cartier@bio
nicoleatbio
A post on SBIRGA asked the question, “Just how short-sighted is the VC community?” The post discussed a recent analysis by the State Science and Technology Institute (May 28th Digest) of a study conducted by Pricewatershouse’s MoneyTree Report that indicates venture capital companies are making more investments in later stage companies and fewer investments in start-up companies.
This piece points to the important role of the SBIR program in funding new ideas that have the potential to become viable products, a point I most certainly agree with.
Today, by far the largest seed capital fund in the country, the SBIR program, is run by the U.S. Government. It amounts to $2.2 billion dollars annually and is given to companies that want to develop new technologies into viable products. Generally it is given out in a $100,000 first round and a $750,000 second round on a competitive basis. Doing the math, you see that several thousand new ideas get funded each year.
The post goes on to state that the VC community is pushing an agenda on Capitol Hill that would change the SBIR program into one that helps leverage private investments in later stage companies with public money which may prohibit new ideas from getting funded and prevent early stage companies from developing.
The VC community is pushing changes through Congress that will convert the SBIR program into one that helps leverage their private investments in later stage companies with public money. Sweet deal if you can get it. But other than using taxpayer money to make the rich richer, what is the cost?
The MoneyTree Report does in fact illustrate the important role SBIR grant funding plays in providing seed money for projects that are too high-risk to attract venture capital funding. SBIR provides validation that the research project has commercial potential and this support can help attract venture funds for these promising projects.
The biotechnology industry has been advocating for reform for the SBIR program to once again allow biotech companies with venture capital backing from multiple investors to be allowed to compete for SBIR grants.
The purpose is not to help VCs leverage their private investments in later stage companies. If one of these companies has VC backing, it is likely tied to the more-developed lead product. For example, small biotechnology companies may not have a product on the market, but will have 3-5 research projects in their pipeline. These VC funds cannot be used to fund these other more early-stage research projects that may also have great potential; only the main project will receive the funds.
SBIR grants help these early-stage innovative research projects get off the ground. Biotech is a research and capital intensive industry – it can take 8-10 years and $800 million dollars to get one product through the FDA approval process – and there are more failures than successes. It is important that SBIR funds go to new ideas and should be given to small businesses based on the merit of the project. Companies that have attracted VC for one project should not be prohibited from competing for funds to research another therapy or treatment that has potential to benefit the public. Helping small biotechnology companies have the ability to develop more than one project makes that company more stable and more apt to grow: this is good for innovation and good for building a young industry.
Filed under: SBIR, venture capital | Tagged: biotech, capitol hill, MoneyTree, SBIR, SBIRGA, SSTI, venture capital
I am glad to hear that BIO agrees that the purpose of SBIR is not to help VC leverage their private investments. Can we all work to keep it that way? Of course if we are talking about a company that has received an early round of VC funding of a few million dollars, in most cases they can still receive SBIR funding. However, it troubles me that a smart VC who knows the science and the market and who has invested tens of millions of dollars in a company would then not invest a few hundred thousand dollars more in the company for a new, probably related, application of the company’s technology.
If the level of VC investment in a company before it becomes ineligible for SBIR funding was the only issue with the SBIR bill that passed the House of Representatives, the statement of BIO that it is not trying to allow VC to leverage their investments could at least seem creditable. However, other provisions of the bill that drastically change this highly successful program, casts serious doubt on this intent.
If a VC wanted to change the SBIR program to leverage their own private investments, they would eliminate the requirement that Phase I funding must be obtained first. This would allow them to match-up their later-stage developed technology with the Phase II requirements and reach the major SBIR money without being slowed down by Phase I. They would then greatly increase the dollar amount of awards to say three times the current level. This would cut out funding for a lot of new ideas, but the VC would get an attractive level of funding. And finally they would allow unlimited Phase II awards so that the SBIR funds could continue to roll into the companies they control. If these sound familiar, they should as they are the provisions that BIO has gotten through the House of Representatives.
The SBIR program has a 25 year history of helping companies get new ideas off the ground, some of which VC have then invested in. The legislative changes that have been proposed will greatly reduce the flow of these new ideas. Then, in perhaps in as little as five years, I can almost hear the VC complaining that there are not enough new ideas being developed to invest in. I call that short-sighted.