Lawmakers Propose Start-Up Funding Firm

Recognizing the importance of small business as a chief component of California’s powerful economic engine, state lawmakers are seeking to create a public-private corporation to help fast-growing firms find the capital they need to develop and succeed.

Embodied in legislation introduced by Assemblywoman Susan A. Davis (D-San Diego) is a proposal that would establish a multimillion-dollar office--the California Seed Capital & Early Stage Corp.--to help start-ups acquire financing in the early stages of operation.

The bill comes in the wake of a study by the California Research Bureau released earlier this month that found a $5.4-billion funding shortfall for fast-growth firms in Los Angeles and Orange counties alone.

Davis’ bill, AB 1752, is designed to help these enterprising young companies, dubbed “gazelles,” which generally have revenue growth of more than 20% annually.

The state study, which was conducted at Davis’ request, surveyed the success of similar programs in 15 other states. The lessons learned emphasize the importance of attracting private funds and allowing the private sector to manage the money to best meet the demands of the marketplace.

The proposed seed capital corporation would provide an alternative to traditional debt financing, which isn’t usually appropriate for many entrepreneurs who are cash-strapped and capped out on their credit cards. Indeed, the new corporation itself would be financed by a seed loan of $5 million from the state’s general fund, due to be repaid within five years once it becomes self-sufficient.

The corporation is predicated on the notion that private and public institutions would open their pocketbooks to help California maintain its competitive status in luring and aiding small, but promising, businesses in the Golden State.

“If the private sector doesn’t come forward, the whole plan wouldn’t fly,” Davis explained.

Davis’ legislation calls for the forming of a seven-member board of directors who would manage the program. The bill proposes that two of the members come from the private sector, but Davis said plans are underway to amend the bill so that a majority of the board--at least four--would be nonbureaucrats with investment experience.

The board would choose which companies to invest in, forming contracts with various firms and rewarding investors with returns on their investment. The board would be appointed by the governor, the leaders of the Assembly and Senate, the director of finance and the lieutenant governor.

The legislation doesn’t specify the criteria for businesses to qualify for the seed money. Such decisions would come at the discretion of the board.

The California Assn. for Local Economic Development supports the seed capital corporation concept.

“We would certainly like to make capital available to small businesses,” said Paula Connors, manager of government relations for the statewide economic development organization.

“[AB 1752] seems to be market-driven. . . . It’s not like a grant or a handout, but a way to jump-start small businesses,” she said.

The Assembly Appropriations Committee is expected to consider the bill Wednesday.