Outcome of SBIR remains unclear

Authorization for the Small Business Innovation Research program ends in its current form at the end of this month, but investors and the National Venture Capital Association (NVCA), which has lobbied for an amended version of the program, are pessimistic about overcoming some obstacles toward that end.

One managing director of a prominent venture capital firm, whot asked not to be named, calls the SBIR program “a joke.”

“It’s a total pork program,” the VC says. “As a taxpayer, I think the program in its current form should be killed. If it’s not going to be, I at least want the money to be used to make our country stronger.”

The SBIR program, which was started in 1982, used to be widely used by VCs. The way it works is that federal agencies, with an annual external R&D budget of more than $100 million, are required to allocate 2.5% of their extramural R&D dollars to the SBIR grant program. Currently, 11 agencies have SBIR programs, with the largest share of awards coming from the Department of Defense and the National Institutes of Health (NIH).The program distributes slightly more than $2 billion a year in grants to companies with fewer than 500 employees, and whose R&D efforts have the potential to be commercialized.

All of this funding has translated into an incredible amount of intellectual property and a significant number of commercial products. More than 84,000 patents have been issued to SBIR grant recipients, according to the U.S. Senate. In addition, the Small Business Administration (SBA) reports that about 1-in-4 SBIR-funded projects result in the sale of new commercial products or processes.

However, in 2002, the government stopped issuing the grants to startups whose venture backers or “affiliates” owned more than 49% of the company, concluding that startups with deep-pocketed investors don’t need it.

“[The companies receiving SBIR grants today] are basically a lot of people who are grant mills,” says NVCA President Mark Heesen. “They go from one grant to another with no intention of moving their research to the next level, but they’re viewed as the little guy, and they hold sway.”

The NVCA has spoken out against that 2002 decision ever since. Among its many arguments is that VCs thoroughly vet the companies they back, so that venture-funded companies are more likely to have solid technologies than their independently owned peers. The NVCA has argued, too, that VC-backed companies stand a better chance of growing into big companies, and big employers.

The Biotechnology Industry Organization (BIO) has joined the NVCA in its opposition and the two have lobbied to get the rules changed. BIO points out that, due to the enormous costs associated with product development, clinical trials, and product production, most biotech startups need VC backing and grants to bring products to market.

In response to the concerns raised by the NVCA and BIO, in April, the U.S. House of Representatives passed a bill that would expand the eligibility requirements for the SBIR program to enable companies that are majority owned by venture firms to receive SBIR grants. One restriction to this expansion in the bill is that no single venture firm could own a majority of the company. In other words, if three VC firms each owned 20% of a company that company would be eligible; but, if one venture capital firm owned more than 50%, the company would not be eligible.

The U.S. Senate this month is scheduled to vote on a modified version of a bill that would allow the SBIR to funnel just up to 18% of the NIH’s SBIR dollars, and 8% of the other SBIR agencies’ dollars, to startups whose majority owners are venture firms.

If the Senate passes the bill, the House and the Senate will reconcile their two bills. The White House previously expressed opposition to the House bill, stating it “could lead to inappropriate subsidization of well-capitalized businesses.”

Heesen says that it’s “very unlikely” that the program, which he says needs to be reauthorized, will be anything other than automatically extended for two years before it gets considered again.

And that will be just fine with small businesses, says Lloyd Chapman, president of the American Small Business League, a 4-year-old organization and an outspoken opponent of the NVCA’s efforts.

“[The VC issue] is a problem that doesn’t exist,” says Chapman. “There are no findings that it does, or anything in writing saying that the federal government needs to work with this. More, the people who the SBIR program is supposed to help don’t want it.”