A business development company, also known as a BDC, works to nurture or incubate small companies or businesses that are just getting started. A BDC is similar to a venture capital (VC) fund, but while a VC fund is privately held, a business development company is publicly traded. In other words, business development companies typically sell stock shares on public indices, such as S&P, AMEX, and NASDAQ.
Business development companies usually must adhere to standards and regulations set forth by their country's government. In the United States (U.S.) for example, a business development company must adhere to regulations set forth by the Investment Company Act of 1940. These rules state that such a company can invest only in private entities, as opposed to publicly-traded businesses. In additional, they must file quarterly and annual reports with the U.S. Securities and Exchange Commission. Rules for specific regions and countries can usually be found through an Internet search.
Some larger business development companies coordinate investments to several private companies. Other firms have internal departments that provide VC funds. VC funding and business development company funding both serve to incubate small businesses and investments. The goal is to nurture new ventures into productive businesses and then harvest a longer-term payoff by cashing in on the equity shares. Firms that work to provide these types of business incubators often wear several hats; some may assist in building a business plan, setting up a budget, designing production schedules or any number of other hands-on tasks. Other firms or funds may be set up to provide only capital, or they may offer basic advice and certain key business services.
To qualify as a business development company, an entity normally must meet standards for diversifying its holdings, and in the U.S., it must collect at least 90% of taxable gross income from the sale of securities or stocks. A business development company may employ something called mezzanine financing as well, which involves raising money for a company that’s at work but not yet open; this type of financing also may apply to business expansions in the planning stages but not yet functioning. Some critics of business development corporations have likened them to Ponzi schemes. Defenders of business development companies maintain that the funds democratize the investment world by allowing individuals to share in the riches generated by the incubation process.