13 Aug Debate continues on SBIR/STTR eligibility
During a question and answer session at a recent Wisconsin Innovation Network (WIN) lunch, there was considerable discussion as to the proposed changes to the Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR) grant program eligibility requirements included in a bill that the U.S. House of Representatives recently overwhelmingly approved in April. Since the WIN lunch, a U.S. Senate committee chaired by Senator John Kerry (D-MA) unanimously passed a separate bill in July. The Senate bill provides numerous compromise changes to the SBIR/STTR eligibility requirements. The final bill that will likely be approved by Congress and put before the President could have a significant impact on many area technology companies.
Federal agencies with an annual external research and development (R&D) budget of over $100 million are required to allocate 2.5% of their extramural R&D dollars to the SBIR grant program. Similarly, federal agencies with extramural R&D budgets of over $1 billion are required to allocate 0.3% of their budgets to the STTR grant program. Currently, eleven agencies have SBIR programs and five agencies have STTR programs. The largest share of awards in both programs comes from the Department of Defense (DOD) and the National Institutes of Health (NIH). In 2006, agencies awarded approximately $2 billion in SBIR grants and approximately $225 million in STTR grants.
All of this funding has translated into an incredible amount of intellectual property and a significant number of commercial products. According to Senate figures, over 84,000 patents have been issued to SBIR grant recipients. In addition, according to the Small Business Administration (SBA), approximately 1-in-4 SBIR-funded projects result in the sale of new commercial products or processes.
Some of the more controversial elements of the SBIR/STTR programs involve the eligibility requirements. Currently, a SBIR/STTR recipient must, among other requirements, be an independently owned and operated for-profit U.S. company that (a) is at least 51% owned and controlled directly or through another company by one or more individuals who are citizens of, or permanent resident aliens in, the United States, and (b) has, including its affiliates, less than 500 employees.
In 2001, the SBA took the position that a company in which venture capital firm(s) own more than 49% cannot qualify for SBIR/STTR grants because the 51% requirement of individual ownership is not met. The “51% requirement” in essence precludes many venture-backed life science companies from applying for SBIR/STTR funding.
As one might imagine, the SBA ruling did not sit well with National Venture Capital Association (NVCA). Biotechnology Industry Organization (BIO) joined the NVCA in its opposition and the two have lobbied hard to get the rules changed. BIO points out that, due to the incredible costs associated with product development, clinical trials, and product production, most biotechnology companies need both venture capital and grant money in order to bring products to market. While the SBIR/STTR eligibility requirements do not preclude venture-backed companies, it is not realistic for most companies according to BIO to make it through the process while maintaining majority ownership in a company.
House of Representatives
In response to the concerns raised by the NVCA and BIO, in April, the U.S. House of Representatives passed a bill that would expand the eligibility requirements for the SBIR/STTR program to enable companies that are majority owned by venture capital firms to receive SBIR/STTR grants. The only substantive restriction to this expansion in the bill is that no single venture capital firm could own a majority of the company. In other words, if three venture capital firms each owned 20% of a company that company would be eligible; but, if one venture capital firm owned 60%, the company would not be eligible.
So, what’s the big deal if venture capital firm-controlled companies are permitted to obtain SBIR/STTR grants? Plenty, according to many early and seed stage companies that attended the recent WIN luncheon. The SBIR/STTR grant programs are limited in amount and by opening the door to more companies to compete for the grants, especially those that are funded primarily by institutional venture capital money, many early and seed stage companies will not get the money that they view is their current primary financial lifeline.
The House bill would also increase the maximum size of Phase I awards from $100,000 to $300,000 and Phase II awards from $750,000 to $2.2 million.
While the increase in each award amount is a welcome proposed change, the overall funding of the SBIR/STTR programs would remain the same under the House bill. The result would be that while the grants would be larger, there would be fewer of them. This issue has not been lost on many of those who would be affected. The National Small Business Association (a nonprofit advocacy group for small businesses) estimates that the number of SBIR grants awarded each year would be cut in half under the House bill because it would triple the size of allowable awards without increasing the program’s overall size. In addition, if companies were allowed to apply for Phase II grants without first proving their idea’s worth in Phase I, it would make the program vulnerable to influence peddling and abuse, according to NSBA lobbyists.
In light of the criticisms of the House bill, Senator Kerry’s subcommittee has tried to strike a compromise. As passed, the Senate committee’s bill would make the following changes:
- Companies in which venture capital firms own more than 51% would be eligible for up to 18 percent of the NIH’s SBIR dollars and up to 8% of the other ten SBIR agencies’ SBIR funds; thus leaving the balance, 82% and 92%, respectively, exclusively for companies that meet the historic eligibility requirements.
- The SBIR budgets for most agencies would increase from 2.5% of SBIR agencies’ extramural R&D budgets to 3.5% over the course of 10 years, 0.1 percent per year. The significant exception for this is NIH. At DOD and the Department of Energy, the increase would focus on Phase II awards.
- The STTR allocation would increase from 0.3% of STTR agencies’ extramural R&D budgets to 0.6%, over the course of 6 years, for all STTR agencies.
- The award size guidelines for the SBIR and STTR programs would increase from $100,000 to $150,000 for Phase I and from $750,000 to $1 million for Phase II. This is in line with the recommendation of the National Academy of Sciences.
- The SBIR and STTR programs would extend through 2022 and 2023 respectively.
Although the White House has expressed opposition to the House bill, stating it “could lead to inappropriate subsidization of well-capitalized businesses,” as of this writing the White House has not released its position on the Senate bill. As it stands, Congress is in recess until September. Upon their return, the staff of Senator Kerry’s committee anticipates a favorable vote on the Senate bill in the full Senate. After Senate passage, it is likely that the House and the Senate will reconcile their two bills. Given the stakes, there are high hopes that Congress will pass a final bill before the end of the year that ensures program stability and encourages small technology company development.
Laura Riske is Director of Government Affairs for Michael Best & Friedrich and has nearly 20 years of experience identifying and defining legislative business problems, developing solutions through research and analysis and implementing strategic political plans on behalf of clients.
The opinions expressed herein or statements made in the above column are solely those of the author, and do not necessarily reflect the views of the Wisconsin Technology Network, LLC. WTN accepts no legal liability or responsibility for any claims made or opinions expressed herein.