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 pity 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 start up 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 start-ups 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 non-partisan, non-profit 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 start-ups.
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.