PrintJune 20, 2008
How Big Money is Hijacking a Small Business Technology Program
Like many high-tech small business proprietors. I've been wearing a black armband since April 23 to mourn the death blow that Congress inflicted on one of the great incubators of technological small businesses: the Small Business Innovation Research (SBIR) program. In passing a supposed "renewal" of the bill, the House has opened the program to raiding by financial vultures.
Before describing this shameful hijacking by big money interests of a program intended to provide startup companies with a first rung on the ladder, I'll briefly summarize the SBIR program and the need that led to it.
The dazzling flood of high-technology innovation in twentieth century America originated in large part from lone-wolf scientists and engineers in garage or basement workshops -- men with dreams who struggled for years to turn their visions into commercial realities. Companies like Ford, Boeing, Polaroid, and Xerox attest to the power of those dreams. As long as these companies were run by the men who founded them, research was held in high esteem. The research laboratories of companies such as AT&T, IBM, Westinghouse, and Xerox vied with universities and government laboratories in discovering new technologies such as lasers and integrated circuit chips.
But by 1980, the honeymoon was over. The management of high-tech companies had passed from the hands of inventors to MBAs who were only interested in the next quarterly statement. Corporate research laboratories were closed, drastically cut, or diverted into mundane product development. Geniuses in garages found it increasingly harder to find funding to develop their ideas [1]. Venture capitalists (VCs) were only interested in sure-fire moneymakers and usually spurned brilliant but high-risk concepts -- or else financed them only under usurious terms, such as a controlling share of the company. The commercialization of new technology continued, but we were living off the backlog of innovations discovered in previous decades.
Then, in 1979, Roland Tibbetts at the National Science Foundation had an inspiration. He began a tiny experimental project called the Small Business Innovation Research Program. Researchers with intriguing but unproved concepts could apply for a "Phase I" six-month grant, in the range of $50,000, to demonstrate the validity of their idea. If successful, they could apply for a two-year "Phase II" grant of several hundred thousand dollars, with which to develop their ideas into proved concepts that could attract legitimate investors for commercialization.
After SBIR became an official government program in 1982, it caught on like wildfire. The Department of Defense and the National Institutes of Health found their SBIR programs to be gold mines of new ideas and products addressing problems that government laboratories and large companies had been unable to solve. SBIR has also been a wonderful stimulus for small business development and for commercializable research in general [2]. Eventually, SBIR programs were administered by eleven federal agencies with a total annual budget of nearly three billion dollars. A related program, The Small Business Technology Transfer Program (STTR), enables partnerships between small businesses and universities. You can learn more about these programs here, here, and here .
The SBIR program has been a wonderful boost for startup high-tech small businesses, many of whom could not have started any other way. But despite twenty-six years of fine tuning, there have been a few problems:
- A few companies became "SBIR mills" whose principal source of revenue was the SBIR awards themselves, with little or no effort being made to commercialize the ideas later. This practice has been countered by making the commercialization history of prior awards a factor in considering new ones.
- Although intended primarily for startup micro-companies with fewer than a dozen employees, SBIR complies with the Small Business Administration's definition of "small" as :"less than 500 employees". This allows larger well-established companies, who can and should fund their own research, to horn in. Recently, one such middle-sized company, with substantial sales and affiliations already in place, received eight SBIR awards simultaneously.
- Even worse, some large companies, aroused by the smell of federal money, have lobbied to have the "small business" restriction removed so that they too could compete for SBIR funds.
- Moreover, venture capital consortiums, eager to assemble "harems" of partly or wholly owned SBIR-recipient small businesses, have lobbied for the inclusion of VC-owned companies in the program.
- Congress has never fully accepted the value of SBIR and, by way of control, insists on its renewal every seven to ten years. This is usually done in a hurry just before the expiration date, thereby allowing opportunities for the covert "earmarking" of abuses such as those mentioned above.
These issues came to a head this spring when, in its usual rush toward summer adjournment, the House took up H.R. 5819, the "SBIR/STTR Reauthorization Act". As one SBIR advocate put it, the bill was
"rammed... through with minimal debate (none was permitted) or testimony. Neither SBIR companies or advocates, nor the National Academy of Sciences which recently studied SBIR intensively at Congress' direction, were invited to speak; only the biotech and venture capital lobbyists were given an opportunity."
The bill passed 368 to 43. It later came to light that many representatives had been unaware that the bill would (a) allow venture capital consortiums to exploit the SBIR program and (b) increase the size of the grants to make it more profitable for the bigger fish.
Several SBIR "mentors" (consultants who teach small firms how to prepare proposals) had spotted these Trojan horse provisions and had tried to warn congressmen in advance. Their analyses of H.R. 5819 can be found here and here. Protests from the National Small Business Association, the Small Business Technology Council, and the National Federation of Independent Businesses also went unheeded.
Briefly, some of H.R. 5819's provisions will enable large financial interests to invade the SBIR program, shove aside small startup businesses, and gobble up a lion's share of the funding. These new provisions include:
- A venture capital firm could own up to 20% of an SBIR applicant business BUT a consortium of 5 or more VCs could own 100% of an SBIR applicant/recipient and could even establish a harem of a dozen such captive businesses, with the inventors thereof being mere pawns.
- A company would be able to apply for a Phase II grant without having successfully completed a peer-reviewed Phase I grant. This will allow larger companies and consortiums to flood agencies with proposals containing half-baked or stale concepts and, by sheer numerical and resource superiority, squeeze out startup small businesses with valid new ideas.
- The size of the grants will be more than tripled, making Phase II grants, at several million dollars apiece, bigger that legitimate startup companies usually need but juicy morsels for VCs.
There's much more but the above will give you some flavor of the terrible transformation of the SBIR program that is now being pushed through Congress.
But who, you may wonder, is doing the pushing? Who would want to take something intended for startup small businesses and open it for large firms and "vulture capitalists"? Veteran business reporter Keith Girard pins the tail on Rep. Nydia Venlazquez (D-NY), who he claims is a long-standing champion of venture capitalists. And sure enough, Ms. Velazquez has introduced bills to spur VC investment and pushed to get the Small Business Act redefined to include 49% VC-owned large firms. By one of those strange coincidences for which DC is famous, MS. Velazquez receives sizable campaign donations every few months from the National Venture Capital Association -- although her office assures us that she's not motivated by VC money.
Rep. Velazquez is the Chairman of the House Small Business Committee and the author of H.R. 5819.
H.R. 5819 has been sent to the Senate, where it I hope it will be given a much cooler reception. But in view of the massive donations that the National Venture Capital Association and related lobbies have traditionally made to members of Congress, and the rush to beat SBIR's expiration in September, the bill might pass with the VC-friendly provisions intact.
I urge you to contact your senators and warn them about the hidden booby traps in H.R. 5819. Please ask them to insist on ample testimony and debate, to read the analyses cited above, and to insist that the harmful provisions be deleted.. You can find a sample protest letter at the NSBA website.
If you think my plea sounds urgent, you're right. Although I haven't been involved in the SBIR program for years, I owe whatever prosperity I now enjoy to the SBIR grants that enabled me to start my company. Now suppose you had been similarly helped by a wealthy benefactor when you were young and you now saw him being mugged by thugs in the street. Wouldn't you rush to his aid? Well, that's what I'm doing now.
NOTES:
[1] The only geniuses in garages who survived the drying up of funding were the software geeks, who needed only a computer to develop their ideas. Therefore, they have continued to flourish without federal aid.
[2] The high level of innovation demonstrated by SBIR applicants would seem to justify loosening up the rules to allow a small fraction of basic research proposals, exempt from the need to demonstrate commercializability.
