Big Fight Over Small Business Research

The U.S. Congress is scrambling to reauthorize a $2 billion program that supports research by small high-tech businesses before it expires next month. And although all sides agree that start-up companies are an important engine in fostering innovation, there are some big disagreements about the program’s impact on academic research funding and the kinds of companies eligible for support.

The Small Business Innovation Research (SBIR) program, which began in 1982, is funded by taxing the research budgets of 11 federal agencies. The current 2.5% set-aside would grow to 3.5% by 2020 under a bill (S.1233) passed last week by the Senate Committee on Small Business and Entrepreneurship. (The portion spent on a younger sibling that targets university start-ups, the Small Business Technology Transfer program, would grow from 0.3% to 0.6%.)

The House version (H.R.2965) of the reauthorization, to be taken up on Wednesday by the science committee and possibly Thursday by the small business committee, provides for no such increase. That’s fine with the biomedical research community, which isn’t thrilled at the prospect of a bigger bite being taken out of federal support for basic research at the National Institutes of Health, which runs the second largest SBIR program after the Department of Defense. It’s also the position taken by the Obama Administration as outlined in a 2 June letter to Senator Mary Landrieu (D–LA), chair of the Senate panel. A last-minute change in the Senate bill, however, includes NIH in the expansion, possibly a reaction to a decision by Congress in February to exclude NIH's $10 billion boost in the stimulus package from the SBIR set-aside.

Among legislators, the size of the set-aside isn't the biggest bone of contention. The real battle is likely to be over how to ease a controversial restriction on participation by venture capital firms imposed by the Small Business Administration in 2002. That change blocked companies receiving a majority of their funding from venture capital firms from applying for grants on the grounds that the program was designed to help the proverbial entrepreneur in his garage, not a spinoff from some giant company or a gamble by deep-pocketed financiers.

The biotech industry and NIH officials disagree. They say that the exclusion is counterproductive and has prevented the agency from funding those companies most likely to hit the jackpot. The House bill attempts to restore the status quo by lifting the restriction but adding a proviso that no single venture capital firm could hold a majority stake in a start-up. The Senate bill, in trying to strike a balance, would allow NIH to spend up to 18% of its money on grants to such firms, with other agencies limited to 8%. (The numbers are based on a 2006 report by the General Accounting Office that found 18% of NIH's SBIR awards in 2001–-04 went to companies that had received money from venture capitalists. The DOD figure was 7%.) The White House waffles on the issue, telling Landrieu that small businesses "should not be crowded out of the program" but that it's also important that "the most promising small companies are not arbitrarily restricted or excluded because of their capital structure."

A neutral party in the debate, the National Research Council of the National Academies, says in a new report out this month that the provision is trying to fix a problem that doesn't exist. Its survey of companies that had received Phase II grants (up to $750,000 after a $100,000 proof-of-principle Phase I award) found that as few as 12%—and perhaps only 4%—of companies that rely on venture-capital funding received SBIR awards. (The study covered awards made from 1992 through 2002.) It argues for a return to the pre-2002 status quo, saying that "the impact of the ruling falls disproportionately on the most promising firms—those repeatedly selected by NIH for their promising technologies and venture investors for their commercial potential."

Both bills would raise the current guidelines on the size of the typical awards, now $100,000 for Phase I and $750,000 for Phase II, to keep up with inflation. The House is more generous, going up to $2 million for Phase II and $250,000 for Phase I. (The Senate levels are $1 million and $150,000, respectively.) The House would extend the program for 2 years, whereas the Senate's bill runs until 2023.

The clock is ticking on a compromise. The programs expire on 31 July, and although all sides say they want to finish work by then, it's more likely that Congress will need to approve an extension into the fall so legislators can keep plugging away.

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