Naked Grab for SBIR Funds Gets New Clothes

As Mark Twain once said, "Clothes make the man. Naked people have little or no influence on society." The same can be said about a bill in Congress. How it’s dressed often determines how much support it attracts.

Twain’s pithy adage is being played out in the current debate over a House bill that would significantly change two key federal sources of funding for small startup firms -- the Small Business Innovation Research (SBIR) program and the Small Business Technology Transfer Research (STTR) program.

The measure would re-open the programs to companies largely backed by deep-pocketed venture capital firms, which have been shut out of competing for SBIR/STTR grants since 2003. After failing in two previous congressional sessions, however, the legislation has been dressed in a new set of clothes.

It’s now a jobs bill.

"With unemployment hovering [over] 9 percent, Members of the Committee said the job-creating potential of the two programs is particularly important right now," said House Small Business Committee Chairman Nydia Velazquez, (D-N.Y.), who has been pushing the legislation on behalf of large venture capital groups.

"At its core, this bill is about creating new jobs by supporting the innovation of America’s entrepreneurs," she said again, after the full House passed the bill, (H.R. 2965) this week by a substantial margin, 386 to 41.

The jobs argument was enough to convince lawmakers like Rep. Ron Kind (D-Wis.) to vote for the bill, even though 90 percent of the high-tech startups in his state receive no venture capital backing. He told his hometown newspaper, the Milwaukee Journal, the measure was "vital to getting Americans back to work."

Indeed, the National Venture Capital Association (NVCA), the industry’s main lobbyist, frequently cites a study it sponsored to prove the point. It showed that venture-backed companies accounted for 10 million jobs and $2.1 trillion in revenue between 1970 and 2005. In all, that effort represents 17 percent of U.S. gross domestic product, it notes.

But according to one influential study, the claim is highly exaggerated.

"These are impressive numbers," states the report, produced by the nonpartisan, nonprofit Kauffman Foundation. "But noting that venture capital played a role in the early days of these storied companies is not the same as saying the venture industry deserves full credit for these companies any more than does, say, Pacific Gas & Electric, which provides electrical power to Bay Area homes and businesses."

The study found that less than 1 percent of the estimated 600,000 new businesses created in the United States annually receive venture capital funding. Of course, that would include every business from the corner grocery store to high-tech startups.

But even after limiting that list to the nation’s fastest growing companies, venture capital was found to play only a limited role. Of the 900 firms that appeared on Inc. magazine’s list of fastest growing companies between 1997 and 2007, only 16 percent -- less than one in five -- were backed by VC firms, the study found. 

"Venture capital and entrepreneurship are separate phenomena, even among growth companies, and conflating the two, let alone implying that the former causes the latter, is untrue and unhelpful," the study noted.

Even in a technology hotbed like California, venture capital is not the biggest generator of new companies, or jobs. In fact, the SBIR program is the largest source of seed-stage technology funding, according to two groups, the San Francisco branch of the Innovation Alliance and Small Business California, an independent small business group.

In 2005, they noted, the SBIR program awarded 1,190 grants in California, totaling $387 million, compared with only 80 seed-stage venture capital investments.  "In most other states, venture capital plays no role at all in technology startups, usually accounting for less than 1 percent of new technology startup activity," the groups said in a statement opposing the House bill.

Contrary to job creation, "thousands of companies are going to be going out of business" as a result of the House bill, according to Ann Eskesen, president of the Innovation Development Institute in Massachusetts, another hotbed of entrepreneurial activity.

Over the 27-year life of the programs, fewer than 40 percent of 1,300 startup companies eventually bought by larger corporations had received venture capital backing, her organization, which specializes in tracking the SBIR/STTR grants, found.

Although Eskesen’s points are well taken, few members of the House small business committee and likely even fewer members of the full House have heard them. That’s because Velazquez has repeatedly refused to allow small business groups to testify on the legislation.

This week, dozens of small technology firm executives flooded Capitol Hill to protest the House bill’s VC provision. They argued that the programs in their current form are crucial to their firms’ survival during the brutal economic downturn.

But through parliamentary maneuvering, House leaders slammed the door on an open floor debate on the measure. "Any opportunity for discussion or vote on compromise amendments were summarily eliminated by the House Committee on Rules," according to Rick Shindell, who publishes the "SBIR Insider" newsletter.

The committee ruled that 34 of 39 floor amendments were "out of order" and refused to allow them to be considered, including a key amendment sponsored by Rep. Ed Markey (D-Mass.). It would have placed curbs on VC participation in the programs. Similar provisions currently exist in the Senate bill.

Shindell says the Markey amendment had strong support in the House and likely would have passed if it had been considered. But the NVCA strongly opposed the amendment and also opposes the Senate bill.

Velazquez’s heavy-handed effort to ramrod the legislation, reflecting House Speaker Nancy Pelosi (D-Calif.) unseen hand, has been one of its biggest red flags and undercuts the venture capital industry’s arguments for change.

If the bill truly had merits on its own, why the need to limit debate, time and time again? The fact is, if the bill were stripped of its new "job creating" clothes, it would be the same old naked grab for money by a well-heeled industry.

As the situation now stands, a conference committee between the House and Senate must work out differences between the two bills. Let’s hope wiser heads prevail in Congress’s more deliberative body.