The Small Business Administration lost $281 million from liquidations of failed small business investment companies between 1990 and 1996, according to a General Accounting Office report.
Further, 160 of these venture capital firms currently are in liquidation and the SBA estimates that total losses in the program since 1990 will increase to $404.1 million.
Small-business investment companies are private venture capital firms, operated by individual managers or banks, that are licensed and regulated by the SBA.
"When you are making equity-oriented investments in small businesses, you expect a significant number to fail," said Don Christensen, the SBA's assistant administrator for investment.
When the economy slumped in the late '80s and early '90s, many small businesses failed and SBA-licensed venture capital firms entered liquidation.
But Mr. Christensen said only four venture capital firms have gone into liquidation in the last two years and he expect the losses to subside once the SBA cleans up the earlier failures.
In addition, Congress revamped the licensing requirements in 1992 to reduce the SBA's exposure to losses in the investment program.
Congress boosted the amount of capital needed to form a venture capital unit to $5 million, raised the auditing standards, and required the managers to have investment experience.
"Today's SBIC program is far different from the one that gave rise to the losses we see here," Mr. Christensen said.
In addition to using private funds to invest in small businesses, the venture capital firms can issue debt instruments, which are guaranteed by the SBA.
The venture capital firms also can sell securities to the SBA, which allows the federal agency act as a limited partner in the firm and share any profits.
Through those funding methods, some of the venture capital firms can receive as much as $4 from the SBA for every $1 they invest of their own money.
The 70 bank-owned venture capital firms account for more than two-thirds of the $4.5 billion invested through the SBA program. But banks tend to invest their own funds.
In 1996, bank-owned firms used less than $100 million of SBA financing, while individually owned venture capital firms used nearly $900 million in SBA financing.
