MADISON – Amid a crowded congressional schedule that includes health-care reform and the latest on the economic stimulus plan, it’s not surprising that a bill to extend the life of an effective federal research grant program might slip between Washington’s legislative cracks.
Here’s hoping the future of the Small Business Innovation Research grant program, better known by the acronym SBIR, hasn’t slipped too far. This program has turned ideas into products and thriving businesses since 1982 – at a good value to taxpayers. It deserves to be reauthorized.
The delay on Capitol Hill has less to do with Democrats versus Republicans or White House versus Congress than it does small business versus mostly small business. And it’s all over an issue most people would find a bit arcane.
A premise of the Small Business Innovation Research grant program is that small businesses are a vital source of new ideas, but they’re likely to need some support in the early stages as they turn those ideas into novel products and services. Through carefully metered grants that get larger as an idea gains momentum, businesses can test concepts, build prototypes and more.
Through SBIR and a small related program, 2.5 percent of the outside research budgets of 11 federal agencies (including the Department of Defense and the National Institutes of Health) are set aside for small businesses. The program funds around $2.3 billion in private-sector research per year. By way of comparison, the federal government spent about $49.4 billion on science and engineering grants to 672 universities and colleges in 2007.
The SBIR program has led to 55,000 patents and the formation of thousands of small businesses nationwide, many of which grew into larger businesses that now employ millions of Americans. So, why not renew the program and move on?
While the bill is mostly settled, a major sticking point is language that would allow small businesses that are “majority owned” by private investment groups – such as venture capitalists – to apply for SBIR grants. For the first 20 years of SBIR’s existence, it didn’t matter who owned the company. But a 2002 ruling by an administrative law judge changed that. The judge declared that small businesses owned by investment groups with a controlling interest (51 percent or more) could not receive SBIR grants. That’s true even if the 51 percent interest is divided among multiple investment groups.
Some small businesses in Wisconsin think the ruling should stand. They worry that venture-backed companies will gobble up all of the SBIR grants if they’re allowed back into the hunt. They don’t trust industry groups such as BIO, which represents biotech companies of all sizes, or the National Venture Capital Association to look out for their best interests.
Other small business owners say their firms shouldn’t be penalized simply because they’ve attracted investors – because those investors are precisely the people who are likely to help their firms grown. What does it matter, they argue, if a 10-person high-tech company is financed mainly by venture capital? 
The most neutral source to weigh in is the National Research Council, a body whose members are drawn from the National Academy of Sciences, the National Academy of Engineering and the Institute of Medicine. In a report issued earlier this year on the NIH experience, the NRC came down on the side of letting venture-backed firms compete for grants.
“The impact of the (administrative law judge) ruling falls disproportionately on the most promising firms – i.e., those firms that have been repeatedly selected by both NIH for their promising technologies and by venture investors for their commercial potential,” the report concluded.  “By selecting out some of the most commercially promising innovative small firms, the (2002 ruling) appears to limit opportunities to exploit the nation’s substantial investments in research at NIH.”
The report noted that between 4 percent and 12 percent of firms that received Phase II awards during a certain period were “excluded, or possibly excluded,” from the SBIR program because of the ruling. The National Research Council also conceded it’s hard to know for sure because investment reporting requirements are vague.
A version of the bill favored by the Senate would allow 18 percent of SBIR grants issued by NIH and 8 percent of those issued by other agencies to go to firms with majority venture capital investment. How will those agencies decide which firms are majority-owned and which are not, absent a lot more paperwork? And will the next bureaucratic ruling conclude that companies majority-backed by angel networks (basically, informal networks of investors) should also be excluded?
The National Research Council recommended either restoring the old rules or “making some other adjustment” that will allow venture-backed companies to compete for SBIR grants. That’s essentially what the House of Representatives voted to do. It makes sense to pass that version now.
Still is president of the Wisconsin Technology Council. He is the former associate editor of the Wisconsin State Journal.