Velázquez Champions VC Firms at Small Business Expense

Small businesses suffered a stinging defeat in Congress this week, delivered by the one lawmaker who is supposed to be looking out for their interests, House Small Business Committee Chairman Nydia M. Velázquez, D-N.Y.

Velázquez has been quarterbacking the venture capital industry's efforts to reverse a Small Business Administration policy that prohibits firms substantially owned by venture capital companies from participating in two key conduits for government research grants, the Small Business Innovation Research (SBIR) program and the Small Business Technology Transfer (STTR) program.

For the past two years, she has been the bill's principal sponsor, and in each case she's rammed it through the House at lightning speed with little regard for small business concerns. By the time the dust had settled this time, the House of Representatives had overwhelmingly approved the bill (368-43). The measure all but eliminates "small business" from the programs, according to the National Small Business Association (NSBA).

The NSBA is one of several small business groups that have been pitted against the Biotech Industry Organization (BIO), the National Venture Capital Association (NVCA), and other groups in the five-year battle over the SBA policy. Indeed, the stakes are high. More than $10 billion has been funneled through the two programs since their inception in 1982.

The whole intent of the programs is to make sure small, independent R&D firms have a shot at government grants. In keeping with the landmark 1958 Small Business Act, which created the SBA, the SBIR and STTR are only supposed to be open to "independently owned" firms with fewer than 500 employees.

The programs operated with relatively little controversy until the SBA revised its eligibility policy in 2003. It began excluding firms from competing for grants if they were substantially owned by venture capital companies. As part of the policy shift, the SBA started counting VC company employees and the employees of the firms they controlled toward the 500-employee threshold. The fight was on.

While Republicans controlled Congress, the biotech and VC industry made little headway. But after Democrats took over in 2006, the playing field began to tilt. Small businesses suddenly proved to be no match against a team stacked with heavyweights like Abbott Laboratories, Pfizer, Merck, Monsanto, Bristol-Myers Squibb, Amgen, Eli Lilly, Schering-Plough, GlaxoSmithKline, and other multinational pharmaceutical companies. All, of course, are major campaign contributors.

The most recent effort is a case study of how Velázquez has thrown the game to big pharma, through the BIO. Out of three hearings on the bill since January, 10 of the 16 witnesses had ties to biotech and/or venture capital interests, two had general biotech backgrounds, and the rest were government officials. No one spoke on behalf of small businesses, according to Rick Shindell, who writes a newsletter on the SBIR program.

"Nobody was asked (or allowed) to give testimony in any of the three hearings contrary to the word of BIO and NVCA. In communication with House [small business committee] staffers, the subject of alternatives to VC was 'off limits.' Some small Maryland-based biotech companies wanted to make their side known, but were rebuffed by the committee. They then tried to go through their Congressman [and House Majority Leader], Steny Hoyer, D-Md., but to no avail," Shindell wrote.

The bill contains all of the provisions sought by biotech and venture capital interests, according to small business groups. Significantly, the bill prohibits the SBA from classifying any VC company as a "large business" as long as the company has fewer than 500 employees, no matter how many "small" businesses the VC firm controls. "This raises the specter of a competition for funding between actual small businesses and "small businesses" owned by a VC syndicate that controls 1,000 small companies, employees 100,000 people, and generates billions in revenue," according to the NSBA.

Another provision would allow federal agencies to award an unlimited number of "jumbo grants" particularly tailored to large venture capital concerns. It raises grant ceilings to $300,000 from $100,000 for Phase One research projects and to $2.2 million from $750,000 for Phase Two projects without an increase in the overall set-aside for the program. "Using conservative estimates, more than half the companies currently in the SBIR program would be purged," the NSBA says.

Yet another provision appears to shift control of the programs from the SBA's Office of Technology to a newly created interagency committee controlled by two other government agencies. That would take the programs out of the hands of the pesky SBA and put them under agencies that are more receptive to the venture capital industry.

After Velázquez introduced the bill (H.R. 5819), it was marked up by three committees and moved to the full House for a vote in one week. Of course, legislation never moves like that without the imprimatur of House Speaker Nancy Pelosi. The California Democrat happens to represent wealthy San Francisco suburbs that are home to dozens of high-tech moguls. It should also come as no surprise that Velázquez is the top recipient on her committee of campaign contributions from the NVCA this year. Thirteen other committee members have received campaign contributions as well, according to federal campaign finance records.

Venture capital and biotech concerns argue that the size restrictions imposed by the Small Business Act are antiquated and don't reflect the reality of modern research. Because of the high costs of developing new drugs, venture capital funding is required almost as a matter of course. The industry raises the specter that many promising drugs will be abandoned or will go undeveloped without access to the programs.

As always, however, the issue is about far more than altruism. VC firms want the money because they have stopped funding almost all early Phase One research. Instead they are focusing on later stage funding where the risks are lower and the potential return on investment is much higher. In essence, the industry wants the government to take all the risks, so they can step in later and take all the profits.

If that's the way the VC game is played, so be it. But the SBIR and the STTR are "small business" programs. These bills are nothing more than an effort to hijack them. If Congress wants to funnel more grant money to VC firms, it should set up separate programs to do so. But that would require more money, and lawmakers would be forced to explain why deep-pocketed VC firms deserve government handouts.