Monday, April 28, 2008

Federal SBIR grant changes raise small-business ire

By Efrain Viscarolasaga

Proposed changes to the federal Small Business Innovation Research (SBIR) program -- including more money per grant, a fast-track option for federal agencies, and the inclusion of more venture capital-backed companies -- have small-business advocates and research firms that subsist on government grants crying foul.

For companies seeking SBIR grants from agencies such as the U.S. Department of Defense or the National Institutes of Health, the changes would pit venture-backed companies against their independent counterparts, all vying for a smaller number of awards.

The SBIR reauthorization bill, which was being debated in the House this week and is expected to go to the Senate next, would raise the amount of Phase I grants to $300,000 from $100,000 and Phase II grants to $2.2 million from $750,000. In addition, federal agencies would be allowed to provide more funding -- or even allow some companies to skip Phase I entirely -- at their discretion.

Opponents of the proposed rule say the bill not only would allow VC-backed companies to take funding now slated for small, independently owned companies, but that the larger grant amounts would encourage more VC-backed firms to chase SBIR dollars.

New England Research Inc. in White River Junction, Vt., does geological research for the U.S. Department of Energy and for commercial customers. It has landed eight Phase I SBIR grants and three Phase II grants since 1985. The firm's principal scientist, Gilles Bussod, said the new Congressional proposal would only help larger, more established companies.

"It goes against the diversity that is supposed to be a part of the SBIR program," he said. "It would defeat the purpose of the program if the grants went to only a few, quote-unquote, 'small' companies."

More than 2,000 New England tech companies have been awarded SBIR grants since 1982, and 690 of those are still working under a grant, according to the Innovation Development Institute, an SBIR advocacy group in Swampscott. There are 134 VC-backed SBIR awardees based in New England.

The 12 participating federal agencies now allocate 2.5 percent of their annual budgets to SBIR programs, and that would remain the same. But with larger award amounts, fewer awards would be granted -- creating even stiffer competition among applicants.

"This is nothing more than a loophole to let large businesses get small-business funding from the government," said Lloyd Chapman, founder of the California-based American Small Business League, a vocal opponent of the legislation.

VCs have been lobbying for these changes for some time. While VCs manage funds that can run over $1 billion, portfolio companies have access to only small portions of that capital -- and therefore are more akin to traditional SBIR participants, VCs suggest.

In addition, VCs see themselves as a first line of defense for the government in evaluating companies and their commercial potential. Because VC-backed companies are stronger candidates in bringing a new technology to market, VCs claim the SBIR program should support more of them -- and should spend less to support research that may have little future value.

"It feels like an irresponsible use of government dollars if you are going to fund companies that couldn't raise (private) funding on their own," said Michael Greeley, president of the New England Venture Capital Association and general partner at Flybridge Capital Partners, a Boston-based VC firm that recently changed its name from IDG Ventures.

Ann Eskesen, president of the Innovation Development Institute, is fighting hard against the proposed legislation, as she has done in the past when reauthorization has come up. However, she says the VC community still holds a role in innovation and should be included in the SBIR program.

"No one has ever challenged that the VC-backed community has a place, but once you use that as a benchmark to judge companies, you will have a number of companies that don't pass muster," she said.

Eskesen's firm holds one of the nation's largest databases of information on SBIR fundings and participating companies, and she has encouraged her contacts to push their Congressional representatives to vote against the reauthorization. Her hope is that enough "no" votes will force the Senate to send the proposal back to the House for a wholesale redraft of the bill in a manner that is more equitable for both sides.

"We're fighting when we should be around a table talking to each other," said Eskesen. "It's gotten nasty, and it didn't have to."