Bickering between House and Senate lawmakers has put into limbo whether VC-backed startups will get a greater opportunity to procure contracts from federal agencies. At the center of the battle that could recast VC-backed companies’ ability to innovate in partnership with government bureaus is a fight between House and Senate lawmakers over funding provisions for the Small Business Innovation Research (SBIR) program.
Finally, movement in the House looked promising. Last week, however, debate about where the Senate stood on certain program provisions failed its cloture vote to bring the matter to the floor of the entire Senate, putting the philosophical debate about the access of venture-capital startups to SBIR money back to square one.
The House of Representatives recently agreed to increasingly make available SBIR funding to young companies heavily backed by venture capital. The Senate Committee on Small Business and Entrepreneurship did not share the position that the House recently took, but this might have changed had the measure got before the full Senate.
Lately, the House has worked harder than the Senate to open more SBIR funding to VC-backed startups. The House version of the legislation gives VC-backed firms access to 45 percent of SBIC funding, and, with its latest changes, doesn’t mandate that VC interest in these startups be limited to a 49 percent ownership stake. The Senate, at this point, not only rejects this provision but would give VC-backed firms access to just 25 percent of the award dollars from three federal agencies, including the National Science Foundation, and to 15 percent from eight others.
The SBIR program is intended to ensure the government and taxpayers have access to cutting-edge and cost-effective innovation while supporting growth of small business. Given our current levels of unemployment and our need to reinvent the U.S. economy, one would hope that common sense would prevail and that the SBIR program is made open to the broadest cross-section of the best qualified candidates.
All entrepreneurs should be able to compete on an equal footing for capital. The only parameter that should be considered is who has the best ideas. The latest turn of events underscores once again that the United States must take steps to implement innovation, not just discuss the issue or hotly debate it.
Unfortunately, special interests have for years sought to restrict participation in the SBIR program based upon how a small business has financed its growth. If a company got too much venture capital, its participation in the SBIR program was severely restricted, regardless of its merits. An entrepreneur who financed his company with a loan or savings or investments from friends, family or angel investors, has no such restrictions.
The U.S. government must realize that the twin pillars of innovation – talent and capital – are the most portable assets in the world, poised to move to whatever environment embraces and rewards them. U.S. venture capital inflows have improved, but they would improve a lot more if an increasing amount of venture capital wasn’t leaving the U.S. for places like China and India.
Entrepreneurs, VCs, business leaders and anyone with a stake in the industry’s development through the procurement of federal grants need to call their congressmen and urge them to vote to level the playing field for entrepreneurs and allow VC-backed startups full access to the SBIR program.
Robert Ackerman is a managing director and founder of Allegis Capital. Opinions expressed here are entirely his own.