Venture Capital Bill Rockets Out of Committee

A controversial bill has rocketed out of a House committee that would allow firms substantially owned by venture capital companies to qualify for federal small business programs.

The speed at which the House Small Business Committee acted stunned some small business advocates who likened the action to a stealth attack by venture capital lobbyists in Washington.

"That's shocking, very, very disappointing," said Lloyd Chapman, president and founder of the American Small Business League (ASBL). Chapman, a frequent critic of the Small Business Administration (SBA), said he intends to challenge the measure in court if it passes. "I can't lobby against these guys because they have all the money in the world. But we will file suit to show that it's inconsistent with the Small Business Act," he said.

The measure, known as "The Small Business Investment Improvements Act of 2007" (H.R. 3567), would make significant changes in the way the government provides grants and loans to startup companies. But the most controversial provision would change the long-standing definition of a small business.

Right now, a small business must be "independently owned and operated" and have fewer than 500 employees to qualify for government programs. If a venture capital company makes a substantial investment in a business, the SBA currently counts its employees and the employees of its other affiliates as part of that business. The bill, however, would allow a company to retain its small business status, after a substantial venture capital investment.

Accessing sufficient capital to fund research and development is the largest problem facing tech startups, according to Scott Koenig, a biotech executive, who testified at a House Small Business Committee hearing two weeks ago. Government small business programs could help bridge the gap in funding that industry insiders refer to as the "Valley of Death," said Koenig, who spoke on behalf of the Biotechnology Industry Organization, which is the principal lobbying arm for 1,100 biotech companies.

According to Robert J. More, who also testified on behalf of the National Venture Capital Association, the change merely acknowledges that venture capital has become essential to most technology and biotechnology startups. More noted that the SBA only began counting venture capital employees after it changed its interpretation of the law in 2001.

Congress and small business advocates have been putting intense pressure on the SBA to clean up its government contracting programs. Several government audits have found that billions of dollars in small business contracts are actually being funneled to large corporations through awards to small corporately owned subsidiaries. SBA Administrator Steven Preston testified that the bill would run counter to that effort.

Rick Shindell, who publishes an independent newsletter for firms that participate in the government's Small Business Innovation Research Program (SBIR), wrote recently that the bill was the reincarnation of a similar measure that failed in 2004. He expressed surprise at the swiftness of the committee's action.

"Am I being paranoid about this new legislation? Consider this: The new bill was just introduced Tuesday, Sept 18, and is being rushed to mark up by the full House Committee on Small Business, Thursday, Sept 20. How's that for speed?" he wrote.

The committee passed the bill the same day as the markup. I first broke the story about the controversial change in my column two weeks ago following a hearing on what was, at that time, only a legislative "proposal." The committee advertised the gathering as a hearing on surety bonds. My column, however, set off alarms among small business groups.

Shindel noted that the Small Business Technology Council, a nonpartisan group that represents small tech firms, opposes the measure. In recent testimony, Jere Glover, the group's executive director, called the change "radical." He urged Congress to create an entirely separate program for VC-owned firms.