Funds allocated by KSC to a Fund may only be used to support eligible small businesses in Washington D.C. Fund applicant/awardees will be required to ensure investments comply with all U.S. Treasury requirements, including but not limited to:
• Funds may be used to provide investment capital to Small Businesses located in Washington D.C. for the purposes of growing those companies in Washington D.C.
• A Fund shall invest funds in a portfolio company on the same terms as other investors in the financing. The Fund must also invest its own private capital at least a proportionate amount as defined in the investment agreements but at a minimum at a 1:1 proportion.
• Under no circumstances will an Investment Entity invest funds in any single round of equity financing that is a total of more than $20M. However, Treasury asks funds to target support towards investments with investment rounds that average $3M or less.
• Funds may be used for follow-on investments in portfolio companies, subject to the investment round size, conflict of interest, and other SSBCI exceptions
• Investments in Portfolio Companies may take the form of equity or hybrid Investments, including convertible debt and Simple Agreement for Future Equity (SAFEs)
• Funds will make individual investment decisions
• Funds and portfolio companies are subject to the terms and conditions set forth in all U.S. Treasury guidelines and requirements
• Funding provided by other Federal sources shall not be counted toward satisfying the matching requirements for a Fund. Other public sources of funding may be considered on a case-by-case basis, pursuant to the terms and conditions set forth in the SSBCI Capital Policy Guidelines.
• 50-100 DC tech companies funded by the program
• Positive investment returns over a 10-year period (Goal of recycling the capital into a larger program to fund more DC companies).
• 7,000 new tech jobs in alignment with Mayor Bowser’s objectives
Venture capital funds offer a variety of services to their portfolio companies. These services can include, for example, financial management, operational guidance, transaction consulting, and connecting portfolio companies to potential customers, investors, board members, and officers. These are services that the portfolio companies need to grow their businesses and vary depending on the portfolio company’s stage in the venture capital ecosystem.
Funds may request reimbursement for defined and documented services provided to SSBCI portfolio companies up to 1.71% of the allocated amount. This is the ‘management fee’ as Treasury has envisioned it. The Fund will be required to identify the services that will or have been provided and certify annually that such services have in fact been performed.
The agreement between the Fund and the Portfolio Companies should include disclosure of these services offered by the Fund Manager.
Consistent with industry standards on management fees, the fund should reimburse KSC for payments of such fees before returns on investment are paid to the general or limited partners (“LP”).
The “annual average” is calculated based on the average amount of the federal contribution that is used to cover services to portfolio companies over each year of the life of the venture capital fund, up to a maximum of ten years. Because the 1.71 percent allowance is an average, the fund may in some years use an amount of the federal contribution greater than 1.71 percent to cover services to portfolio companies, so long as in other years the amount used is less than 1.71 percent. Because the annual average is calculated over a period of up to ten years, the maximum expenditure on services to portfolio companies is 17.1 percent of the federal contribution (i.e., 1.71 percent x 10 years).
If, however, a fund’s life is less than ten years, the annual average for such fund must be calculated based only on the life of that fund. For example, if the life of a fund is only five years, the maximum allowance for such fund is 8.55 percent (i.e., 1.71 percent x 5 years). KSC and DMPED will entertain variable approaches to management fee recovery to best align with a given fund’s formation strategy.
Participating Fund Managers are allowed to receive a carried interest pursuant to their limited partnership agreement. KSC and DMPED will consider the waterfall distribution method chosen and the amount of carried interest as part of its investment consideration.
KSC does not contemplate reimbursement of additional fund operating expenses. It is important for a Fund Manager to understand that all operational expenses – including those amounts necessary to perform reporting requirements – are not covered by this program and cannot be charged to KSC.
Compliance: KSC and DMPED require Funds to comply with all SSBCI requirements and Fund Managers will be required to ensure their invested Portfolio Companies comply with all SSBCI guidelines.
Examples of some, but not all, of the data collection, compliance, certification and reporting requirements that are mandatory for the program are as follows:
A) Certifications by companies at the time of investment that:
• The funds received will only be used for an approved purpose
• The investment will not create a conflict of interest (“COI”)
• No principal of the investor or investee has been convicted of a sex offense against a minor
• If the business is a type of business impacted by climate, in a CDFI area, a Socially or Economically Disadvantaged (“SEDI”)-owned or controlled business
B) Quarterly and annual reporting is also required
Fund Managers shall only invest in eligible businesses. “Eligible Businesses” shall mean companies who meet all of the following criteria:
• Private company: Non-public company registered in DC and subject to taxation in DC (e.g. a corporation, partnership, joint venture, cooperative, sole proprietorship).
• Small business: Have fewer than 500 existing employees, including subsidiaries and affiliates.
• DC-based business: Have at closing, or sign an agreement pledging that it will have within six (6) months after funding:
• Headquarters within DC (principal business operations conducted from a physical location in DC); and
• At least 50% of employees must work in and provide services in DC OR at least 25% of employees must be residents of DC.
• In rare circumstances, companies who do not meet these requirements but are willing to open an additional office location in DC may be eligible for funding if the company is likely to provide substantial economic impact to DC in terms of job growth, capital investment and contributions to DC’s economy. These deals must be approved by DMPED prior to investment and no more than 10% of total investable funds should be spent on out of jurisdiction companies.
• Technology-based business: Business who creates proprietary technology or who leverage technology to offer a good or service.
• Early Stage: All companies must have started operations within five years from the date of the investment.
Businesses who meet the following criteria shall receive additional preference in consideration for investment:
• Businesses owned by economically disadvantaged individuals;
• Businesses owned by individuals who have been subjected to racial or ethnic prejudice or cultural bias because of their identity as a member of a group without regard to their individual qualities; and
• Businesses that otherwise meet the definition of, or are eligible for certification as, an Equity Impact Enterprise, as that term is defined by section 2042(b) of the District of Columbia Small, Local, and Disadvantaged Business Enterprise Development and Assistance Act of 2005, effective December 3, 2020 (D.C. law 23-149; D.C. Official Code § 2-218.02(8A)).
Each Portfolio Company (not Fund) is required to self-certify the following items.
• To remain a D.C based company for at least three (3) years
• That they are a small company as defined by the SBA
• There are no insiders as described under Treasury guidelines
• They are not a business that: engages in speculative activities, earns more than half its annual net revenue from lending activities, is engaged in pyramid sales, engages in activities prohibited by federal law, or is engaged in gambling.
• None of the principals have been convicted of sex offenses against a minor
• They will comply with Civil Rights Requirements
• The funds received will only be used for an eligible business purpose
• The funds will not be used to: finance passive real estate investment, refinance existing debt, repay delinquent federal or state income taxes, repay taxes held in escrow, reimburse Funds to an owner, purchase any portion of the ownership interest of any owner, purchase goodwill, or finance any portion of SBA- or other federally guaranteed loans
• That it will comply with document review, retention and reporting requirements required by Treasury. This includes reporting on the following items: yearly revenue and net income, number of full-time employees, number of jobs created and retained, and other information all as described in the Treasury guidelines.
Additionally, Fund Managers must be prepared to collect the following information on portfolio companies invested in with SSBCI dollars:
• EIN
• NAICS Code
• If the company is located in a CDFI Investment Area (and if an owner resides in a CDFI Investment Area)
• If the business is located in an Energy or Climate Impacted Community (as defined under SSBCI)
• The primary and secondary business activity for which the investment Funds will be used
Companies will also be asked if they are minority-, woman- or veteran-owned or controlled and if the owner(s) are a part of a SEDI designated group. Further, they will be asked to respond to a Supplemental Questionnaire that includes additional demographic information or other designations of SEDI categories. Response to these questions is voluntary.
Further, Treasury asks for impact data for each portfolio company, including but not limited to:
• Total subsequent capital raised
• Jobs created
• Revenue generated
At the time of a capital call, Managers shall submit compliant documentation required under the SSBCI program. While KSC will continue to refine precise reporting requirements and cadence, subject to change over time, the format and nature of the information currently required from Treasury may be seen in the References section below.
Managers shall be responsible for gathering and accurately reporting its own information in a timely manner.
Applications for the D.C. Venture Capital Fund will consist of four rounds. Each round will be evaluated and scored according to the guidelines below. KSC and DMPED anticipate a high number of competitive applications and expect that the full application process will take between 16-20 weeks in total. Applicants will be communicated with throughout the process and will be notified when they have moved from one step to another.
Applications will be accepted on a rolling basis and should expect to hear back within 30 days of the initial application screening. Once the applicant is invited to proceed to step 2, the due diligence period may take up to 6 to 8 weeks to review. During this time the team may follow up for additional information. In Step 3, scheduling of the interview will take place to meet in person or over a video call to clarify information in the due diligence process and terms for potential investment. The committee will review the application for a final decision within 6-8 weeks preceding the final execution of the agreement.
• Full deployment of the program funding into DC tech companies through 5-7 fund managers
• 50-100 DC tech companies funded by the program
• Positive investment returns over a 10-year period (Goal of recycling the capital into a larger program to fund more DC companies).
• 7,000 new tech jobs in alignment with Mayor Bowser’s objectives
Treasury imposes rigorous requirements on jurisdictions for matching Funds, Leverage Cash and Compliance and Reporting. KSC as manager of Washington D.C.’s SSBCI Venture Capital Program, flows down these same requirements to partner Fund Managers.
Fund Managers seeking an LP investment from KSC with SSBCI funds, must have a minimum 1:1 match from other LPs that the Fund will commit to invest in D.C. This means that D.C. cannot invest in a Fund unless the Fund can show that an amount equal to or greater than the SSBCI Fund investment will come in from private LPs and for investment in the District. KSC plans to issue a Letter of Intent to selected Fund Managers once KSC has finished diligence and decided to invest in a Fund. Additionally, The District wants to ensure the Funds are self-sustaining without the SSBCI investment, and therefore recommends the SSBCI allocation account for no more than 20% of the total fund size. This means that a Fund that requests a $5 million allocation from KSC: (1) must secure a match of at least $5 million from other LPs;(2) anticipate investing $10 million in the District; and (3) plan on closing at least a $25 million Fund.
Treasury expects all jurisdictions to realize 10X “leverage” cash on all SSBCI funds provided to the District across both credit support and venture capital programs. In this case, “leverage” means the amount of private capital deployed as a result of federal dollars invested. KSC anticipates that the D.C. SSBCI Venture Capital Program will drive the preponderance of that leverage and so will target funds capable of driving at least 10:1 private cash to SSBCI funds. Toward that goal, Fund Managers will track and report on all Leverage Cash attained through the life of the Fund. This will include match funds realized at close and additional funds deployed by all private investors both concurrent with the Fund’s investment in portfolio companies and downstream of the Fund’s investments for as long as those companies remain in the Fund’s portfolio.
Compliance: KSC and DMPED require Funds to comply with all SSBCI requirements and Fund Managers will be required to ensure their invested Portfolio Companies comply with all SSBCI guidelines.
Examples of some, but not all, of the data collection, compliance, certification and reporting requirements that are mandatory for the program are as follows:
A) Certifications by companies at the time of investment that:
• The funds received will only be used for an approved purpose
• The investment will not create a conflict of interest (“COI”)
• No principal of the investor or investee has been convicted of a sex offense against a minor
• If the business is a type of business impacted by climate, in a CDFI area, a Socially or Economically Disadvantaged (“SEDI”)-owned or controlled business
B) Quarterly and annual reporting is also required
SEDI-owned businesses are business enterprises that certify they are owned and controlled by individuals who have had access to capital on reasonable terms diminished compared to others in similar economic circumstances, due to their: (a) membership of a group that has been subjected to racial or ethnic prejudice or cultural bias within American society; (b) gender; (c) veteran status; (d) limited English proficiency; (e) physical handicap; (f) long-term residence in an environment isolated from the mainstream of American society; (g) membership of a federally or state-recognized Indian Tribe; (h) long-term residence in a rural community; (i) residence in a U.S. territory; (j) residence in a community undergoing economic transitions (including communities impacted by the shift towards a net-zero economy or deindustrialization); or (k) membership of another “underserved” community as defined in Executive Order 13985.
The SSBCI program has established targets to increase SEDI-owned business participation and to provide additional funding awards to states if SEDI targets are met. If DC meets the SEDI objective of thirty-three percent (33%) investments made in SEDI qualifying companies, up to an additional $[X] million can be made available to the District for SSBCI investment.
DMPED and K Street Capital are dedicated to the alignment of targeted, intelligently deployed capital with a scalable and sustainable entrepreneurial ecosystem fully inclusive of SEDI-owned businesses. K Street Capital seeks to ensure that all founders and owners of qualifying businesses throughout Washington D.C. have equitable access to early-stage capital.
Follow-On Commitments and New Commitments in Tranches 2 and 3:
Subject to a Fund Managers’ performance and availability of funds, KSC may provide follow-on investments to the initially selected Fund Managers who demonstrate performance and who are fully compliant with all regulations. Follow-on investments would take place in subsequent Funds managed by the same Fund Manager. However, selection of a Fund Manager for an allocation in the first tranche, does not guarantee future funding from the program. KSC reserves the right to allocate funds to new Fund Managers throughout the SSBCI program.
SSBCI funds are disbursed from Treasury to states in three (3) tranches. A state is eligible to receive its subsequent tranche of funding once eighty percent (80%) of the prior tranche is “expended, transferred or obligated.” Additionally, States are eligible to receive additional SSBCI investment capital in Tranches 2 and 3 as a function of their ability to meet the Treasury Department’s objectives for investment in Socially and Economically Disadvantaged (SEDI) owned businesses in Tranche 1 and 2 (see below). For these reasons, Managers must be prepared to contribute to SEDI investment goals and must be prepared to make timely and accurate report of all investments placed.
All Fund Managers who apply for SSBCI monies should familiarize themselves with the regulations to ensure they can and are willing to comply with all required regulations.
