Does biotech win if VCs get a better chance at SBIR?

12:22 pm by | 6 Comments

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The dimensions of a protracted battle over the beloved Small Business Innovation Research program are all the more vexing for the biotechnology industry, which is at odds with itself over whether more venture-backed companies should be eligible for a bigger slice of the funding.

Currently, any small business that’s owned mostly by venture firms is ineligible to compete for hundreds of millions of SBIR dollars. That would change, though, under proposals backed by some members of Congress, the National Venture Capital Association and BIO, the national biotechnology trade association.

Supporters say giving venture capitalists access to more government funds would accelerate a national economic resurgence. Plus, they point out that life-science companies often take on investment (and give up equity) earlier in their development, and that many venture companies are small operations far from the perception of a nine-figure equity fund.

But other small businesses, include life-science companies, see the changes as a potential death knell for small business funding and the spirit of innovation. Firms in the Midwest and beyond point to some sobering statistics: while SBIR money is relatively evenly distributed throughout the country, the overwhelming portion of venture-capital seed funding goes to New York and California.

Give venture-funded companies full access SBIRs and the Midwest’s share of SBIR money will dwindle, said Robert Schmidt, chairman of three Cleveland life-sciences business: Cleveland Medical Devices, Orbital Research and NeuroWave Systems.

“What we are arguing against is large business participating in a small-business program,” Schmidt said.

The SBIR program was supposed to be renewed earlier this year. But debates over the venture issue and whether to increase its funding have delayed the renewal. The program in April received a temporary extension that runs out in July. Additional congressional hearings to discuss renewal are scheduled for next week.

Some venture-backed companies lost access to Small Business Administration money about six years ago. A series of federal rulings said companies owned mostly by venture firms had to count all employees at the VC firm’s businesses in determining whether they were considered “small businesses.”

That essentially made it impossible for any majority-venture-backed business to meet the definition of a small business, and venture funds and their interest groups have opposed the definition ever since.

BIO spokeswoman Ellen Dadisman said it doesn’t make sense to ban companies that win venture funding from getting the secondary business validation of SBIR funding. In turn, keeping firms that win SBIR funding from taking on more venture capital can hurt innovation, Dadisman said.

“If you have to spend $1 billion to make a drug, you are not going to get it all from SBIR grants,” she said. “But if you’re looking at a long-term process and earning the confidence from investors, then you really want to have two feathers in your cap: one is SBIR and the other is venture capital.”

The venture community’s argument has gained new allies as the economy has faltered and politicians looked for any means to speed recovery.

“Venture capitalists fit right into helping to spur this greater economic growth,” said U.S. Rep. Joe Sestak, a Pennsylvania Democrat who has crafted legislation to allow venture firms full access to SBIRs. Sestak wants to increase the average growth rate of the nation’s gross domestic product to 4.5 percent — roughly two percent higher than the 10-year average. Providing more help to venture firms, which will in turn fund high-growth ideas, is one way to increase GDP, Sestak said.

But opponents say allowing VCs more opportunities than they already have to win this funding would ruin chances for other small businesses to grow. True small businesses won’t be able to compete with applications created by well-financed venture funds, said Rick Shindell, a business owner in Washington state who publishes SBIR Gateway, a collection of news on federal small business programs.

“We have to balance public good compared to public policy,” Shindell said. “First and foremost, SBIR is for small business innovation research.”

Shindell also is critical of the potential for VCs to get at higher-figure payouts in a new SBIR system. Congressional proposals currently want to increase the amounts of a development-stage “Phase I” grant from $100,000 to as much as $300,000, while Phase II grants — currently paying no more than $750,000 — could go up to $2.2 million, according to some proposals.

That could provide more money for increasingly expensive research. But it also could cut the number of grants available to small businesses, according to a Congressional analysis (pdf). Plus, one proposal allows businesses to leap-frog a Phase I application — that’s currently not the case — and apply directly for a Phase II grant.

The SBIR set-aside could increase, though, from 2.5 percent from every federal department with external research and development funding, to 3.5 percent by 2019, depending on the renewal legislation passed through Congress.

Schmidt, reviewing SBIR, venture payments and analysis from the SBIR consulting firm InKnowVation, predicts SBIR money would concentrate in California, Massachusetts, Pennsylvania and New York if VCs received greater access to the funding. It would then drift away with other states that have traditionally gotten little interest from venture capitalists.

“This is about large market-dominant groups sucking the life out of the little companies,” Schmidt said. “It’s about Wall Street taking over Main Street. This is very dangerous for our country.”

Some in biotech and small business want a compromise, though the momentum for further VC access may be so strong that those who favor the change may not need to bargain. Shindell said he’d accept access to companies owned mostly by venture capital if they limited the amount of money they could receive through SBIR.

One congressional proposal does something like that: allowing majority venture-owned firms the chance at 18 percent of total SBIR funding. Plus, organizations like BioEnterprise, Cleveland’s biotech support organization, support using  a portion of SBIR money for majority venture-owned firms.

Lisa Kurek, managing partner of Biotechnology Business Consultants in Michigan, thinks any change should include a re-definition of venture capital firms.

“There’s a difference between large venture funds or the institutional investors with two or three-person managed funds with less money and early-stage money,” Kurek said. “If  a change is made, I think there has to be more differentiation – definitions of venture capital. There need to be set parameters.”

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Chris Seper

By Chris Seper MedCity News

Chris Seper runs and contributes regularly to the site. He is the vice president of healthcare for Breaking Media, MedCity's corporate owners. Reach him at [email protected]
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