Reauthorized in 2021 from a similar program that ran between 2010 and 2017, the initiative provides close to $10 billion in capital to states and territories, which are allocated a certain amount to be used to set up equity programs and distribute funds to finance small businesses. Areas that implement these programs are able to provide direct equity or act as a limited partner in a venture capital fund, Fooks said.
In total, there is currently $3 billion in federal funds among 84 programs, with 36 of them dedicated to venture capital investing.
"Enabling legislation requires that these federal dollars cause and result in private financing to small businesses, so it's intended to be catalytic in some form," he added. "Beyond that, there's also a strong emphasis for the capital to reach underserved markets or underserved business operators, so states are mindful of this in deploying capital."
For venture capital fund programs, Fooks said states are motivated to support funds that are in their first or second round of fundraising, founded by people from diverse backgrounds or located in regions that don't have a lot of venture capital fund activity, such as rural areas.
The deployment of the capital is geared toward smaller businesses, which in federal terms is "nothing larger than 500 employees," Fooks said.
Federal funds cannot participant in investment rounds of more than $20 million, which makes managers in their first or second fund more attractive. While the initiative attracts a wide spectrum of funds, Fooks said the median is between $30 million and $50 million, but it sees some funds applying that are smaller than $10 million and larger than $100 million.
Capital allocated to a state is also limited to management firms based in that state.
Over the past six months, at least 14 states have committed capital to managers from the federal program, including California, Colorado, Minnesota, New York, Pennsylvania and Wisconsin. The initiative will "start to see more in the next three or four months, given the pipeline" it has been observing, Fooks said.