peHUB Wire: Friday, March 13, 2009

Today may be Friday the Thirteenth, but the Small Business Administration is facing a real horror next Friday. That’s when the Small Business Innovation Research (SBIR) grant program is scheduled to expire.

For the uninitiated, SBIR grants are designed to fund basic R&D being conducted by for-profit institutions. The goal is to stimulate technological innovation to both meet federal R&D needs and to help commercialize existing federal research, via small businesses. They are awarded by 11 different federal agencies (NIH, DoD, DoE, etc.), although SBA has administrative oversight. As of the last information I could find, Phase I grants are worth up to $100,000, while Phase II grants are worth up to $750,000 for two years of research. In fiscal 2006, there were 3,836 Phase I grants awarded, and 2,026 Phase II grants awarded. In addition to the money, award recipien! ts are allowed by be solely-sourced by relevant government agencies (i.e., go around the typical procurement process, which is generally dominated by massive corporations).

I know what you’re probably thinking: Why on earth does this matter to the peHUB audience? VC-backed startups are, you know, backed by VCs. If $100k is going to make or break them, then there are bigger issues to deal with.

My answer is twofold: First, VC-backed companies could use SBIR grants to fund experimental research outside of their primary product plans. This is particularly true if a company could develop an application specific to DoE or DoD. After all, part of SBIR’s mission is to stimulate Moreover, SBIR grants could be used by seed-stage life sciences companies to pursue alternate applications for their developing therapies.

Second, you’re right. This has no impact on VC-backed companies. Since the program’s inception, it has stated that qualifying companies must be 51%-owned by individual U.S. citizens. SBA’s initial interpretation was that VC partnerships were comprised of U.S. citizens, and therefore counted. A reinterpretation in 2004, however, was that VC partnerships did not qualify, which resulted in their companies being excluded (as are companies with more than 500 employees, or those owned by large corporations).

As I wrote at the time, this is bad policy. Proponents of the current interpretation claim that allowing VC-backed participation would just help rich investors get even richer. Maybe, but that is the micro view. The macro view is that re-reinterpretting the rules would help improve military effectiveness, medical care, military effectiveness, energy efficiency, etc. After all, aren’t VC-backed entrepreneurs often the best and brightest entrepreneurs out there?

Unfortunately, this battle over “to VC or not to VC” had helped delay SBIR reauthorization – leading to the looming deadline. The NVCA and others have lobbied to change the rule, while small biz groups have fought hard against it (and won unlikely bedfellows like Sen. John Kerry and former President Bush). No word yet on where the Obama Administration stands, which has enabled continued stagnation.

A spokesman for the U.S. Senate Committee on Small Business & Entrepreneurship says that Sen. Landrieu and others are hoping to pass a program extension, but had no additional details. For example, how likely is such an extension? Would it be for weeks? Months? Would there be any changes to award qualifications?

Karen Hontz, director of government contracting for the SBA, says that she too is hopeful, but that no promises have been made. Moreover, she says there have been no decisions made on what to do if the program expires. For example, will there still be Phase II money for successful Phase I recipients? Will a Phase II recipient in his/her first year still get second-year funding? No idea how these issues remain unresolved with one week to go, but unresolved they are.

The irony for SBA, of course, is that they snubbed the very people who could help keep the SBIR program alive: Venture capitalists. These are a wealthy bunch, who contribute to elected officials and are considered local business leaders in states like California, Massachusetts, North Carolina and New York. If VCs believed their companies benefited from SBIR grants – or even had reason to be more familiar with them – then they’d be fighting the good fight. As it stands now, though, they’re sitting on their hands and the program is falling through the cracks.

*** Last night: Jon Stewart didn’t bring the funny, but Jim Cramer didn’t bring the Cramer. Where was the spirited defense? The bombast? Is it an overstatement to say that the Mad Money host looked to be on the verge of tears? Stewart obviously had good ammo, but Cramer didn’t offer up some very obvious rebuttals. Anyway, watch the videos here. You be the judge.

Top Three

Sangart Inc., a San Diego-based developer of an artificial blood substitute, has raised $50 million in additional Series F funding. This brings the round total to $100 million, and the company’s total venture capitalization to over $170 million. No investor information was disclosed, although the initial tranche was led by Leucadia National Corp.

VF Corp. (NYSE: VFC) has acquired the remaining two-thirds of sportswear maker Mo Industries from Summit Partners and Mo Industries founder Moise Emquies. The deal was valued at $161 million, plus the repayment of $47 million in existing net debt. VF Corp. had acquired the initial one-third stake last June.

AEA Investors is raising up to $300 million for its second Small Business Fund, which focuses on small-cap leveraged buyouts, according to a regulatory filing.

VC Deals

Transera Communications, a Sunnyvale, Calif.-based provider of on-demand virtual contact center software, has raised $17 million in fourth-round funding. Return backers include Accel Partners, Apax Partners, Lighthouse Capital Partners and Storm Ventures. The company previously raised around $30 million.

Kenta Biotech, a Switzerland-based developer of human monoclonal antibody therapies for serious hospital infections, has raised CHF 12 million ($10m) in Series B funding. No investor information was disclosed.

RedVision has raised $6.8 million from Edison Venture Fund. The Parsippany, N.J.-based company provides real property research solutions for lenders, title agents/insurers and attorneys.

Hunch Inc., a consumer-facing online decision engine, has raised $2 million in Series A funding, according to a regulatory filing. No VC firm names are disclosed, but the company’s board now includes Rob Stavis from Bessemer Venture Partners and Hemant Taneja from General Catalyst. Hunch founder and CEO Chris Dixon was once an associate with Bessemer.

Bay City Capital has agreed to lend $10 million to portfolio company VIA Pharmaceuticals Inc. (Nasdaq: VIAP). VIA already has borrowed the first $2 million tranche.

Cornerstone OnDemand Inc., a Santa Monica, Calif.-based provider of talent management software and services, has raised $12.7 million in Series E funding. Meritech Capital Partners led the round, and was joined by return backers Bay Partners and Bessemer Venture Partners. The company had previously raised over $32 million. peHUB earlier this week reported that the round was for $9 million, based on a regulatory filing.

Buyout Deals

Lion Capital has agreed to acquire a 20% stake in clothing retailer American Apparel (AMX: APP) for approximately $80 million, according to The New York Times. Under terms of the deal, Lion would receive warrants for 16 million new shares at a strike price of $2 per share.

PE-Backed M&A

Adknowledge, a Kansas City-based provider of behavioral online advertising solutions, has acquired the Media division of MIVA Inc. No financial terms were disclosed. Adknowledge raised $48 million in funding in 2006 from Technology Crossover Ventures.

Pennant Foods, a provider of bakery products to the food service and retail markets, has agreed to acquire a portion of the General Mills Bakeries and Food Service frozen bread dough business. No financial terms were disclosed. Pennant is a unit of Fresh Start Bakeries, a platform company sponsored by Lindsey Goldberg LLC.

PE Exits

Gen Cap America has sold Hobby Lobby International Inc. to Family Time Hobbies LLC, a holding company controlled by Nashville-based entrepreneur Mark Cleveland. No financial terms were disclosed. Hobby Lobby is a Brentwood, Tenn.-based distributor and retailer of model airplanes, helicopters, boats and accessories.

Vina Capital has sold its equity stake Masan Group, a Vietnamese food and beverage company, on Vietnam’s over-the-counter market. The sale generated over $20 million.

Firms & Funds

The Gores Group is raising its third fund with a $1.5 billion target, according to LBO Wire. The Los Angeles-based buyout firm raised $1.3 billion for its second fund in 2007.

KKR is targeting around $1 billion for its debut mezzanine fund, according to LBO Wire.

Pharma Capital Partners is raising $100 million for its debut fund, according to VentureWire. The firm was formed by former members of Merck Capital Ventures, and will focus on technologies that can improve pharmaceutical company operations.

VenGrowth Asset Management has agreed to sell its mutual fund business, Criterion Investments, to First Asset Capital Corp. No financial terms were disclosed. In a statement, Vengrowth said the move would allow it to “dedicate itself fully to its private equity business.”

Xie Ping, deputy manager of sovereign wealth fund China Investment Corp., wrote in an article that CIC “should and could do its best to increase its transparency under the precondition of not touching on commercial secrets.”

Human Resources

Irving Weissman has joined the technical advisory group of OVP Venture Partners. He is a Stanford University professor who has formed three stem-cell companies: SyStemix Inc., StemCells Inc. and Cellerant Inc.

Lisa Kro, managing director and CFO of Goldner Hawn Private Equity, has taken a board seat with Famous Dave’s of America Inc. (Nasdaq: DAVE).