Hopes and Cures

The Senate Small Business Committee has passed an SBIR reauthorization bill. We hope the House and Senate will work together to pass a final reauthorization bill before this program is set to expire on September 30, 2008.

From the Puget Sound Business Journal:

Under a compromise negotiated in the U.S. Senate, small companies that are majority-owned by venture capital firms would once again be eligible for Small Business Innovation Research (SBIR) awards.

The deal limits the number of SBIR contracts that can be awarded to VC-owned firms, however. The legislation would allow the National Institutes of Health to award up to 18 percent of its SBIR dollars to VC-owned firms. The other 10 agencies that participate in the SBIR program could award up to 8 percent of their SBIR dollars to these types of companies.

The compromise was included in an SBIR reauthorization bill approved July 30 by the Senate Small Business and Entrepreneurship Committee on a 19-0 vote. If it’s passed by the full Senate in September and accepted by the House, it could end a five-year battle over eligibility for the SBIR program.

Congress created the SBIR program in 1982. It requires federal agencies with large outside research budgets to award at least 2.5 percent of this money to small businesses. In fiscal 2006, small companies received approximately $2 billion in SBIR contracts.

The Small Business Administration ruled in 2003 that a company doesn’t qualify as a small business if venture capital firms have an equity stake of 50 percent or more in the company. This made many companies, particularly in the biotechnology industry, ineligible for SBIR awards.

The Biotechnology Industry Organization (BIO) and the National Venture Capital Association have been lobbying Congress to overturn the SBA’s ruling ever since. They contend small biotech companies are forced to turn to venture capital because bringing new drugs and other innovations to market takes a lot of time and money. These companies shouldn’t be penalized just because of their financial structure, they argue.

“Thousands of small companies are pursuing biotech innovations that can improve human health, expand our food supply, and provide new sources of energy,” said BIO President Jim Greenwood. “They may not yet have product revenue, but they have tremendous potential — and are precisely the kinds of efforts the SBIR program was intended to foster.”

The Small Business Technology Council and some current SBIR recipients, however, contend that companies owned by VC firms are no longer small businesses. Ownership equals control, they argue. Allowing companies flush with venture-capital cash to be eligible for SBIR awards would crowd out businesses that truly are small, they fear.

The House sided with BIO and venture capitalists. By an 368-43 vote April 23, it passed legislation that would restore the SBIR eligibility of venture-owned small businesses, as long as no single VC firm owns a majority stake.

The Senate, by contrast, worked for months on an agreement aimed at addressing the concerns of both sides. By allowing NIH to award up to 18 percent of its SBIR grants to venture-owned firms, it acknowledged the importance of venture capital to the biotech industry while ensuring that most of the awards go to small businesses that are not controlled by VC firms.

The Senate legislation also would increase SBIR’s share of agency R&D budgets from 2.5 percent to 3.5 percent, except at NIH, which would remain at 2.5 percent. The House rejected a proposal to increase the SBIR share to 3 percent, largely due to opposition from universities, which feared they would lose federal research dollars as a result.

The size of SBIR awards also would increase under the Senate bill, from $100,000 to $150,000 for first-phase awards, and from $750,000 to $1 million for second-phase awards. The House, by contrast, tripled these recommended maximums. This would result in far fewer companies receiving SBIR awards, critics said.

The Senate bill was a result of negotiations between Sen. John Kerry, D-Mass., and other senators.

To read more about BIO’s position on this update, please go to: Senate Small Business Committee Reinstates Limited SBIR Grant Eligibility for Firms Majority-Backed by Venture Capital