Friday, August 1, 2008

Feds advance SBIR funds for VC-backed startups

By Catherine Williams, Special to Mass High Tech

Congressional lawmakers this week moved to make a major change in the way Small Business Innovation Research (SBIR) grants are doled out, paving the way for venture capital-backed technology companies to get a piece of the action.

The Senate Small Business and Entrepreneurship Committee has moved its proposal, which earmarks certain federal funds for companies with a majority of venture backing, out to the Senate for a vote. Backers of the bill include biotechnology companies, which lobbied hard for the change. Critics, including U.S. Rep. Niki Tsongas (D-Mass.), say the proposal shifts the SBIR program away from boosting unfunded companies.

Provisions of the SBIR/STTR Reauthorization Act of 2008 passed by the Senate Committee on Small Business contains the following:

• Reauthorization:  The program would be extended for 14 years.
• Venture Capital Investments:
  • The Department of Health and Human Services (NIH):  companies majority-owned and controlled by multiple venture capital companies can compete for up to 18 percent of that agency's SBIR funds.
  • All other agencies:  majority-backed VC companies can compete for up to 8 percent of SBIR funds. 
  • Companies whose backing by a single VC comprises more than 49 percent would remain ineligible for SBIR grants at all agencies.
• Award Levels:
  • Phase 1 awards are increased from $100,000 to $150,000.
  • Phase 2 awards are increased from $750,000 to $1 million.
  • No agency will be allowed to exceed the award amount by more than 50 percent.
• Oversight:  There are numerous provisions requiring each agency to track how many majority venture capital company proposals are received and the amount of venture capital a company has when it receives an award.

The Senate’s version of the bill has won a lukewarm review from at least one local biotech executive, Bind Biosciences Inc. CEO Glenn Batchelder. He supports increased access because grants could speed development of Bind’s oncology program, but Batchelder would like to see more. “For the small businesses developing the most promising new therapies, it’s a small step in the right direction,” said Batchelder.

The Senate plan allocates 18 percent of the National Institutes of Health’s SBIR budget for companies that are majority venture-funded, and it allows the other 10 participating agencies, including the U.S. Departments of Defense and Energy, to set aside 8 percent of SBIR dollars to that class of firms. Large federal agencies participating in the program are required to allocate 2.5 percent of their overall budget to the SBIR program.

The opposition includes Bob Baker, president of the Smaller Business Association of New England (SBANE), who said the SBANE membership is “four-square against” the move. “We’ve been opposed to the intrusion of venture capital because we believe SBIR is not the vehicle for this,” said Baker.

Les Bowen, CEO of Materials Systems Inc. in Littleton, also stands in opposition to the measure. Privately held Materials Systems has won more than a dozen Phase 2 SBIR grants, he said.

“If a significant portion of SBIR funds get used for venture capital majority-owned businesses, there’s that much less funding to create and service high-technology businesses that have no other option,” said Bowen.

In 2007, Massachusetts was No. 2 nationally, with 731 SBIR grants, behind only California’s 1,201 awards, according to the State Science & Technology Institute.

For five years, the Massachusetts Biotechnology Council (MBC) has pushed lawmakers to allow companies with more than 51 percent venture backing to participate in the SBIR program. Robert Coughlin, the council’s president, said spending taxpayer dollars on therapies that have the best chance of getting to patient bedsides is a wise investment. Biotech companies depend on steady funding flows because they have decade-long life cycles, Coughlin said.

“The inability of these companies to compete adversely affects the patient population,” said Coughlin.

For example, in 2007, Bind won a $150,000 Phase 1 SBIR grant from the National Cancer Institute to develop a targeted therapy for hormone refractory prostate cancer. After that Bind collected $16 million in Series B funding, making it ineligible to apply for a Phase 2 grant, said Batchelder.

Bind, which employs 25 workers and maintains 11,000 square feet of lab space,  had to “reprioritize resources” because the grants could have funded scientific staff, toxicology studies and accelerate therapeutics entering clinical trials, said Batchelder.

SBIR funding is set to expire on Sept. 30. Congress has yet to approve the bill released Wednesday by the committee chaired by U.S. Sen. John Kerry (D-Mass.). A version of the SBIR funding bill passed in the House in April. If the Senate approves its version of the bill, a compromise bill would still need to be negotiated.

Any final bill could face resistance from members such as Tsongas, who does not support a bill that would “remove the small-business character of the program by allowing venture-capitalist-supported companies to compete for awards,” said Tsongas spokesperson John Noble in an e-mail.

Catherine Williams is a freelance reporter in Boston.