treasury's proposed SSBCI funding for Tennessee, plus the projected aggregate total of matching or co-investment dollars and leverageable debt-financing the state and its allies say they believe they can direct toward SSBCI portfolio businesses in Tennessee, between now and a decade hence.
Notably, while improving jobs-creation, household income and quality-of-life measures are inherent goals in any economic-development effort, the $1BN impact calculation does not rely on often controversial projections of new-jobs creation and other socio-economic benefits that are likely to come with execution of the SSBCI program in Tennessee.
Tennessee's SSBCI proposal isn't an academic treatise. In one sense, it's an opportunity to demonstrate state and national resolve to address factors often described as market failures within the entrepreneurial sector, while driving capital into underrepresented segments of the economy.
Gov. Bill Lee's Department of Economic and Community Development (ECD) and that agency's sponsee -- Launch Tennessee (aka Tennessee Technology Corporation, a 501c3 nonprofit) -- learned weeks ago that their collaborative SSBCI proposal for recruiting equity investment and credit-support proposals had moved from the federal application queue and into active review by Treasury examiners.
An ECD spokesperson said again today that the Treasury review of the state's proposal continues. Treasury SSBCI staff have not yet responded to a status query.
Treasury has in the past 60 days announced SSBCI fundings for 14 states that could ultimately enjoy an aggregate total funding of as much as $1.6BN (batch announcements here and here).
If Treasury's disclosure pace continues, Tennessee might learn the fate of its SSBCI proposal before State government enters its autumnal cycle of Cabinet-level budget meetings (and, before mid-term electioneering reaches a crescendo, nationwide).
A favorable Treasury decision would also be handy for those organizing the annual Governor's Economic Development Conference (now set for Sept. 19-20); and, particularly, ahead of Launch Tennessee's 36/86 Festival (Sept. 27-29).
ECD's proposal calls for relying on Launch Tennessee to administer the State's equity-investment program and to execute investments, within the bounds of approved criteria and guidelines, as well as subject to reporting and compliance requirements. LaunchTN may also create or reconstitute an investor advisory group.
The equity part of the overall SSBCI plan for Tennessee has been dubbed "BuildTN," and the equity-investment components are projected by ECD to attract at least $707MM in capital leverage in the form of matching funds and follow-on investments.
ECD proposes using a total $70MM of its proposed $117MM direct SSBCI funding to support the following equity-investment programs:
► BuildTN Tech Fund (using $40MM of SSBCI capital) focused initially on early-stage markets for emerging companies in Life Sciences, Energy and Environmental Technology (Cleantech), Agricultural Technology (AgTech), and Automotive-Mobility (all sectors featuring existing mentor networks supported by LaunchTN and others). The Tech Fund would also plan to "expand into areas where opportunities continue to expand for Tennessee, including Healthcare Technology, Artificial Intelligence-Machine Learning, Software as a Service (SaaS), Financial Technology (Fintech), IT-Infrastructure, and Advanced Manufacturing and Materials, among others."
► BuildTN Regional Seed Program ($28.8MM) -- The new Seed program would be similar to and would essentially succeed Tennessee's current Impact Fund. LaunchTN explained in its proposal to Treasury that The Impact Fund had previously invested a total $3MM in 28 companies between April 2018 and December 2021. Its INCITE/Impact Fund portfolio companies had to that point leveraged $32.5MM in private funding, while 42% of IMPACT investments were for businesses led by women or minorities.
► BuildTN Multi-fund Program ($2MM) -- LaunchTN said in ECD's initial SSBCI application, "In addition to our own direct investment, LaunchTN has identified the top Tennessee-based venture funds through Pitchbook, review of venture capital funds returns, industry vertical dominance and more across major verticals as potential partners in a multi-fund strategy. This helps to further diversify the planned investment approach, in terms of access, expertise and leveraged capital. The BuildTN Multi-fund Program will allocate $2 million for this strategy. Additionally, LaunchTN will be able to capitalize on relationships with funds and programs dedicated to SEDI founders and populations, including, women, minorities, persons with disabilities, and rural populations. LaunchTN would be able to invest in dedicated funds as first money in for 'cause' in funds such as the Tennessee-based The JumpFund, a fund that focuses on female founders; JumpStart Nova, a fund that focuses on founders of colors, and other funds dedicated to SEDI populations." The Multi-fund proposal also promised that Multi-fund investment dollars will "cause and result in" documented additional private financing.
In operating the Multi-funds program, ECD/LaunchTN also vowed in its proposal to "institute safeguards limiting SSBCI funds to anchor investments that demonstrate cause and result, prohibiting SSBCI participation after a fund's initial close, or restricting investments in funds for which private capital is likely to be invested without SSBCI participation."
With future realizations in-mind, the Multi-fund proposal also makes brief reference to opening a secondary-market window, noting that via the fund LaunchTN "may offer early-stage co-investors a call option to purchase [SSBCI-linked portfolio company] shares at a price equal to a predetermined multiple."
Meanwhile, some of the authors of ECD's SSBCI proposal have apparently also been scouting for potential VC funds to participate in Multi-fund efforts.
Pointing to the field of potential VC partners, ECD's SSBCI proposal submitted several months ago cites as examples The JumpFund, JumpStart Nova, Dynamo Ventures, FedEx venture fund, Bridgestone Ventures, Solas BioVentures, Mountain Group Partners, FCA Ventures, Innova Memphis, GrowthX, ThirdPrime, Angel RoundTable, and Three Roots Capital.
ECD is simultaneously proposing an important second program, which ECD, itself, would administer and operationalize via partners: A $45.3MM facility to fund a business loan participation program (LPP).
ECD currently projects the LPP achieving about $215MM in credit-finance leverage, though that number might change if Tennessee's program is modified, an ECD spokesperson said.
Though still subject to potential amendment during Treasury's review process, ECD vowed in its original proposal that in its LPP initiative, "Average borrower size will be 500 employees or less, [and the program will not] extend credit support to borrowers that have more than 750 employees." ECD also said that while its average LPP loan size will be $250K and its average loan principal amount would be $5MM or less, it could offer credit support for loans with up to $20MM principal amount.
LPP program documents make clear that through the credit side of the initiative, Tennessee is expected to enlist 'partnering' banks, credit unions, community development financial institutions (CDFIs) and minority development institutions (MDIs) to address financial needs of microenterprise borrowers and those involved in larger transactions.
At the same time, ECD said that it aims to employ LPP best practices, and could model elements of the Tennessee LPP effort after what ECD characterized as successful programs sponsored by Georgia, Minnesota and Montana.
Simultaneously, ECD has apparently made extensive efforts to ascertain small business debt needs within the state. Here's a portion of what they wrote on that score in their SSBCI proposal, quoted:
"TNECD utilized a strategic process to identify and implement a debt program that will work for the state, financial institutions, and the needs of small businesses. The department conducted over 100 meetings with entrepreneurial support organizations, banks, credit unions, CDFIs, regulators, potential corporate partners and small businesses to understand the small business debt needs within the state. In addition, the state conducted a formal survey to obtain feedback to test the assumptions and feedback gained from our interviews. As a result, partnering with CDFIs and utilization of the state's network appears to provide a program that will be flexible and impactful of address the financial ecosystem, strengthening, CDFIs, MDIs, and small businesses and entrepreneurs.
"Partnering with the state's CDFIs provides statewide and regional impact. The CDFIs and MDIs will serve SEDI populations, LMI communities, and CDFI investment areas. The structure will allow banks, credit unions and CDFIs to access the program and strengthen the financial and small business ecosystem within TN. This credit enhancement program will be agile to address microenterprise needs to larger loan deals. This will allow regional collaborations, leverage the network effect, and provide access to TA and capital where current gaps exist.
"TNECD conducted working sessions with the CDFIs, MDIs, credit unions, banks and regulators, Tennessee Bankers Association (TBA) and The Credit Union League (The League) to test our assumptions and gain insightful feedback about the needs of small businesses and if CDFIs have the capacity to implement our proposed program of work. Our proposed plan was well received by the working group attendees. The state will utilize our existing statewide network, TBA, The League, CDFIs, banks, and credit unions to implement and market this plan. We will also conduct in person meetings statewide to educate chambers, local communities, and small businesses and entrepreneurs about this program."
Tennessee's narrative, as originally submitted, includes a description of its SSBCI 2.0 efforts to serve Underserved Populations. It is located here.
Among other things, the narrative points to a Tennessee economic recovery that is strong in many respects, but also acknowledges the blow that portions of the state's economy suffered during the most severe pandemic-induced downturns, thus placing a premium on supporting small, entrepreneurial and underrepresented businesses.
The U.S. Treasury has made clear that in the interest of producing equitably widespread economic gains among U.S. populations, stronger performances are being sought in the current SSBCI round from both the grantees and from the Treasury administrators who are conducting SSBCI 2.0.
Federal funding for SSBCI 2.0 is more than 6X greater than was provided via 2010's SSBCI 1.0.
The federal legislation that provided a total $10BN for the latest nationwide SSBCI program became law on March 11, 2021. The $10BN is to be distributed to participating agencies in three tranches, on a schedule to be announced.
SSBCI 2.0 includes "$6.5 billion for an SSBCI capital allocation grant, $1.5 billion to address the needs of business enterprises owned and controlled by socially and economically disadvantaged individuals (SEDI-owned businesses), $1.0 billion for an incentive allocation for participants that demonstrate robust support for SEDIowned businesses, $500 million for very small businesses (VSBs), and $500 million for technical assistance funding," according to a Congressional Research Service report of July 25, 2022, pdf here.
The SSBCI "2.0" program that is now launching came after The American Rescue Plan Act of 2021 (ARPA) was reauthorized and the Small Business Jobs Act of 2010 was amended, thereby setting the stage for SSBCI 2.0.
SSBCI 2.0 was achieved only after several years of relatively low-key lobbying by SSBCI advocates in the nation's capital and among grassroots constituencies.
The previous SSBCI "1.0" was authorized in 2010, with a total $1.5BN in funding for initiatives meant to help speed U.S. economic recovery following the Great Recession (2007-2009).
SSBCI version 1.0 brought the State of Tennessee $29.7MM to establish an "INCITE" co-investment program, which the Administration of then-Gov. Bill Haslam and then-ECD Commissioner Bill Hagerty, now one of Tennessee's U.S. Senators -- packaged along with $20MM worth of related state programs. The amalgam was then promoted as the $50MM Tennessee INCITE initiative.
The Haslam Administration's INCITE acronym stood for "Innovation, Commercialization, Investment, Technology and Entrepreneurship."
VNC understands that in addition to the SSBCI dollars for capital formation and credit enhancement cited above, LaunchTN is requesting from Treasury $1.5MM in technical assistance (TA) to help support efforts by LaunchTN and its ecosystem partners to implement the program.
The window for requesting such TA funding is currently set to close in less than two months, October 14, according to a recent Treasury posting. Related TA information here and here.
During a Launch Tennessee board meeting July 21, LaunchTN staff cautiously expressed confidence that the joint application will result in Treasury funding of TA, as well as the broader SSBCI initiative.
If Treasury does not provide TA funding, LaunchTN would consider either requesting an additional $1.5MM state funding to help implement the program, or it might shift some contingency reserves toward TA funding.
Both TN-ECD and LaunchTN have experienced leadership changes since Tennessee's SSBCI 2.0 proposal was submitted to Treasury: Stuart McWhorter succeeded Bob Rolfe as TN-ECD Commissioner; and, Lindsey Cox became CEO of Launch Tennessee, succeeding Interim CEO Abby Trotter.
The need to mobilize more Angel investors to invest in Tennessee businesses is accurately cited as an imperative in the ECD-LaunchTN proposal, but there's clearly more work to be done on that point.
VNC's previous SBIC 2.0 and SBIC 1.0 coverage is here. Our previous INCITE coverage is here and here. LaunchTN coverage here.
ECD and Launch Tennessee (TTDC) both have in place conflict of interest and ethics policies and safeguards. ECD addressed compliance issues in this portion of the proposal it submitted months ago, located here.
IF THE prospect of SSBCI 2.0 funding seems absolutely tantalizing, learn more: First, read a high-altitude summary of the obligations of states that accept SSBCI 2.0 funding (here); then, a recently updated report on SSBCI by the Congressional Research Service (here). 2016 SSBCI 1.0 program evaluation here. And, further reports here and here.
SSBCI MUST expend its program funds prior to Sept. 30, 2030, with any SSBCI funds unexpended by that date then returned to the U.S. Treasury. VNC
. last edited 1931 8 August 2022