Hopes and Cures

With three weeks remaining before the August recess, time is running short for the Senate to continue to meet regarding the SBIR bill. (NOTE: the House passed a SBIR reauthorization bill in April). Yesterday the Wall Street Journal ran a piece outlining the debate on who should receive these SBIR grants: Should a small business that attracts the keen eye of venture capitalists also be eligible for SBIR grants?

Key Arguments for Restoring Eligibility to Venture Capital-Backed Companies

· The companies that venture capitalists back have already been vetted to show their potential for ability to commercialize research; this is the goal of the SBIR program

· These are small companies, often with no revenue. VC funds tend to be tied to later stage research, whereas SBIR grants are used to fund early stage research. This early stage research is often too conceptual to attract VC funds, which makes SBIR funding all the more important.

For example: That irks executives at venture-backed companies like Applied Genetic Technologies Corp., a small gene-therapy start-up in Alachua, Fla., that is working on cures for rare eye diseases and other ailments. Five years ago, the company had a small-business grant for more than $500,000 revoked because it had recently crossed the 51% VC-ownership threshold. The funding was for research into therapies for Pompe disease, a rare muscle disorder that is often fatal in children.

“Here I am, 12 people, working on very early-stage, risky technologies for ‘orphan’ diseases, which I would think the government would encourage, and I don’t qualify for funding,” says Sue Washer, the company’s president and chief executive. Although Applied Genetic has raised about $27 million from venture capitalists, that money is targeted at the company’s treatment for a certain type of emphysema, which was already being tested on patients, according to Ms. Washer.

Concerns About VC-Backed Companies

· Venture Capital-backed firms have an advantage in the SBIR application process and will “write slicker grant proposals,”.

· The venture community will “turn the program into a ‘feeder’ program that would let government fund high-risk research and allow VCs to profit later.

The House bill would “squeeze out the very small companies” and leave fewer grants for deserving research in markets too small to interest venture capitalists, says Michael Squillante, vice president of research at Radiation Monitoring Devices Inc., a Watertown, Mass., high-tech company. The firm has received many of the Innovation Research grants but no money from venture investors.

However, the Senate is unlikely to take up the House version of the bill, says a person familiar with the legislation. Instead, the Senate’s small-business committee, headed by Democrat John Kerry, is likely to try to strike a compromise, this person said, allowing companies controlled by venture capitalists to participate, but setting limits on the number of VC-controlled firms.