SBIR Gateway VC Discussion Group
(Archived May 2004)
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The comments below are the views of submitter and do not necessarily reflect that of Zyn Systems or the SBIR Gateway. Please address your questions to: [email protected] .
Updated 05/22/0499 messages
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Name withheld by request Durham, NC
Msg 21 of 99
I don't think the VC firms should be allowed an exemption. This goes against the initial goal of SBIR Funding. This would allow larger companies to steal benefits that were set aside for small businesses.
Vote:   NO 
Benjamin Moll Saint Charles, MO
Msg 22 of 99
The proposed rule change would subvert the intention of providing support for small business. It would be a minor matter to structure any research effort as the wholly owned subsidiary of a large corporation. A possible compormise would be to allow people to own less than 51% if the other owner was a VC.
Vote:   NO 
Name withheld by request RTP, NC
Msg 23 of 99
The purpose of the SBIR program is to promote the translation of novel technologies to products. This can be a very capital intensive effort, particularly in the biotechnology sector. As an early stage biopharma company, we receive money from multiple sources to further our business plan. In the short run, these sources include seed/early stage VCs and SBIR awards. As product development advances, we may wish to recruit money from larger VC groups with deeper pockets to faciliate expansion of our efforts and continued drug development.

Excluding sources of large amounts of capital who bring to the table additional expertise and contacts seems contrary to the goals of the SBIR program which is to facilitate product commercialization. The threat of competition to small companies seems minor. Well-capitalized companies don't want their employees spending the hours needed to write a competitive SBIR. Similarly, VC groups that can write $10-20 million dollar checks don't want key personnel directing their effort to funding sources that can contribute less than $1 million versus their R&D responsibilities. Why not let the larger VC firms participate, then if a small SBIR funded company has the opportunity to receive money from such a VC, the companies past SBIR success is not a hurdle to receiving the investment.

Vote:   YES 
Virginia Williams Durham, NC
Msg 24 of 99
As someone associated with a very small business, we are forced to stretch our resources to the hilt, and to sometimes substitute extra effort for extra money. I fear we would have a great deal of difficulty competing for an SBIR with companies that were much more generously financed.
Vote:   NO 
Name withheld by request , IN
Msg 25 of 99
It is a hollow argument to say that VC involvement adds any value to the SBIR process. The vast amounts of VC money are comprised of "Other Peoples Money". The sole purpose of VC funds is to build the fund value for those “Other People”. VC funds are not feasible technology transfer instruments that efficiently provide business and commercializing expertise at the point of most need. VC funds and entrepreneurs are not interested in creating jobs, or the advancement of a technology for the same reasons. The bottom-line for VC funds is “the bottom- line” and “risk mitigation”. In short they are not interested in taking the inherent risks of cutting edge technology without unduly levering the assets and Intellectual Property (IP) of the real risk takers/entrepreneurs. VC involvement may have a more legitimate role in Phase III when the value of a VC capital infusion can be evaluated on a level playing field for all parties. I believe that this change would disincentives the creative idea pool as it currently exists.

This change would drive the Small Business out of Small Business Innovative Research, and likely replace it with litigation. The SBIR process is competitive enough without this change.

Vote No

Vote:   NO 
Cody Benkelman Whitefish, MT
Msg 26 of 99
sent to Max Baucus and Conrad Burns, Montana Senators:

The subject of my email to you regards current efforts underway to redefine eligibility rules for companies participating in SBIR and STTR programs. As I understand it, Venture Capital firms are lobbying congress and/or the SBA to allow companies owned by VCs ("owned" being greater than 51% ownership) to participate in the SBIR/STTR programs, which provides seed capital for companies completing research of value to Federal agencies.

I would like to express my opposition to this change, for the very simple reason that the SBIR program is intended to provide much needed funding to small companies that have no other access to development capital. You know us at Positive Systems, and development capital has *always* been one of our key challenges. From my perspective, this is a rather simple issue. If a company has developed to the point of securing VC funding, their product development efforts must be relatively well developed. If not, there must be another reason the VC feels the company is a "good bet", but in any case the VC has accepted the role of providing that development funding.

Among other issues, if a company is owned up to 49% by a VC, it *can* still participate in the SBIR program. If the VC has taken a position of *majority* ownership in a company, they should be willing to remain committed to providing the development funding needed.

Please leave the SBIR program as is, to focus on providing funding to those companies that truly NEED it.

Cody A. Benkelman
Principal Engineer and co-founder
Positive Systems, Inc.
223 Baker Ave.
Whitefish MT 59937

Vote:   NO 
Name withheld by request , GA
Msg 27 of 99
Our company’s research and development efforts were funded in part by National Institutes of Health SBIR grants, and our drug delivery system is presently in clinical trials and approaching commercialization. In November 2002, the company closed its Series B equity financing of $17 million allowing it to create 20 additional jobs, increasing the company’s size to 45 employees. In return for the VC investment more than 51% of equity is now held by three VC funds.

Prior to November 2002 we submitted and were funded four NIH SBIR grants (three Phase I and one Phase 2). These grants were critical in creating the jobs to grow the company from 5 to more than 20, and to attract VC financing in November 2002 which added another 20 positions to the company’s payroll. By virtue of this SBIR support, several product candidates advanced into clinical trails or were partnered with major pharmaceutical companies. Thus, not only has it been accepted practice for the NIH SBIR program to support the growth of emerging biotechnology companies, but it has helped to accomplish the mission of the NIH and create new jobs as well.

Our operating plan for 2003–2005 calls for continued SBIR/STTR funding by NIH to support high-risk, early stage research and development work. Under the current, restrictive eligibility interpretation as put forth by NIH and SBA our company is disallowed from receiving new SBIR/STTR awards. The absence of external funding will have a deleterious effect on our research and product portfolio as even a well- funded company like ours is unable to shoulder these R&D costs.

To take the SBIR source of capital away, because investor money taints the pool, so to speak, is punitive at least and destructive to new business development in reality.

Vote:   YES 
Rand Swanson Bozeman, MT
Msg 28 of 99
Sixth grade sports teams would be greatly improved by allowing high school aged players on their team because they typically have more developed skills. The reason high school players are not allowed on 6th grade teams is obvious -- it might lead to a higher level of sports for a while, but it would ultimately destroy the atmosphere needed for young players to develop and therefore be disastrous for sports in the long term.

The argument that VC controlled firms would do a better job of serving research and development due to their access to capital seems similar to arguing for letting high school players on 6th grade teams. The added resources of VC controlled firms would likely lead to good research - at least for a while (the same could be argued for General Electric for that matter), but it would also ultimately make the SBIR program inaccessible to start-up companies who do not have the resources to effectively compete. The long-term consequence of this would be fewer start-ups, decreased entrepreneurial spirit, and a great weakening of the economic engine provided by small businesses. Please do not let this happen.

Vote:   NO 
Carl Nelson Washington, DC
Msg 29 of 99
What an interesting question: Should real money be allowed to help small companies with innovative and market-changing ideas get and exploit SBIR?

The question is moot because the government has for two decades showed that it cares little for the kinds of companies and ideas that VCs would invest in anyway. The federal bureaucrats are the small company’s best protection against any invasion by real money with real profit motives. The agencies endlessly choose minor impact projects that have no appeal to VC money.

IF the government had half a venture brain it would fund projects that are too technically risky for VCs but would be attractive if the risk were reduced with a small government investment. That way SBIR would soon start producing the economic gains that the politicians pretend they want but let the bureaus divert the SBIR money away from. SDIO/BMDO (now MDA) did that for more than a decade) although it has recently fallen into the same contract R&D hole the other agencies have been in since the beginning.

Let some competition be introduced into SBIR for economically attractive new ideas. The government agencies could also stand a boot in the most helpful place to get them to take more risks with SBIR and reach farther in their project selection. Playing safe is a sure recipe for mediocrity.

Find a way to get venture money in without letting corporate bureaucracy merely replace or reinforce government bureaucracy. It would do no good to devise rules that let Lockheed Martin or Raytheon, for example, conspire with federal bureaucrats to divert SBIR into minor developments of military hardware.

Ann Eskesen Swampscott, MA
Msg 30 of 99
As you well know, I opted not to get involved in this latest furor in any serious way. The six-week long marathon of the DOD situation earlier this year really sapped our available resources. However, at the request of various people who knew that we had the data, we had recently already made available a preliminary analysis of that data and had provided that to various elected officials, reporters, some agency personnel and also to some of the people who are (were?) taking the strong position in favor of the proposed change.

Basically, we were arguing - as the data showed clearly - that, aside from obvious over-stated suggestions of what terrible things would happen if the rules are not changed, the numbers involved are trivial. Of the over 2500 firms which have been in receipt of SBIR funding in NIH since 1998 (what we call currently active) only about 80 have been in receipt of Venture Capital.

We can document how much money that involves but do not know how the deal was structured. However, based on the numbers we do have and a fair amount of experience in the field, we can estimate (fairly accurately) that the proposed rule change perhaps involves 15-20 firms - hardly enough to warrant a major shift in how SBIR is managed.

Setting aside the current arguments concerning how important VC support of capital hungry biotech firms is in this period of limited access to other equity - which actually IS an important issue - the main proponent's position for changing size standards is now being supported by a chart based on a telephone survey of ten leading VC biotech support firms. Remarkable for its inadequacy!

We took that chart, which identifies those ten firms interviewed, and cross checked the data provided against our own current (to yesterday) fully complete and entirely accurate SBIR-STTR databases. As you know, this data includes, among lots of other business factors (issued patent - US and international; publicly traded; M&A activity; strategic alliances etc etc), the major percentage of VC activity in the SBIR community. For some of the early years, that data may be a little sketchy but for the passed five- six years it is about as accurate and complete as it can be.

To be on the safe side - in case we had missed a firm here and there - we also visited the websites of each of the ten firms to cross-check their portfolio listings against our data, and finally, we even ran the names of all their investment firms through CRISP just in case these firms had NIH funds other than SBIR or STTR.

The results are not at all supportive of the BIO position in that the data they are using is seriously inaccurate.

  • Many firms they did not identify were actually awardees;
  • Many they suggested were there, were not -- and in very large increments.
  • Additionally, because of the standard procedure of syndicating deals, many firms are double, triple and even quadruple reported. The actual number of SBIR involved is about third of those listed.

It doesn't help their case that many of the firms which they do list correctly as having been awardees, are long since outgrown the program and have not received SBIR-STTR funding in many years.

The numbers simply do not support the VC-BIO-NVCA position and they must be prevented from achieving this change.

Far more telling than any position they are taking specific to this issue is the fact that if we do allow this to happen, it will be the thin end of what I would suggest is a very thick wedge. What other exception do we allow next?

As one of the original SBIR players - with a very few others, we worked back in the late seventies and early eighties for passage of the original SBIR enabling legislation; I was right there for the 1986 reauthorization and the 1992 and was on the front line of almost every battle involving SBIR ever since, including the most recent DOD debacle earlier this year - we have stood steadfast throughout for a number of things

  • technical excellence as the ONLY criterion of selection for award
  • bipartisan support of this very important national resource
  • complete integrity in the conduct of the program.

Stick to the rules and you will have my complete support; bend the rules to your own advantage - whatever that is - and I will fight .... and we haven't lost a battle for this program yet!

Ann Eskesen
Innovation Development Institute
45 Beach Bluff Avenue Suite 300
Swampscott, MA 01907-1542
Voice: (781) 595-2920
Fax: (781) 593-4660
Email: [email protected]
Web: http://www.inknowva

Vote:   NO 
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updated 05/22/04
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