House Passes Controversial Small Biz Bill

The House passed a controversial bill Thursday night that would enable small firms that have venture capital backing to qualify for all federal small business programs, including procurement contracts and special research grants.

The measure swiftly scooted through the approval process since Rep. Jason Altmire (D-Pa.) introduced it Sept. 18. Altmire is a member of the House Small Business Committee, and panel Chairwoman Nydia Velazquez (D-N.Y.) is a cosponsor. The House passed the bill 325-72.

"H.R. 3567 is about investing in our nation's small businesses and filling the current gap in seed capital that entrepreneurs depend on," Rep. Velazquez told the Small Business blog. "The bill includes safeguards that prevent any individual or entity from gaining an unfair advantage, ensures that the investors themselves are small and prohibits any large companies from being involved."

She said on the House floor Thursday that the bill "represents an important step toward revitalizing SBA's investment mission." She noted that in 2002, the SBA licensed 41 new Small Business Investment Company funds and more than half of those focused on investing in early stage business. In 2006, the SBA licensed 10 of these funds, none of which were targeted toward early stage firms, according to Velazquez. SBIC funds channel private investor money -- which is sometimes paired with government money -- to small, quickly growing firms.

Critics say the bill is full of holes that will enable billion-dollar companies to benefit from federal small-business programs.

The National Small Business Association opposes H.R. 3567. It says "universities could set up holding companies and acquire small businesses, and SBA would have to treat these conglomerates as small businesses -- the same way they'd have to treat VC conglomerates."

The group maintains that allowing universities to participate in small-business programs would be damaging in the federal R&D contract arena. "Universities dominate in this field, controlling more than half of the dollar value of federal contracts, while small businesses control a meager 4.3 percent," according to the association.

However, the House Small Business Committee noted that under tax law a university can't own a for profit entity.

The SBA "strongly opposes" parts of the legislation, according to agency spokesman Michael Stamler. "It would be a step backward from our recent progress in addressing the misidentification of large firms as small businesses for federal procurement purposes."

The SBA believes that the language is overly broad and needs to be amended so that "ownership and control rests positively with the entrepreneur."

The bill restricts venture capital firms to a less than 50 percent stake in a small firm.

The SBA also bristles over the measure's proposed "angel investor" program. The bill would create an investment program at the SBA that would provide up to $2 million for investor groups to fund small enterprises.

"The SBA does not support providing capital to high net worth individuals to support their investments," said Stamler. "The best way to strengthen small business is through an economic framework that encourages investment at all levels through broad-based and reasonable tax rates and reduced regulatory impediments to the flow of capital."

Jack Biddle, a partner at VC firm Novak Biddle in Bethesda, Md., said the bill "is good for our economy and our national security," adding "I think the government is smart to try and bring in the best of the best -- who are disproportionately backed by VCs -- into the government tent."

"There is a misperception that if a firm has funding from a venture capitalist, then it must be flush [with cash] and therefore not need government support," said Jim Greenwood, president and CEO of the Biotechnology Industry Organization in Washington, D.C. "That's not the case."

He said VCs often will fund a project when it is nearing a clinical trial or further along in the research process, and back in a lab there could be helpful additional findings. When a small firm wants to pursue that additional lead, a VC will often say "we're not funding that research, we're funding the initial project."

That firm may seek out an SBA-affiliated Small Business Innovation Research grant to explore the second project, and "if they have VC funding they will be disqualified from the funding and they can't pursue a fruitful new treatment or cure."

Doug Doerfler, president of MaxCyte, a Gaithersburg, Md., firm that develops cell-based therapies for oncology and infectious diseases, said the bill clarifies for him that when he's over the 50 percent mark with VC investment, he's ineligible to pursue SBIR grants, and he says that's unfortunate as he's particularly keen to work with the National Institutes of Health.

Doerfler's firm uses a VC syndicate as investors. No single investor owns more than 25 to 30 percent of his firm. "Right now the group together is slightly more than 50 percent, but it's a number that moves as we raise money to fund clinical trials," he said.

"It's important to be a part of the NIH process and helping get our new medicines and new understanding to the public," said Doerfler. "The only way that our firm can be involved with NIH is through the SBIR program and there's a misperception that if we're controlled by a VC than we can't participate in the program."

NIH numbers show an ailing SBIR program. The NIH has found that since 2004 there's been a 25 percent drop in the number of SBIR applications and since 2003 there's been a 40 percent decline in new SBIR participants.

Doefler, whose firm has 14 employees, said he's satisfied with the House bill. "I don't know why corporate ownership structure would have anything to do with us. Our business is such that we have to raise a lot of money to support clinical trials." His firm pays upward of $20,000 to $20,000 per patient for this testing.

"Our business is not about gaining money or maintaining a small business status, it's around developing new medicines and it so happens that in our business model we need to raise money," he said.

The National Venture Capital Association supports the bill. Emily Mendell, vice president of strategic affairs for the group, said it "creates much needed financial incentives for investment into small innovative companies."

The VC group criticized the Bush administration for opposing the legislation "and failing to recognize the economic benefits of the government and the venture capital community working together to fund the best ideas and bring them to life."

The bill now will go to the Senate. But it may not be easy. Greenwood said Sen. John Kerry (D-Mass.), who chairs the Senate small business panel, was not receptive of his group's efforts on the matter earlier this year.

By Sharon McLoone |  September 28, 2007; 6:23 PM ET Regulation Legislation
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The American Small Business League has been working on this issue with a number of resources on www.asbl.com and http://americansmallbusinessleague.blogspot.com/

Posted by: ASBL | October 1, 2007 10:45 AM

I am a Principal Investigator on two SBIR grants and am in the exact situation portrayed in the article. We have about 25 people in our company, clearly meeting the definition of a small business. We built our company around research funded through SBIR grants, and we were able to attract venture capital money for expensive clinical trial work on our most advanced project. We are now ineligible to accept the SBIR money, and therefore we will be unable to advance the SBIR work. NIH's previous investment will go to waste, and the development of a much needed antibiotic will be at least delayed or at worst never happen.

It is significant that the NIH has formally protested this state of affairs, and it is encouraging that the House of Representatives has seen fit to address this problem. For the sake of our nation's health, I hope Senator Kerry and President Bush will follow through on this bill.

Posted by: Mark Stidham | October 1, 2007 12:47 PM

Ever since most angel investors moved their investment preferences to much more mature companies, shortly after the dot.com crash, there has been a huge gap in financing opportunities for start-up companies who need several hundred thousand dollars in start-up money. Aside from friends and family investors and bank loans, this gap is often filled by grant programs provided by various government agencies under the US government's SBIR program. I call it "grant land," and I direct entrepreneurs there who need money for research. This money helps them bring their businesses to a point of maturity that angels will be interested in.

I am generally not a proponent of taxation, but this program does make sense. Our money is being used to foster entrepreneurialism which in turn will help economic growth, resulting in a positive return for our tax dollars. In a way, this makes us all angel investors as a very small amount of our tax money is being used to create new companies.

Many are concerned about the misuse of the program by large firms who have majority ownership in the companies applying for grants and loans. Interestingly enough, it doesn't seem to be acknowledged that these firms are taking great risk in investing in early stage companies. They do have the incentives to achieve a return on investment, don't they? There seems to be unfounded concern that universities could create holding companies that perform pure research and not take the next step of bring products and services to market. The bill provides funds to angel organizations, the reaction to which is that tax money is going to high net worth individuals. After all, let's not put any money into the hands of people who could actually make wise and well informed choices for investment, and who are also taking great risk in entrepreneurial companies.

All said and done, these debates seem to fall right on the line that defines who is in control, the US Government or the taxpayers whose money is being used for these programs and who also voluntarily provide financing for these companies. The debate will continue, even as the bill is enacted, but the proposed amendment will help fill the financing gap a little better than it did before.

Bill Warner
Chairman, Triangle Accredited Capital Forum
paladin@paladinandassociates.com

Posted by: Bill Warner | October 2, 2007 1:30 PM

Time to knock off the Government interferience with money management for developing Companies. From my experience, scams like the one shown are pulled, and Minorities get everything else!

Make "Good Faith" Loans available to ALL Business operators, so that when a bad situation adversely affects the Bank's known and respected customers, THEY are able to immediately supply needed Liquid assets when the Liquid assets are actually needed, based on that Bank's good judgement and awareness of the Customers(Client's) needs and realities!

A Six-Year old Company such as my own, that has weathered very bad conditions-Including one of the wettest Springs and summers in history in Austin Tejas(Mexico!), should not be allowed to be destroyed just due to three or four months of light Over-head expenses!

Sometimes, Shi'ites happen, and you find yourself having fallen short of the Money, you NEED to make money!

Posted by: RAT-The | October 3, 2007 7:20 PM

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