Hopes and Cures

Fortune Small Business Volume 18; Issue 3

Funding research to develop cures for life-saving diseases is not a laughing matter, and we shouldn’t be making public policy based on cartoons. Small biotechnology companies, like the innovative and fast-thinking Jerry of the Tom & Jerry cartoon, deserve to succeed, but it’s the Small Business Administration that is holding back some of the best small businesses – those that have earned the confidence of venture capitalists.

 At issue in the Reauthorization Act being proposed is the SBA’s 2003 ruling, which changed the definition of what was included in a “small business.” When determining the size of a company, the SBA considers the number of direct employees at the company, as well as affiliated businesses’ employees.  As a result of these rules, a small company with 50 employees could be deemed to be affiliated with hundreds of other employees of companies with which the small company has no relationship whatsoever, just because the companies share a common investor. 

 If the SBA’s logic applied to homeownership, then all people with mortgages held by the same bank would be deemed affiliated for purposes of making decisions about individual household spending.  It is not that large companies want to be considered small, but that actual small companies are now being considered much larger than they are.

 The Fortune piece states: But Jere Glover, an architect of the SBIR program who now directs the Small Business Technology Coalition, disagrees. He argues that SBIR grants resemble the early “angel” funding that helps a promising business get started, before the stage at which the more risk-averse VCs are ready to invest.

 SBIR does provide ‘angel,’ or more accurately, gap funding, so these ideas can be further developed to the point that the private sector will become engaged.  A small business that been able to attract VC funding in one area, a sign of credibility for their work, should not be punished by being prohibited from competing for  SBIR gap funding in a different area , one that also has the potential to benefit public health.  

The article provides misleading information: SBIR offers about $2 billion each year in small grants to high-tech firms, in three phases. The first two rounds, with grants as large as $750,000, are reserved for small businesses. In the third round, applications from entrepreneurs funded by large VCs and other corporations are accepted.

 NIH SBIR grants do not go to projects in phase III, which is why at this stage VC funds become critical. As it is, NIH grants have declined by 21% since the implementation of the 2003 SBA ruling and the number of new businesses applying is the lowest it has been in a decade.

 Everyone involved in this debate believes that SBIR should work to assist small businesses working to bring novel therapies to the market, which is clearly the program’s intent.  Unfortunately, the SBA’s logic doesn’t make sense, and it’s the patients and consumers relying on cures for life-threatening diseases who are being punished.  Our public policy priority needs to be squarely on the side of patients.