The U.S. Senate had a bill last year, and earlier this month the U.S. House of Representatives had a bill (H.R. 5819) to reauthorize and/or “modernize” the Small Business Innovation Research Grant Program (SBIR). The House version died when it reached the Senate, and the Senate is currently working on a new version of a bill. What seems to be the issue? Venture capital. The House bill redefined the “small business” to allow more venture capital investment and still be able to participate in the SBIR program. This raging debate has small businesses and small business advocates pitted against venture capitalists and small businesses. The difference between the small businesses on either side of the aisles (in Congress and this debate): How much funding is needed to commercialize a product and get it to market, AND what can the return on investment be for the “venture”?
Don’t let anyone tell you differently: size does matter. A well-funded company has an advantage when it comes to commercialization. They have the ability to do things better and faster. It doesn’t always mean they will do it better and faster, but it does mean they could. So when big players get to come into a game and they have more resources to play with—newer, more, better—the underdogs could still win, but the odds are less favorable and consequently the little guys often leave the field defeated. When it comes to innovation and competition, too often the process suffers because of the imbalance.
The SBIR program was designed for the small business to get a playing field to compete against comparable small businesses. The big guys don’t get to come into play. If you can move into the “big leagues,” which in general terms that usually means raising big dollars and “smart money” from the professional investors like venture capitalists, then you are moving into a realm where size does matter—and size determination isn’t necessarily best measured by the number of people working in your organization (a number all too changeable and often not reflective of operational realities). “Big business” doesn’t necessarily mean large numbers of employees, big payrolls, or big profits, especially in the early years of technology and product development.
There’s an old saying: “If it looks like a duck and quacks like a duck…it’s a duck” seems to be true and yet sometimes it is not. Early-stage companies that have lots of venture funding could still be considered small businesses. Wait a minute! This is in direct contradiction to what we’ve previously said: if they have venture funding they shouldn’t be a small business, right? Yes and no. There are some instances in which a firm could have raised a considerable amount of money, even $20 million or more in venture funding, even accounting for more than 50% of its funding, and it still be undercapitalized, understaffed, underresourced, and a small business. How? Here’s an example: Have you ever tried to develop a pharmaceutical product, from founding the company through FDA approval and into the marketplace? Consider how much that might cost. Raising $20 million in venture funding may not get your product to market, it may not get change the fundamental characteristics of your business…you may still be a small business.
Between a Flood and a Dam
The answer to the dilemma lies between a flood of “small” businesses created and funded by “venture” funds and that can’t survive and develop their technologies without venture funding and continue to be small businesses involved and participating in the SBIR program. To me, it would be logical to create a process that is somewhat of a mirror image of the current size determination process that is used to determine if a company can no longer participate in the SBIR program. This “determination” examines the companies funding structure and decides if it has exceeded the small business concern definition elements (particularly the venture funding).
It would be a simple process for a current SBIR participating company or a company that is ineligible under the Small Business definition to apply for a waiver or exception to be allowed to continue to participate, on the grounds of the funding requirements for the industry or technology. This type of exemption could include a demonstration that the company:
- Is not substantially controlled, influenced, directed, etc. by the venture firm or institutional investor
- Has a number of employees less than 500
- Has a required investment in technology for product development of $XX million that is typical of the industry(an independent comparator that could be obtained from U.S. Government information)
- Has total grant funding that is X% of total company funding (a relatively small percentage of total funding)
- Has not achieved profitability and/or profits of X % were achieved in most recent calendar year and cumulative profits/losses of $ ____
- Provides audited financial statements (U.S. GAAP)
- Provides other applicable information criteria specified
The SBA could review an objective set of criteria established to determine if a company was eligible to continue to participate … and not open a floodgate of everyone in the pool.
There are other alternatives, but you get the idea. There are compromises and alternatives between the complete redefinition of small business and shutting the door entirely on venture capital. Neither a flood nor a dam will ultimately do the program, small business, or the taxpayer (you and I) a service.
Get Innovative and Get Moving
Ultimately, we need an innovative and timely solution. SBIR is a much-needed source of funding to the early stage and technology innovation community. So get innovating and get moving! We need the legislation now. Call me! I’ve got lots of ideas!
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