Courtesy of Inviragen
Dan Stinchcomb, CEO of Inviragen, says the company is about to test a vaccine for dengue fever using $10 million in venture capital.
Dan Stinchcomb, CEO of Inviragen, says the company is about to test a vaccine for dengue fever using $10 million in venture capital. Courtesy of Inviragen
Venture capitalists are lobbying members of Congress to include the companies they own in one of the federal government's key programs for funding small companies. The program is called the Small Business Innovation Research program (SBIR), and opponents of opening the program to venture capitalists claim this is part of a larger effort by big business to get a share of small-business set-asides.
The program requires agencies with huge research budgets — like the National Institutes of Health and the Department of Defense — to set aside at least 2.5 percent of those budgets for small companies.
The SBIR program will expire at the end of March. As Congress considers renewing it, some want lawmakers to allow businesses that are majority-owned by venture capital firms to be eligible for the grants.
"By discriminating against venture-backed companies, the [Small Business Administration] is removing some of the most worthy applicants from consideration," says John Neiss, managing director of Venture Investors in Madison, Wis.
Shutting The Door On Research
Dan Stinchcomb, chief executive officer of Inviragen in Fort Collins, Colo., says his company is about to test a vaccine for dengue fever. He'll turn to venture capitalists for the $10 million cost. In exchange, they'll take a majority stake in his company. When that happens, Inviragen likely won't qualify as a small business under the SBIR program anymore.
Stinchcomb says Inviragen will lose SBIR grants for other vaccines it is working on. At that point, the company likely will drop those research programs. "This means that promising vaccines that could improve public health in the U.S. and around the world essentially will not be developed," he says.
Implications For Small Businesses
One of the most vocal advocates for keeping SBIR rules the way they are is Lloyd Chapman, founder and president of the American Small Business League.
"I don't think that when Congress passed the Small Business Act in 1953, it was their intention for federal small business contracts to go to multi-multi-millionaires and potentially even billionaires," Chapman says.
Chapman worries that if Congress allows small businesses owned by venture capitalists to participate in the SBIR program, that will set a precedent and it will be open season on all sorts of other set-asides for small businesses.
Some businesses that receive grants through the program worry about competition from venture capital-backed companies if the rules are changed.
"Most early-stage small businesses — they're not sophisticated enough to compete successfully for these large dollars," says Russ Farmer of ADA Technologies in Littleton, Colo. "Your large VCs [venture capital companies] — they can afford a full-time person who's an expert in submitting proposals."
Farmer worries that not only will they succeed in getting more grants, but he suspects they'll also land larger grants, leaving only the crumbs for companies like his.
He and other advocates for keeping the rules the way they are may have trouble convincing those in Washington of their concerns. According to the Center for Responsive Politics, venture capitalists gave $11.9 million in political contributions in 2008 — mostly to Democrats.
Venture capitalists, along with advocates from the biotechnology industry, have been lobbying Congress to change the SBIR rules. They had hoped to get something inserted into the economic stimulus bill, but that didn't happen. Now they hope that when Congress reauthorizes the SBIR program, lawmakers will pass language changing the rules.