Response to August 2000 Forum Article by Timothy Bates on Financing for the Development of Urban Minority Communities

Tim Bates focuses on the poor performance of Minority Enterprise Small Business Investment Companies (MESBICS) in the 1987-to-1994 period as a basis for criticizing the U.S. Small Business Administration (SBA), the Community Development Financial Institutions Fund, New Market Venture Capital, and other federal efforts at promoting capital formation in the inner city. MESBICS did indeed fail during that period, but so did a number of conventional Small Business Investment Companies (SBICs)—and mostly for the same reasons. The SBA made sweeping program changes in 1994 and 1995 that significantly improved the SBIC industry performance and dramatically increased participation of inner-city entrepreneurs. The SBA’s job is not to mitigate risk by avoiding financing gaps, but to take the risk that the private sector cannot or will not take—and develop effective ways to manage it. The process is necessarily iterative, and the key questions are as follows: What are the impediments we face now, and how do we overcome them?