Congress Should Approve SBIR Bill Without Venture Capital Loophole

If Thomas Edison invented the light bulb today, there’s a chance his invention would never make it out of his workshop.

The deep global recession is grinding down the pace of technological innovation both here and abroad because the supply of capital and the demand for technological goods and services have fallen dramatically. In fact, new patent applications have fallen so sharply, the U.S. Patent and Trademark Office, which funds itself through fees, is facing a budget crisis, according to one news report.

The trend has been especially punishing for small entrepreneurial firms, which have always struggled to find capital to develop new products and services. Yet, for months, Congress has dithered over the fate of one of the government’s most successful conduits for small business research and development: The Small Business Innovative Research Program (SBIR).

History of the SBIR

The SBIR program, and its sister Small Business Technology Transfer (STTR) Program, were created more than 25 years ago to support small entrepreneurial firms. Today, small firms are now generating the lion’s share of new patents, and are being counted on to lead the nation out of the recession. But for the past year, the programs have become political footballs in a contest between the venture capital industry and small business groups.

The programs came perilously close to extinction in March, when their authorization was set to expire. But Congress extended the program through July of this year by continuing resolution. Almost a year ago, the House passed an SBIR reauthorization bill (H.R. 5819), but the measure has been held up in the Senate because of a controversial provision that would open the programs to large venture capital firms.

The provision’s opponents say large venture capital firms would have an unfair advantage in the competition for scarce grants. The VC industry says venture stakes in small research firms are now a fact of life, especially in biosciences, and those firms are being unfairly excluded from the programs.

The National Academy of Sciences recently completed the most extensive study of the program in its history. The study found that the program was meeting, and in most cases exceeding, every benchmark across 11 participating federal agencies.

The SBIR program now accounts for one-third more patents annually than all U.S. universities combined. And SBIR delivers about one-quarter of the nation’s most important innovations each year, according to a recent independent study.

Yet small businesses receive only 4.3 percent of federal research and development dollars and SBIR accounts for over half of that, according to Jere N. Glover, executive director of the Small Business Technology Council in Washington, D.C., which represents independent entrepreneurial firms.

In fact, the percentage of scientists and engineers employed by small companies has grown from 6 percent in 1978 to 38 percent in 2007. More scientists and engineers today work for small companies than for universities, nonprofits, large businesses, or the government itself, Glover noted.

Glover was one of several witnesses who appeared at a hearing recently on the SBIR bill before a subcommittee of the House Science and Technology committee, which commissioned the NAS study. The committee must approve the bill before it can move to the full House for a vote.

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Debate about SBIR and venture capital firms

Jim Greenwood, president and CEO of the Biotechnology Industry Organization (BIO), spoke on behalf of venture capital firms, and noted some of the anomalies created by the program’s current restrictions on venture capital involvement in small firms.

Under current Small Business Administration (SBA) regulations, a public company with 499 employees and hundreds of millions of dollars in revenue would be eligible for the program. But a private company with 20 employees would be ineligible, if venture capital firms held a 50 percent or greater stake and exceeded the SBA size guidelines, he noted.

Since the SBA adopted the current regulations in 2003, Greenwood said the number of biotech firms participating in the program has declined dramatically. SBIR grant applications through the National Institutes for Health (NIH) declined by 11.9 percent in 2005, 14.6 percent in 2006, and 21 percent in 2007. Additionally, the number of new small businesses participating in the program has decreased to the lowest proportion in a decade, he said.

However, opening the door to the SBIR program could allow subsidiaries of large corporations to compete for the grants. These large corporations and VC firms are eligible to compete for 97.5 percent of federal R&D funds outside of the SBIR program.

Given the government’s long-standing and dismal record for awarding contracts earmarked for small business to large corporations, changes to the SBIR program sought by VC firms would create an easily exploitable loophole that could undermine the program’s intent, namely assisting small, independent companies.

What's next for SBIR?

Right now the SBIR receives only 2.5 percent of all external federal research and development funding. The SBTC recommends doubling that amount, which makes sense, especially given the difficult economy.

Congress needs to act on this legislation expeditiously. Given the SBIR’s track record, it should not have to justify its existence every three or four years. Delays in Congressional reauthorization totally unrelated to SBIR temporarily shut down the program in 2000.

Uncertainty about its future, as each reauthorization looms, puts thousands of jobs and hundreds of companies in jeopardy. SBIR has proved its worth. Congress should make it a permanent program. Even more importantly, Congress should increase funding for the program and maintain the integrity of its current restrictions so the next Thomas Edison gets a fair shot at getting an invention to the market.

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