June 25, 2009 by Julie Collins
House Committee Passes Controversial Bill
As reported by the Wall Street Journal this afternoon the House Committee on Small Business unanimously passed a bill that would reauthorize the SBIR/STTR program until 2011. The bill is controversial as it allows venture backed companies to once again participate in the program. The eligibility rules are written to allow firms owned and operated by venture operated companies to receive awards as long as the venture operated company does not employ more than 500 people or own more than 50% of the applicant organization.
Last week the Senate Committee for Small Business and Entrepreneurship also unanimously passed a bill reauthorizing the program until 2020 and allowing venture backed companies greater access to the SBIR/STTR program but to a lesser extent. Importantly it limits the total amount of SBIR funds awarded to majority owned venture operated firms to 8%. The NIH is the exception to this rule and allowed to use 18% of SBIR funds on awards to venture operated firms. Both the Senate and House bills increase the award amount for Phase I and Phase II.
If both bills are passed by the House and Senate they will be sent to a conference committee and hopefully common ground will be found.
The bigger controversy however is not simply allowing unfettered access to VC-owned and -controlled firms, but the radical dismantling of the three phase system that has been the hallmark of SBIR since its inception in 1982-83 (in fact even before when the precursor to SBIR was an experiment at the NSF).
H.R. 2965 would essentially destroy the ability of Phase I to support early-stage seed funding for feasibility studies, shifting focus toward later development and growth work, favored by VCs. It would overinflate awards (rather than simply accommodating inflation) at both Phase I and Phase II, and permit unlimited sequential Phase II awards, without any requirements for commercial viability or third-party investment. The net effect would be a decimation of the number of awards available, stifling innovation rather than fostering it.
H.R. 2965 is a bad bill, for innovation, for small businesses, for job creation, for the economy. The only winners here are the very few companies who might receive awards under a neo-SBIR (that might quickly devolve into earmarks for backroom lobbying), and the politicians behind the bill, who might extract hefty campaign contributions from the NVCA and BIO who have been lobbying for the shift in emphasis.
It boils down to this: Should SBIR be about stimulating innovation, and seeding promising ideas by small businesses and lone entrepreneurs? Or should it become a tool for risk mitigation by large Venture Capitaliists?