Companies, trade groups face off in SBIR debate

SYRACUSE - A nationwide battle is brewing over a popular federal program that provides billions of dollars to small companies researching and developing new technologies.

The federal Small Business Innovation Research (SBIR) Program is well known to technology startups everywhere. The program

Companies nationwide received more than $2 billion through the program last year, according to the National Science Foundation. Since its launch in 1982, SBIR has provided more than $18.9 billion for more than 88,800 research projects.

With that many dollars at stake, it's no surprise potential changes could ruffle some feathers. The issue in question is participation in the program of companies with venture-capital backing.

Companies and their advocates on both sides have been fighting over the place of venture-backed firms at the SBIR table for at least six years. The debate has intensified as Congress prepares for a massive reauthorization of the program, which is set to expire in 2008.

The problem

Until 2003, venture-backed companies were just as eligible for SBIR funding as those owned by individuals, according to the Biotechnology Industry Organization (BIO), a national biotech trade group with 1,100 members. In 2001, however, the Small Business Administration (SBA) took action on certain aspects of its SBIR eligibility rules as a result of a legal case.

The end result was that companies majority owned or controlled by venture firms could no longer participate in the SBIR program, according to BIO.

Since that time, venture firms, the companies they fund, and groups like BIO have been lobbying Congress to reverse SBA!s action. Others, like Marcene Sonneborn, an SBIR specialist at the Central New York Technology Development Organization, are hoping legislators leave things alone.

Keep 'em out

Venture-backed companies don't need SBIR money as much as firms without the benefit of deep-pocketed investors, Sonneborn says.

"It would place more resources in the hands of those that already have more resources," she says. "What this would mean is little, tiny companies and spinoffs from [Syracuse University] won't get that money because there's going to be money going toward companies that already have venture-capital money."

If venture-backed firms are allowed to participate in the program, they will bring their extensive resources with them. That will put other businesses at a disadvantage because venture companies can afford luxuries like grant writers to create sparkling SBIR proposals, Sonneborn says.

Providing SBIR money to venture firms is in some ways contradictory to the program's mission, she adds.

"The SBIR program was developed to support true innovation and for companies that, but for SBIR funding, they would not get started or developed," she says. "It was meant to support them before there was commercial potential. But venture-capital firms don't come in until there is potential recognized.

"The minute there's a VC involved, it means someone recognized commercial potential."

While groups like BIO describe SBA's 2001 action as a "change," those on the other side of the debate argue, that the agency simply clarified a long-standing rule.

"For some reason, the VCs and their allies continue to state that SBA changed the rules on them," Robert Schmidt, founder and president of Cleveland-based Cleveland Medical Devices, Inc., said during testimony in APril to the U.S. House of Representatives Subcommittee on Technology and Innovation. "... The affiliation rule [is] more 50 years old."

Schmidt also pointed out that firms owned by individuals often work on problems that venture companies pass by. Such research areas include development of bioterrorism defenses and vaccines, he argued.

"Whether or not large VCs are interested in such areas, small companies are," he added.

Let 'em in

More than half of the private biotech companies in the country are now ineligible for SBIR funding simply because of their capital structure, says Alan Eisenberg, executive vice president of business development and emerging companies at BIO. That means valuable research on new technologies is being ignored by a government program that was created precisely to support it.

Venture-funded companies don't have endless resources. Just because they have investment capital doesn't mean they don't need additional support to pay for early-stage research on new products, Eisenberg explains.

"Some of those projects are very early on and not in human testing or even in animal testing yet," he says. "They're just trying to understand something and get a proof of concept to see if something works. That's the perfect type of place for an SBIR Phase I grant."

SBIR awards come in different phases depending on the stage of a company's research.

Eisenberg also says that many of the firms opposing inclusion of venture companies in the SBIR program have a motive other d= fair play. Some of them base their entire business models on winning hundreds of SBIR awards, while venturebacked companies are only looking for a handful.

"Frankly, these companies are grant hogs," he says.

Keeping venture-backed firms out of the SBIR program can have stark consequences for their operations.

Boston-based Paratek Pharmaceuticals was forced in 2003 to abandon research on a new antibiotic and lay off 10 employees as a result of the SBIR eligibility changes, said Thomas Bigger, the company's CEO, at a July 2006 hearing before the U.S. Senate's Small Business Committee. The company was eventually able to restart the program. Bigger testified on behalf of BIO.

"However, we were unable to find alternative funding until two years later, ultimately delaying patient access to the novel therapies that much longer," he said. "The majority of BIO's members who are private companies have also faced similar fates ..."