Congress Settles the Debate Venture and Institutional Backed Firms are Small Businesses

With the passage of the new legislation in Congress venture backed firms (and with other institutional investors) will continue to be classified as small businesses.  The battle that has been waging for some time has finally been settled. What this means for both sides is that the how we define small business is not by who is investing in the company.  Instead, the definition will remain on the other factors such as revenues, number of employees, etc.

The reality is that all businesses start out as small businesses.  How they are started and where the funding comes from plays an important part in the practical versus the theoretical definition of “small”.  In practical terms, two businesses may look very much alike on the surface.  They may be in the same industry.  Have the same number of employees.  They may even be competing against each other.  The difference cannot be seen until you look at how the companies are funded, owned, managed and “connected” beyond the initial “small business” façade.

The Appearance of Small

There is no doubt that growth takes cash.  Cash requires investors.  Having the ability to get investors means having the connections, the know-how, the expertise, the “package” which attracts investors, and every business wants that package.  Here is the question:  When a business has that ability and puts together that package, should it then be taken out of the equation for special programs meant as resources and stimulants for companies who have not yet been able to get to that point?  If programs are meant to be funding for high risk projects where small businesses are getting the opportunity to prove themselves, what happens when the funding is opened up to companies which have already demonstrated they are beyond the “proving themselves” stage.

Hedging Venture Risk or Recognizing Longer Development Cycles?

The company with a promising drug has years of development and testing and millions of dollars in investment to fund – and they have other ideas for products.  They want to continue to receive grants for the new ideas to fund proof of concept and initial product development.  On the other side, a computer software company receives grants and, with funding from state matching programs and their own savings, can get their product to market.  Entirely different levels of capital needs.  As one government source puts:  “A company that can raise funds shouldn’t be penalized for that capability.  All businesses can learn to compete at the proposal level.  They have the same access to resources on how to write proposals, so the playing field is level when competing for the funding at the proposal level. So why penalize a company, that is also capable of putting together a winning funding proposal for venture and other funding?”

Opponents to legislation that was known as HR 3567 say this is back door for venture and big business to receive grant funds and compete unfairly against the truly small business – the inventor, the scientist, who need the funds to get started and get the technology going.  The proponents say this is encouraging investment in the infrastructure and competitiveness of business.  Yes to both.

Unfair and Necessary

Whether it is under today’s existing rules and guidelines or the new rules such as those H.R. 3567 would put in place, it will inevitably be unfair to some.  The existing rules were intended to prevent recipient companies from “making a business from grants”.  Yet there are companies who have been success stories receiving grants for the entire length of time the grant programs have existed.  IF they are successful and commercializing technology after technology, why are they still tapping into the grant program to fund their research?  Because they have found the loophole to remaining a “small business” and have reached a point where the cost of grant funds (business systems and compliance) is negligible.  Free money any one?  If these companies can participate for decades, then arguably a small start-up with venture backing with large capital needs is just as entitled, as is a university-backed company, and so on.

H.R. 3567 is holding a mirror up to the system and saying “Look at the reality of where we are.  There are practicalities for certain types of businesses with huge capital demands.”  On the other side, the small business which is not venture backed or affiliated with larger organizations must be able to compete and win.  They must have access to funding which may be their only source for proof of concept and product development dollars due to the high risk of the technology and the business stage.

USB – Unaffiliated Small Business?

There are disadvantaged small businesses.  Minority small businesses.  Women-owned small businesses.  Service-disabled veteran small businesses.  Maybe there will be an unaffiliated small business, meaning the business is funded solely by individuals or is at least 51% owned by individuals.  The government can then require so much business be done with these USB’s. Maybe not.  Things change.  Things evolve. Who knows what the next evolution of change may be.

Greater Opportunity

The truly small business that has no experience in business or in capital markets that is looking for funding for its high risk, early stage technology will be potentially competing against even more players for fewer dollars.   Perhaps this is capitalism and competition at its most basic form, where small businesses have to get better at the business side much earlier in the process – becoming more competitive, more commercially aware earlier.

Venture Investment Doesn’t Mean Cash Rich or Successful

Venture investment doesn’t mean automatic success and it doesn’t mean cash rich or cash flow positive.  A venture backed firm has been successful in raising funds, but it doesn’t mean it has reached commercialization by using those funds, or that those funds were used on the particular technology currently being developed, or that the company is well particularly successful at well anything.

Many companies are able to raise funds, but those funds are sufficient to get the technology to market or the company runs into other issues.

Commercialization Potential

When it comes down to defining a small business, it is about more than who invests in the business and how much money they invested. It isn’t about how many employees.  It is about how much money it will take to develop the product and get it into production and into the marketplace.  It is about how the money is used and how it is managed.  It is about the business’ infrastructure and who will get the “benefit” of the funding.  It is about whether the small business is truly innovative and has something big business and the market is interested in – a commercialization opportunity.

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