Today may be Friday the 13th, but the Small Business Administration is facing a real horror next Friday. That’s when the Small Business Innovation Research (SBIR) grant program is scheduled to expire.
For the uninitiated, SBIR grants are designed to fund basic R&D being conducted by for-profit institutions. The goal is to stimulate technological innovation to both meet federal R&D needs and to help commercialize existing federal research, via small businesses. They are awarded by 11 different federal agencies (NIH, DoD, DoE, etc.), although SBA has administrative oversight. As of the last information I could find, Phase I grants are worth up to $100,000, while Phase II grants are worth up to $750,000 for two years of research. In fiscal 2006, there were 3,836 Phase I grants awarded, and 2,026 Phase II grants awarded. In addition to the money, award recipients are allowed by be solely-sourced by relevant government agencies (i.e., go around the typical procurement process, which is generally dominated by massive corporations).
I know what you’re probably thinking: Why on earth does this matter to the peHUB audience? VC-backed startups are, you know, backed by VCs. If $100k is going to make or break them, then there are bigger issues to deal with.
My answer is twofold: First, VC-backed companies could use SBIR grants to fund experimental research outside of their primary product plans. This is particularly true if a company could develop an application specific to DoE or DoD. After all, part of SBIR’s mission is to stimulate Moreover, SBIR grants could be used by seed-stage life sciences companies to pursue alternate applications for their developing therapies.
Second, you’re right. This has no impact on VC-backed companies. Since the program’s inception, it has stated that qualifying companies must be 51%-owned by individual U.S. citizens. SBA’s initial interpretation was that VC partnerships were comprised of U.S. citizens, and therefore counted. A reinterpretation in 2004, however, was that VC partnerships did not qualify, which resulted in their companies being excluded (as are companies with more than 500 employees, or those owned by large corporations).
As I wrote at the time, this is bad policy. Proponents of the current interpretation claim that allowing VC-backed participation would just help rich investors get even richer. Maybe, but that is the micro view. The macro view is that re-reinterpretting the rules would help improve military effectiveness, medical care, military effectiveness, energy efficiency, etc. After all, aren’t VC-backed entrepreneurs often the best and brightest entrepreneurs out there?
Unfortunately, this battle over “to VC or not to VC” had helped delay SBIR reauthorization – leading to the looming deadline. The NVCA and others have lobbied to change the rule, while small biz groups have fought hard against it (and won unlikely bedfellows like Sen. John Kerry and former President Bush). No word yet on where the Obama Administration stands, which has enabled continued stagnation.
A spokesman for the U.S. Senate Committee on Small Business & Entrepreneurship says that Sen. Landrieu and others are hoping to pass a program extension, but had no additional details. For example, how likely is such an extension? Would it be for weeks? Months? Would there be any changes to award qualifications?
Karen Hontz, director of government contracting for the SBA, says that she too is hopeful, but that no promises have been made. Moreover, she says there have been no decisions made on what to do if the program expires. For example, will there still be Phase II money for successful Phase I recipients? Will a Phase II recipient in his/her first year still get second-year funding? No idea how these issues remain unresolved with one week to go, but unresolved they are.
The irony for SBA, of course, is that they snubbed the very people who could help keep the SBIR program alive: Venture capitalists. These are a wealthy bunch, who contribute to elected officials and are considered local business leaders in states like California, Massachusetts, North Carolina and New York. If VCs believed their companies benefited from SBIR grants – or even had reason to be more familiar with them – then they’d be fighting the good fight. As it stands now, though, they’re sitting on their hands and the program is falling through the cracks.