Why is Louisiana's $113M Stimulus Money for Small Businesses Stuck in Red Tape?

Louisiana's economic development agency is mired in red tape and falling behind its peers in distributing a $113 million pot of federal stimulus money to startups and fast-growing small businesses, according to a federal report and local fund managers set to receive the money.

The funding earmarked for Louisiana is part of the $10 billion State Small Business Credit Initiative, which was launched in 2021 as part of the Biden Administration's $1.9 trillion American Rescue Plan stimulus package. The program is a relatively small part of the billions in stimulus received by Louisiana and other state and local governments over the past three years, but it is seen as potentially offering an outsized impact by funding the startups and small businesses that create jobs at a much faster rate than the rest of the economy.

The U.S. Treasury Department runs the program and expects that each $1 will attract 10-times that amount in private investment. Also, the majority of the money is targeted at under-served communities, including military veterans, rural areas and Black entrepreneurs.

Louisiana Economic Development, which is running the program in the state, first asked for applications from investment groups in April 2022. LED has received $33 million of its total $113 million allocation. So far, it has approved just one $287,500 equity investment and $4.7 million in loans. That means it has passed on 15% of the total received, though only 1% of money targeted at equity investment.

A report from the U.S. Treasury said that as of June, states and territories that received funding through the program have on average passed along about 30% of what's been given to them. Some states and territories have already passed through all of their first allocation and are on to their second chunk of money. Though 25 investment funds have been approved for the main equity segment of Louisiana's program, only Boot64 Ventures has received funding, and as a new fund it hasn't yet invested the $287,500 in any companies.

Fund managers say that the program, sometimes referred to as SSBCI, won't meet its goals if LED doesn't move faster.

"SSBCI is a big opportunity for the state, but we need to get the funds flowing," said Jon Atkinson, CEO of The Idea Village, a New Orleans non-profit and one of those approved for equity investments.

LED spokesperson Mark Lorando said Thursday that agency officials weren't available to discuss the program and its pace of distribution. "The Louisiana SSBCI team will continue to diligently support our equity and lending partners in their efforts to complete all necessary steps required to access SSBCI funds," Lorando said in an emailed statement.

The U.S. Treasury Department gave states wide latitude to build the program as they wished. LED has chosen to focus the bulk of its allocation — $91 million— on two equity funds. It has also chosen to be a co-investor on behalf of the state.

Trickle down The idea is that investors like The Idea Village, as well as others including funds run by Tulane University, Ochsner Health, or new groups like Boot64 Ventures and 100 Black Angels & Allies, will invest in companies that could go on to be the next Lucid or Levelset, two local tech startups that were sold for hundreds of times their initial investment and which now employ hundreds in high-paying jobs.

But LED's critics say that the agency doesn't have the expertise or staff to cope, which has led to a lot of slow-moving paperwork.

"This is a new tool for LED; they do not play in private equity and fund management activity," said David Smith, executive director of the entrepreneur accelerator at BRF, the economic development agency for north Louisiana. BRF is one of those approved for SSBCI equity investment. "They're not used to dealing with this and when you're new to something in government you move very slow," Smith said. "The downside is that we could be getting that capital deployed and working in Louisiana right now."

Fear of losing out

The slow movement could mean missing out on a substantial part of the allocation. The Treasury Department is releasing the money in three tranches and the second tranche is dependent on investing the first by the beginning of 2026.

Some investment fund managers noted that in 2011, it took LED until 2015 to disperse $5 million through an earlier, simpler version of SSBCI.

"Louisiana needs to be in more top rankings rather than bottom rankings among the states," said Hal Callais, who runs Callais Capital Management, one of the funds approved by LED for SSBCI equity investment. "That's especially true in backing startups and small businesses."

Callais noted that it's a very difficult time for startups and fast-growing new firms after a long period of rising interest rates. Venture fund investing in the U.S. this year has been just one-third of what it was at the end of 2021, according to data from consultants Ernst & Young.

In tough times, Louisiana companies aren't likely to be first-in-line to attract investment; and the longer it takes to get them money, the more likely they are to fail, Callais said.

To be sure, the federal government has also seen delays in the program's rollout. The Treasury Department was taken to task by the General Accounting Office — the federal watchdog — for taking too long to set clear rules for states.

Also, fund managers gave LED credit for wanting to direct the bulk of the federal funding towards equity investments, which means potentially a much bigger bang for each buck. But it also means a steeper learning curve.

Steep curve "At least 20 of the funds they've chosen are first-time managers," said one experienced fund executive who didn't want to be quoted by name in case it affected his relationship with LED. "That is good as it will build bench strength, but it's bad because it means all those audits and other paperwork. A lot of folks don't know what they're doing right out the gate."

Fund managers are also concerned about delays sparked by potential changes of leadership at LED as the administration of Gov.-elect Jeff Landry takes over. Already, several key staffers at the agency have left and the civil servant running a large part of the SSBCI program is due to retire soon, according to a source familiar with the programs.

Atkinson said that the urgency of fixing the SSBCI program could be an opportunity for the state bureaucracy to fill the gap in small business investing know-how.

"From my perspective, the state needs to create a dedicated startup and innovation strategy focused on the needs of venture scale companies, then build capacity around it," he said.

Editor's Note: The story was updated to clarify changes to the staffing of some LED programs.