Benefiting Underinvested Communities: The New Markets Venture Capital (NMVC) Program

Elected to national office in 1990, Republican Congressman Gary Franks was the first African-American elected to the U.S. House of Representatives by a district that was overwhelmingly white. During his three terms in office, Gary Franks secured many economic advantages for American small business owners, notably introducing the Urban Entrepreneurial Opportunities bill in Congress. Many components of this bill were signed into law by President Bill Clinton in 2000.

The legislated Urban Entrepreneurial Opportunities Act set up the New Markets Venture Capital (NMVC) program, which has encouraged the creation of venture capital investment in low-income communities throughout America for the past decade. The six established New Markets Venture Capital Companies enjoy public SBA financing support while operating as for-profit, privately managed investment funds. This structure ensures that NMVC companies allocate venture capital efficiently and productively, as any wholly private investment firm would.

A 2006 report prepared by the Community Development Venture Capital Alliance (CDVCA) points to substantive benefits of the program during its first five years. NMVC investments benefited underinvested urban and rural communities in Maine, Maryland, Virginia, and the District of Columbia, as well as Appalachia and the Deep South. NMVC companies notably leveraged $136 million in non-program investments (a 4:1 ratio) from outside sources, such as angel investors and non-affiliated venture firms.

Directly responsible for creating and maintaining over 1,500 jobs, the NMVC program also provided $6 million in operational assistance grants to help firms build effective business plans, generating initial investment momentum. Companies benefiting from these grants included a Maine software business, an industrial mat manufacturer, and a Vermont fair trade produce importer.

The CDVCA report concludes that the NMVC program’s mission driven, for-profit structure enables the identification of financially sound, high-growth startups in low-income and under-invested regions of the nation. In particular, it provides a key incentive in encouraging private investors with expertise in low-income community opportunities to take action based on that knowledge. Given the importance of entrepreneurial investment in driving America’s ongoing economic recovery, the NMVC program is as critical as ever today. As a Partner at Gary Alvin Associates and a Visiting Professor with Hampton University, Gary Franks continues to place the well-being of America’s small businesses prominently among his professional interests.

Gary Franks and the Urban Entrepreneurial Opportunities Act

In 1993, Representative Gary Franks introduced the Urban Entrepreneurial Opportunities Act to Congress. Eventually becoming a Small Business Administration program, the Act was designed to stimulate job growth in low-income areas. Representative Franks’ bill was signed into law by President Clinton in 2000.

At the heart of the Urban Entrepreneurial Opportunities Act is an amendment to the Internal Revenue Code that provides tax incentives to corporations that make equity contributions to small businesses in specially designated low-income zones.

The Urban Entrepreneurial Opportunities Act resulted in the creation of the Small Business Administration New Markets Venture Capital (NMVC) program. By 2003, this program had created agreements with six for-profit investment funds that focused exclusively on businesses in low-income areas. These funds were intended to make equity investments in small businesses, which are defined as companies with net after-tax profits of less than $2 million annually.

Companies supported by the NMVC had to be located within specific census tracts or divisions that fulfilled the following conditions:

– A poverty rate of 20 percent or more

– 50 percent of household incomes under 60 percent of the area median gross income

– Location within a HUBZone, Rural or Urban Empowerment Zone, or Rural or Urban Enterprise Community

Acceptable equity investments for the program included common and preferred stock, as well as non-amortized subordinated debt. The investment firms involved in the program were privately owned, applied to participate, and received screening by the Small Business Administration.

To learn more about the NMVC, visit www.sba.gov.