Survey Shows Small Tech Companies Oppose Proposed Changes in Federal R&D Contract Awards

July 28, 2005

Washington, D.C. - A precedent-shattering proposal to give large venture capital firms greater access to the federal government's top research and development program (R&D) for small companies is opposed by 90 percent of the most affected R&D companies.

That is the key finding in a survey released today by the Small Business Technology Council, the nation's largest organization of small technology-based companies in diverse fields.

At stake is the overall direction of the Small Business Innovation Research (SBIR) program, a widely-praised federal program that has yielded more than 45,000 technology patents and hundreds of billions of dollars in technology innovations since 1982. Large venture capital (VC) firms that are ineligible to control companies in the SBIR program are seeking changes in the program's rules to allow such control.

The proposal has been heavily promoted as a way to aid biotechnology companies receiving SBIR awards from the National Institutes of Health (NIH).

SBTC surveyed a group of likely beneficiaries -- all SBIR contract awardees from NIH during the past two years. The changes sought by the large venture capital companies would give these awardees wider access to venture capital, if they and the VCs agreed.

Survey respondents were presented with a position paper prepared by the Biotechnology Industry Organization (BIO) in support of the proposed changes, and an SBTC position paper of equal length, covering the same points, opposing the changes.

When then asked whether they "favor allowing large venture capital firms to control companies in the SBIR program," 90 percent of the NIH awardees respondents said they were opposed.

When asked a related question, whether they favored "allowing VCs that are owned other companies, universities, pension funds and other institutions to control companies in the SBIR program," 89 percent of these potential beneficiary companies said they were opposed.

Background information

The SBIR program: SBIR was created by Congress in 1982 to help meet the federal government's own R&D needs. The program allots 2.5 percent of the R&D budgets of 10 federal agencies to a competitive program of contracts awards to small businesses. Companies must meet the definition of a small business contained in the SBIR statute (fewer than 500 employees) to qualify for these contracts. The SBIR program has been repeatedly praised for its effectiveness by such third-party evaluators as the Government Accountability Office, the National Academy of Science, and the National Academy of Engineering.

Current status of venture capital firms in the SBIR program: SBA permits venture capital firms of all sizes to hold minority interests in SBIR companies.

Small venture capital firms -- defined as those with fewer than 500 employees, including all affiliates and subsidiaries -- may hold a majority interest in SBIR companies, as long as the VC is itself owned by individuals and not by other companies or institutions.

Large venture capital companies - those not meeting these standards - may hold a minority interest, but not a majority interest, in SBIR companies. That is what large VCs seek to change.

At issue: Can a "small" business that is controlled by a large business access a federal R&D program for small business? For this to occur, SBA would have to waive its "affiliation rules" for the first time in the 52-year history of the agency. That is exactly what proponents of the change have sought. Without waiting for SBA to act on that request, they are now asking Congress to legislatively void the "affiliation rules" for large venture capital firms (S. 1263, H.R. 2943). Doing so would contradict the legal principle underlying dozens of small business laws and hundreds of regulations -- that a small business is one that is "independently owned and operated" (15 USC 632a).

Other questions: Why should large venture capital companies be given access to a 2.5 percent allocation for small business when they already have access to much of the remaining 97.5 percent as well as more than $53 billion in their own uninvested capital? *

How would the whole SBIR program change if large companies have access to it? Is it meaningful to call it a "small business" program at that point?

How would the research direction of the program change? Would it shift away from the early-stage research that the program has always emphasized and toward late-stage technologies that venture capital firms have always preferred? How would such a change impact upon the nation's innovations?

About the Survey

The SBTC survey was sent to a list of 535 SBIR award winners at NIH during the past two years. The survey instrument stated neutrally that there was a controversy regarding the role of venture capital companies in the SBIR program. It invited respondents to view the arguments in favor of large venture capital company access to SBIR, via a link to a position paper on the Biotechnology Industry Organization Web site, and arguments opposed, via a link to a parallel position paper on the SBTC website. Respondents then were asked to vote on the two questions stated above. Seventy companies, representing about 13 percent of the sample, responded to the survey.

*Source: VC Funds Overlang Survey, Dow Jones Venture One, March 24, 2005