06 May Should VC-owned small businesses receive government grants?
Madison, Wis. – Unless you’re a scientific researcher, an economic development professional, or someone who enjoys poring over federal data, chances are good you’ve never heard of Small Business Innovation Research grants. If you’re someone who cares about whether Wisconsin is getting a fair shake in Washington, D.C., however, you might want to learn the ABCs of SBIRs.
The House of Representatives voted 368-43 in late April to dramatically overhaul SBIR and a related program, which goes by the acronym STTR. If passed by the Senate, the House bill would represent the most sweeping change in those research grant programs since they were created 25 years ago.
The question being asked by Wisconsin’s tech-based start-up firms is whether the change is good – or potentially harmful.
Through the SBIR program, 2.5 percent of the outside research budgets of 11 federal agencies (including the Department of Defense and the National Institutes of Health) are set aside for small businesses. The program, which funds around $2.3 billion in research every year, has helped thousands of small firms turn ideas into products and services.
Over time, Wisconsin businesses have lagged in winning SBIR awards. In the fiscal year that ended March 31, 2007, 51 Wisconsin businesses reported 84 awards worth $33.7 million. That was up from 46 companies, 74 awards, and $30.5 million reported in the previous year. While that’s progress compared to the past, Wisconsin’s SBIR success rate is still only half the U.S. per capita average.
VCs in the mix?
Will the House-passed bill improve Wisconsin’s odds? Some investors and biotech industry analysts believe the answer is yes; some small business owners fear the answer is no.
In recent years, the SBIR program has been mired in a debate over what qualifies as a small business. The U.S. Small Business Administration ruled in 2003 that a company no longer qualifies as a small business if venture capital firms have an equity stake of 50 percent of more in the company.
The Biotechnology Industry Organization and the National Venture Capital Association have pressed Congress to overturn that ruling. They contend the high cost of bringing new drugs and other technologies to the market force many companies to turn to venture capital firms for money. They argue a 10-person biotech firm in Madison isn’t a “big business” just because venture capital firms with downstream ties to larger corporations own 51 percent of the stock.
Some patient-advocacy groups also claim current SBIR rules crimp promising research on chronic diseases by artificially forcing venture capitalists to stay below the 50 percent investment line. An under-capitalized biotech company takes much longer to push a drug through the pipeline.
Some small businesses disagree. They worry that if the 50-percent VC investment cap is lifted, the coastal “vulture capitalists” will dominate SBIR and crowd early-stage businesses out of the nest. These skeptics argue that few venture capitalists actually invest in true start-ups, which are the companies most in need of SBIR grants. Venture capitalists prefer to leave those risky deals to angel investors and wait for a start-up to blossom.
Showdown in the Senate
The Senate has yet to confront the VC ownership debate. But even the opponents of the House bill should concede SBIR needed a facelift.
The House bill dramatically increases the size of future SBIR awards and will probably reduce the number of awards by about 40 percent. Given that some SBIR grants were almost too small to be useful, larger grants – properly targeted – may be an improvement. It may represent wiser use of federal tax dollars.
Getting VCs more involved might change the habit of some companies to become hooked on SBIRs, year after year, without making substantial progress toward commercialization. Say what you may about venture capitalists, but they set milestones and push research-oriented companies toward becoming product-oriented companies.
For those who worry SBIRs are already hogged by the technology “have” states on the East and West coasts, the House bill may other some relief for the “have-nots.” It includes a provision that orders the 11 granting agencies to “give priority to applications from companies located in geographic areas that, as determined by the administrator, have lost a major source of employment.” That should benefit states such as Wisconsin.
Wisconsin hasn’t exactly prospered under the SBIR status quo, so perhaps it’s time to try a new system.
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