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Study offers ideas, strategies to cover capital funding gaps

Staff Report
Published Jan. 30, 2013

The financial meltdown caused by the Great Recession continues to hamper fledgling entrepreneurs searching for money to grow their businesses, according to a new study released by the New Carolina Entrepreneurship Task Force.

Dirk Brown
Dirk Brown, co-author of the study
“Access to capital is cited as a primary concern of the top executives for these high-impact firms and is one of the top limitations of their companies,” the report said.

A series of recommendations to address capital funding gaps identified through a survey of high-growth S.C. firms and interviews with financial and business executives are outlines in the report. Those suggestions range from enacting an angel investor tax credit to promoting the growth of equity funds.

The report also calls on state economic development agencies, universities and private sectors to develop and “support a more robust and formalized South Carolina business network.”

Although the debt and equity markets have constricted in the United States since the 2007-2008 recession, there are two groups of South Carolina companies that have been hit particularly hard, the report said.

These firms are early-stage technology-based companies attempting to commercialize products and services, and high-growth existing companies with sales between $3 million and $50 million that have problems securing capital to cover cash flow, the report added.

“Given the macroeconomic environment, we anticipated a mismatch between the types of financing currently available in South Carolina and the financing needs of high-impact firms,” said Dirk Brown, director of the Faber Entrepreneurship Center at USC’s Darla Moore School of Business and co-author of the study.

The report’s recommendations

The report offered four key recommendations designed to close the capital gaps that it identified. Those include:

● Enact angel investor tax credit legislation. The legislation would provide credits to individual high net worth individuals — those with at least $1 million in financial assets — who made stock or convertible debt investments in new companies.

● Increase the annual funding cap on the SC Launch Industry Partnership Fund from its current $6 million level. The fund, managed by the SCRA, is widely recognized as a source of financing for high-impact ventures.

● Provide matching funds for selected Small Business Innovation Research Phase II grants in order to attract federal funding for the commercialization of technology in S.C. firms and attract out-of-state technology-based companies to move here.

● Revise the state’s investment adviser registration/examination requirements to promote the growth of the equity funds in the state.

High-growth companies — those that double revenues on average in the most recent four years — are creating most of the new jobs and wealth in South Carolina, the report said.

The high-growth firms, usually defined by those reporting revenue growth of 20% a year, accounted for 2.7% of private sector firms in South Carolina during 2004 to 2008, but contributed 66.8% of all net employment gains during that period, according to the report.

Research also showed South Carolina outperforms most states in small business job creation because of high-growth firms, the report said. However, the state hasn’t been as successful as its neighbors in nurturing these companies to scale up sales beyond $25 million a year.

High-impact companies in South Carolina tend to cash out when they reach a valuation of $25 million to $50 million rather than trying to scale up, according to the report.

Since 2000, more than 150 S.C. firms have been acquired by companies outside the state while less than 80 acquisitions were made by companies based in the state, the report noted.

The report also cited the state’s conservative business culture. A majority of investors, lenders and executives interviewed for the study noted that most S.C. businesses are averse to giving up equity to obtain financing under standard market terms. Those interviewed also said S.C. firms are reluctant to “double down” to leverage debt financing.

The Faber Entrepreneurship Center is working with the state Commerce Department, the private sector and New Carolina: South Carolina’s Council on Competitiveness to help develop a stronger business network and support for high-impact firms.

“Many of the ideas will roll into a state innovation plan we hope to launch early this year and some will be addressed by commerce’s Division of Small Business,” said Commerce Secretary Bobby Hitt.

The Faber center was commissioned by New Carolina to conduct the study, with input from the Commerce Department. The study was conducted to provide state-level economic development policymakers with a better understanding of the capital gaps affecting high-growth firms founded in South Carolina.

In compiling the report, researchers interviewed more than 100 S.C. business owners and 70 bankers, venture capitalists, private-equity managers, business consultants, attorneys, investment brokers and certified public accountants.