VC-Owned Firms Are Likely To Become Eligible For SBIR Grants Once Again

Each year about $2 billion in Small Business Innovation Research

(SBIR) contracts are awarded by the federal government.

Surprisingly, for the past five years none of these grants have

gone to small businesses in which venture capitalists own a

majority stake. However, a compromise bill addressing this issue

has emerged in Congress with strong support in both houses and is

expected to become law next month.

The compromise bill, which was unanimously approved by the

Senate Committee on Small Business and Entrepreneurship on July 30,

2008 and is slated for a full Senate vote in September, will allow

the National Institutes of Health to award up to 18 percent of its

SBIR funding to VC-owned firms. Other agencies will be able to

award up to eight percent of their SBIR funds to VC-owned

firms.

The SBIR program was created by Congress in 1982 and requires

that certain federal agencies award a portion of their outside

research budgets to small businesses. Re-authorization of the grant

program for the upcoming fiscal year beginning on October 1, 2008

has been held up over the issue of whether small businesses owned

by venture capital firms should be eligible for SBIR grants.

In 2003, the Small Business Administration ruled that companies

in which venture capital firms hold an equity stake of 50 percent

or more do not qualify as small businesses. For the past five

years, the eligibility of VC-owned firms for SBIR grants has been

debated in Congress.

On one side of the debate, the Biotechnology Industry

Organization (BIO) and the National Venture Capital Association

have urged Congress to overturn the SBA's ruling, arguing that

venture capital is essential to fund some types of small

businesses, especially biotech start-ups ? where the

costs of bringing new therapeutic products to market can be

extraordinarily high. They have argued that VC-owned companies

should not be penalized based on their financial structure. On the

other hand, the Small Business Technology Council and others

contend that companies owned by VC firms should not be considered

small businesses because they have access to the deep pockets of

their VC funds. They argue that awarding SBIR grants to these

ventures will displace small businesses that truly need

support.

Last April, the House of Representatives passed legislation that

would restore the SBIR eligibility of venture-owned small

businesses, so long as no single VC firm owns a majority stake. The

companion SBIR...