April 2, 2020  
 
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Venture Capital Funding

 

Business Development Company

Designed to provide early stage capital for small companies, the business development company concept is an alternative to venture capital funding and offers several important advantages to both entrepreneurs and average investors.

A Business Development Company (BDC) is a funding vehicle that is designed to help small companies achieve growth during the early stages of development.

However, there are several characteristics that make BDCs unique, distinguishing them from VCs and other private equity firms. Most notable, business development companies are publicly traded companies that are typically listed on exchanges like NYSE, AMEX and Nasdaq.

Overview: The Business Development Company Concept

The business development company category was created by the Small Business Investment Incentive Act of 1980, a piece of legislation that amended the Investment Act of 1940 and allowed the creation of a public vehicle for investment in small, growing companies.

Previously, private equity and VC firms had been limited in their ability to fund small companies due to a provision in the 1940 legislation. This provision prohibited private equity and venture capital firm securities from being owned by more than 100 private investors, eliminating the possibility of a publicly traded, early stage investment fund.

The 1980 legislation specifically intended to increase the volume of growth funding available to small companies by opening up public investment for private businesses. Specifically, the business development company concept was designed to create publicly traded, closed-end funds for investments in private companies.

Like other investment vehicles, BDCs were designed to reward investors through capital appreciation and/or current income. Similar to VC firms, BDCs expect to exert a significant amount of influence over the companies in which they invest. The amount of control varies on a case-by-case basis, but can include consulting, strategic guidance and even board seats.

In general, BDCs are taxed as regulated investment companies (RICs). As RICs, business development companies operate a pass-through business entities with nearly all of their taxable income passed on to investors in the form of investor dividends.

BDC Benefits for Investors and Entrepreneurs

Business development companies offer important benefits for investors and the owners of small, growing companies. For entrepreneurs, the most obvious benefit is access to an additional source of growth capital and strategic partnership opportunities. As young companies struggle with the process of obtaining funding and getting venture capital, the more sources of capital that are available, the more likely it is that business owners will be able to secure the funds they need to achieve critical growth targets.

For investors, a business development company is an opportunity for anyone to buy into the early stage investment market. In most cases, investment opportunities in venture capital and private equity firms are restricted to wealthy investors. But since BDCs are publicly traded, investors across a spectrum of financial backgrounds can participate in the risks and rewards that are associated with small, growth companies.

Another significant advantage for investors is that BDCs are inherently more liquid than private equity investment vehicles. In a VC firm, investors are typically at the mercy of investment managers, unable to convert their investment until the firm liquidates its interest in the company. In a BDC, investors are free to liquidate their investment at any time, simply by selling their shares in the marketplace.

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