This proposed change would give the newly qualifying companies distinct economic and strategic resource advantage over the typical applicant, and that's just not fair.

This change serves the interests of large VC and Biotech organizations who desire to control a piece of the SBIR action for which they have heretofore not qualified.

This proposed change certainly should not be discussed in a rush, and, in my opinion, should not be approved.

I plan to say just that to my congressional representatives in both the House and Senate.

Dear ZYN:

Thank you for providing this forum for the legitimate small business community to counter an organized and well-financed assault on the integrity of the SBA's long-established size eligibility rules.

This attempt by the VC/BIO community to establish corporate welfare in its purest form ("VC welfare") must be defeated. If the VC position prevails, legitimate small businesses will be crowded out of the SBIR competition by the large financial organizations whose huge investments are funneled through VC entities. How can it be rationalized that organizations that are otherwise ineligible for SBIR funding can become eligible simply by making their investments through the VC conduit? If allowed, what is there to prevent large organizations from creating captive VC entities to circumvent the eligibility rules? The "camels nose under the tent" metaphor comes to mind.

Pasted in below are excerpts from my recent communication to cognizant congressional and administration staff.

"1. Contrary to the impression created (by the VC and BIO communities), the current SBIR eligibility rules do not exclude <50% VC-backed (as opposed to VC-owned and controlled) small businesses. These rules do, however, properly exclude those businesses that are majority owned and controlled by entities other than individuals, VC's included.

2. VC organizations are conduits for the investment of hundreds of billions of dollars on behalf of large institutional investors such as pension funds. It is unfair and unwarranted for small businesses owned by individuals to have to compete with these huge financial organizations for limited SBIR funds. SBA rules governing SBIR eligibility correctly anticipate and prohibit such an eventuality.

3. BIO's assertion that "...SBIR awards (for their industry) are even more important because of the scarcity of capital." is brought into question by their revelation that VC investments in the biotechnology and medical device industry totaled $4.7 billion in 2002. This is 3 times the entire 2002 SBIR budget for R&D in all areas of technology, not just bio-tech. Their assertion is also called into question by a September 29 Business Week article stating that the VC industry currently has a near record $84 billion in uncommitted funds.

4. The SBIR program requires that 10 federal agencies set aside 2.5% of their annual extramural R&D budgets to be accessed exclusively by individually owned and controlled small businesses. VC owned and controlled businesses are not precluded from accessing the other 97.5% of the extramural R&D funding from those agencies, 39 times the SBIR funding. This $62+ billion of federal extra-mural R&D funding is the appropriate resource for those, including VC owned ventures, who are not SBIR eligible."

Again, thank you for this opportunity to express my resolute opposition to this attempt to establish a VC welfare program. Greed is a terrible thing.

Sincerely,

This note conveys my strong opposition to allowing businesses to be eligible for SBIR competition that are owned or controlled by venture capital (VC) firms. Based on discussions with my associates, the vast majority of small businesses and their representatives agree with me.

Enforcement of the SBA SBIR Policy Directive provisions on the definition of a small business concern (SBC) and eligibility for SBIR competition has generated a flurry of negative comment primarily from affected small businesses and the VC community. Representatives of these organizations are pushing to change the rules so that businesses owned and/or controlled by VC firms would be eligible for SBIR competition.

Such a rule change would be damaging to the SBIR Program, and harmful to the vast majority of SBIR competitors. Allowing VC firms to own and/or control SBIR eligible businesses is counter to the spirit of the SBIR Program. As Gene Watson (Wyoming) has said, once VCs assume ownership/control of a small business, they should also assume responsibility for providing necessary funding for it.

Channeling government funds (especially SBIR funds) to businesses controlled by VCs would go counter to the very concept of VCs - investing for profit in promising new ventures. Such a practice would be providing government welfare to the VC community at the expense of legitimate small businesses.

Largely lost in the recent discussion on the subject is the fact that VC firms CAN own a significant stake in eligible SBCs. The only restriction is that it owns 49% or less of the SBC, and does not control the SBC through Board of Director positions.

Based on my information from SBA, it is anticipated that a rule change will be in place soon that will allow subsidiaries of SBIR eligible parents to themselves be SBIR eligible. Under this new rule, a VC firm that itself qualifies as an SBIR eligible SBC (per the SBIR Policy Directive) could own a majority and controlling interest in a subsidiary that would be SBIR eligible (as long as the VC and the aggregates of its affiliates do not exceed 500 employees.).

So, there are significant opportunities under the present rules for VC firms to participate in ownership of SBIR eligible small businesses.

The 29 Sep 2003 issue of Business Week magazine carried an article on the VC industry entitled: "All Cashed Up with No Place to Go - VCs have $84 billion to invest and an aversion to risky startups." And VC owned/controlled businesses want part of the "small" (<$2 billion) SBIR Program??? We can't let it happen!!!

Thanks for facilitating this discussion that is vital to the long-term integrity of the SBIR Program!!!

Large VC organizations should not be allowed to compete with other small businesses for SBIR funding.

If an exception is made for Biotechs and VCs, why stop there?? Soon exceptions will be made for other large concerns such as General Motors, Microsoft, and Archer Daniels Midland!

If the article in Business Week is correct, and the large VCs have over $80 billion dollars in uncommitted funds, why aren't they committing some of that money to the projects they claim can't be done without the help of a $750,000 SBIR grant??? WHAT A SCAM. Wake up Congress. Small Business is the name of the game in SBIR.

If venture capital backed firms desire to compete in the SBIR program, they must change their ownership structure to comply with the rules and regulations in the SBIR program. It has been done!

We encounter many scenarios in our SBIR training programs, i.e.,

1. A small (2 person) consulting firm (co. A) owns 90% of an STTR winning company (co. B) - 10% equity distributed to CSO. This changes the definition of 'wholly' owned by another company that is owned by 'individuals'. By distributing 10% equity to 'key personnel', co. B is no longer eligible (even though we're talking about a total of 3 owners and 2 employees. 2. Many small publicly held companies receive SBIR grants. How does one determine 'equity ownership' on the day of award? If board seats are held by VC's who collectively own 'less' than 51% of the stock, is the company 'controlled' by insitutions, even though the stock is held by individuals (at least on that particular day)? 3. If co. A is ineligible (for any reason - rational or not), can they set up an 'arms-length' co. B with equity ownership held by an 'individual', but with a pre-arranged royalty-free license back to co. A for technology developed in co. B?