Kamau and Associates. Since 2003 - The World's 1st Blog for Black & Minority Business
Monday, September 20, 2004
IS THE SBA SBIC PROGRAM A RACIST INSTITUTION?
Critical Documents From Discrimination Lawsuit Reveal BiasSBA's $25 Billion Program Lacks Minority Managers and Records of Investments By Black and Minority Managed Firms
Atlanta, GA - Ten years ago Dr. Timothy Bates authored a study, paid for by SBA's Small Business Investment Company Program (SBIC) program entitled "Is The SBA A Racist Institution?". The study took an incisive look at the SBIC program and the glaring deficiencies and bias in administering the companion Minority Enterprise Small Business Investment Company (MESBIC) program. Bates found that 78% of the MESBIC's failed largely because of SBA's bias and indifference to the MESBIC program.
Dr. Timothy Bates and Dr. Bradford completed a 2003 study - Minorities in Venture Capital - A New Wave in American Business, funded by the Kauffman Foundation. The authors studied 24 venture funds nationally and found that minority focused venture funds are successful with a median rate of return of 19.5% which exceeded the comparable return on the S&P Index. The study firmly concluded that minority-managed firms have a successful track record.
Then came Diamond Ventures; an applicant to the SBIC program. After being denied twice, the firm complained to the Inspector General that it experienced bias and SBA Program Managers conducted unfair assessments of the team's qualifications.
The Inspector General audited Diamond's application process experience and found numerous instances of bias and unequal treatment in Diamond's application process. The report showed among many things that SBA added requirements to Diamond after the application was submitted and that SBA was more rigid in its evaluation of Diamond compared to other applicants. The full report is at www.diamondventuresllc.com
Diamond filed a discrimination lawsuit in 2003 in the Washington, D.C. District Court and won a June 2004 ruling denying SBA's Motion To Dismiss the lawsuit. "We were elated to win this hard fought ruling," said C. Earl Peek, Diamond's Managing Partner. "SBA has nearly 500 teams managing SBIC's and we expect to prove that less than 5% of the total are Black, Hispanic, Asian, Indian, or Women managed," Peek said further. SBA annual reports show that these groups as a whole regularly receive less than 8% in SBIC funding in total and Blacks get less than 2% each year.
Crucial documents turned over by SBA as part of the lawsuit, show handwritten notes and e-mails by SBA Program Managers identifying the application as weak more than three months before any detailed review or scoring was performed. One program analysts told C. Earl Peek, Diamond's Managing Partner, early on that his plans were loosey goosey. Despite demonstrating over 70 years of experience in lending and investing to these types of firm's, SBA challenged the ability of the team to execute its strategy and wrote that lending and investing in LMI markets is a flawed strategy.
SBA Analyst went as far as saying community impact is not a concern of the SBIC program despite the express intentions of Congress in the SBIC and New Markets legislation in recent years. Peek said he was appalled to see SBA comments to answers on Diamond's application. SBA at one point even said parts of its application was gibberish. One Analyst re-computed Diamond's returns on the firm's venture capital deals at 37% which far exceeded the typical 9% return of like SBIC firms, but still chose to call the investments total losers.
"We were floored to see such vicious mean spirited comments on our application when all we wanted to do was make sure capital reaches America's most underserved and qualified groups," said Peek. "We believe that further investigation will show that the lack of black led firms among SBIC licensees leads to the conclusion, similar to that reached by Dr. Bates a decade earlier, that Diamond's experience is part of a systemic bias that has excluded black led firms from the $25 billion SBIC program," noted Josh Rose, Diamond's legal counsel. Diamond Ventures long-term goal is to provide capital and create successes with minorities similar to those achieved by Staples, FedEx, Outback Steakhouse and others who received early rounds of funding from SBIC's.
