Thursday, June 11, 2009

SBIR on the front burner - stir the pot!

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After months of virtual inaction and indifference, the House Small Business Committee has finally put SBIR on the front burner. The Committee is in the process of marking up four separate bills that address SBIR reauthorization. The intent, we're told, is to eventually combine them into a single bill and send it up to the full House for approval.

On first glance, this is almost a de-ja-vu of last year's H.R. 5819 that died (thankfully) without being enacted. But there are a few differences that tells us they have been listening.

The big same-old is that despite our best efforts and the entreaties of over forty House members that SBIR eligibility requirements not change, the VCs are evidently getting their way. Would we really expect different? After all, no small businesses have been invited to testify to the Small Business Committee on this subject.

The four bills being marked up are:

H.R. 2769, “Commercializing Small Business Research and Development Act”
H.R. 2767, “Investing in Tomorrow’s Technology Act”
H.R. 2772, “SBIR and STTR Enhancement Act”
H.R. 2747, “Rural Technology Development and Outreach Act”

Got opinions? Stir the pot by calling, emailing, or better yet, faxing all the Representatives on the Small Business Committee ASAP! No time for form letters. Just make your opinion known.

[Added 6/12: Actually, fellow advocist Jonathan Pearl has provided a model letter -- see Comment #3!]

Then get the word to your Representative and everyone else in the House that you might influence that small business is being threatened. Don't let them just ramrod this through again.

Links to data files of legislator contact information is on www.SBIRreauthorization.com.

[Added 6/13 : Note - some excellent comments have been submitted since this was first published. Be sure to read them, and feel free to add your own!]
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8 comments:

Kevin Baron said...

It also seems that the Senate dropped their version late yesterday as well, sponsored by Landrieu and Snowe. The bill is S. 1223, but the actual text is not available at this time, but I was told by committee staffers that the bill contains the same compromise on the VC issue as their version from last year, S. 3362.

- Fred Patterson - said...

Thanks Kevin! Actually the bill is S.1233. The GovTrack link is http://www.govtrack.us/congress/billtext.xpd?bill=s111-1233. Not there yet, but it'll be up soon. If you just can't wait, send me an email. I was sent a PDF version this afternoon.

BTW, my friend Kevin is the Director of Government Affairs for the American Small Business League (www.ASBL.com), a strong advocate for small business and SBIR. Y'all consider joining!

Jonathan Pearl said...

Here's a model for letters or faxes to your representatives:

Dear [Representative]

We need your help now. Bills have already been introduced in the House, with some provisions that would effectively kill the ability of SBIR to seed early-stage high-impact ventures, replacing it with a crudely wrought corporate welfare scheme to support Venture Capital firms, at the expense of small businesses, job growth, and the nation's economy.

In particular:

* Sam Graves' H. R. 2767 would effectively redefine "natural person" to somehow include "venture capital operating companies." I kid you not! Read the language in the bill. As written, there is absolutely nothing that would prevent this loophole from being utterly abused with abandon. How difficult would it be for members of one venture capital firm to split off and create a second shell VC firm and invest beyond the 50% stipulated? And who owns those VC firms? It could be China or Libya.

* Aaron Schock's H. R. 2772 includes some worthwhile provisions, but the caps introduced in Sec. 12 are perhaps twice what they ought to be. Further, without more oversight or clarification, the open-ended "fast-track" authority proposed in Sec. 11 would effectively permit by-pass of Phase I (despite the explicit though weak requirement for Phase I stipulated in Sec. 14), meaning once again that funding would be shifted to later stages of technological and business development, killing many innovative ideas before they've had a chance to develop, and benefiting only VC investors, not innovation and not the small businesses who create it. Finally, the provision introduced in Sec. 13 authorizing perpetual Phase II funding without regard to commercial potential or private investment is an invitation for unending corporate welfare (which most assuredly would be taken up by those VC-owned firms which H.R. 2767 would welcome in).

* In addition, the proposals to raise award caps, without any proposal to increase allocations for SBIR as a percentage of the money already being spent (not as any additional expenditure) would dramatically reduce the number of ideas being funded, stifling innovation rather than encouraging it.

The bills recently introduced in the House may likely kill innovation research in America! The VCs won't touch us. Without SBIR, there is nothing else, besides deep-pocketed uncles, which unfortunately many of us lack.

I implore you to act now, and lend us the strength of your leadership before it's too late. Small, innovative, high-tech businesses like mine are not seeking handouts. We ask only for a level playing field, in which the strength of ideas wins out against moneyed special interests. Main Street vs. Wall Street!

* Keep SBIR for Small Businesses.

* Keep award sizes reasonable to support small-scale early-stage feasibility studies that have great potential for societal benefit and commercialization beyond government funding.

* Ensure that there be no reduction in the total number of Phase I awards, in order to seed the greatest number of promising ideas.

I thank you once again for your support for small businesses.

[Name]
[Business]
[Phase I SBIR--Agency, Date]
[Phase II SBIR--Agency, Date]

Carl Nelson said...

The SBIR advocates are exaggerating the effect of proposed changes to SBIR.

Higher "caps" on awards need not have any bad effect. The agency is pretty much free to exceed the caps as often as it feels the need, and it can also balance large awards with more smaller awards to keep the average award under the nominal cap. Many Phase 2 projects don't need the big amount to reach a transition point where the technology can compete for mainline or external funding. All it takes is agency management willing to make judgments on how much is enough for each project. Simply ignore the companies' whining about how much free money they "need" (they "need" all the free money they can wheedle from a gullible government).

Even the complete loss of SBIR is unlikely to reduce the small business share of government R&D business. The agency's small business goals would still provide about the same money to small business. It's a myth that SBIR did all that much for small high tech business in the mission agencies. It probably put more NSF and NIH money into small business because those agencies conventionally dealt with research houses, and rightly so since small business has no competitive advantage when it comes to just research.

SBIR does two good things for small business: it opens the federal agency doors to firms that would never find them otherwise, and it allows sole source follow-on contracting. The rest of the claimed benefits would mostly happen even without SBIR.

Kirk Macolini said...

We should be advocating real reform of the program. It's crazy that a company that has received more than $25 million, $50 million, or even over $100 million in taxpayer funded SBIR awards is still eligible for the program, while a small firm that raises $5 million by selling equity is not.

Lets take the training wheels off and limit the number of Phase II awards that a firm can receive.

Please see my recent letter to Chairwomen Velázquez for some more details. http://www.centuriontechnology.com/Reauthorization.pdf

Kirk

- Fred Patterson - said...

My friend Kirk has made some excellent suggestions in his letter to Chairwoman Velazquez. I urge you to follow the link in his comment and read it! Unfortunately I think the House has its lobby-financed blinders on and will, as Keith Girard says in his column on AllBusiness.com (http://budurl.com/rdvf), steamroll their version of the bill through. I believe our only chance for reasonable thinking is in the Senate. So, Kirk, I suggest you send your letter to every member of the Senate Small Business & Entrepreneurship Committee!

Jonathan Pearl said...

Kirk,

This doesn't require an overhaul. Roland Tibbetts himself has made clear the position that "If a small firm cannot show that the idea has enough promise to attract private money after government has invested $1 million, SBIR agencies should fund other ideas." I might disagree on the exact figure, but the principle of not supporting unsustainable and uncommercializable ideas is set in the foundation of SBIR. All that is required is enforcing that principle, not overhaul. Why break what doesn't need fixing?

Your arguments seem hidden behind a veil of trying to limit abuse. Why do you then argue that funding allocations for SBIR are "close
to appropriate based on the quality of the projects funded." And then continue that STTR should be increased dramatically.

What you fail to consider is how we might raise the quantity of high-quality proposals. To my mind, the answer is simple: Get the word out to those thousands (literally thousands) of highly-qualified, highly-motivated, highly-trained, innovative PhDs who have been abandoned by the university system in this country that abuses adjunct professors and graduate students. It is a disgrace to this country that so many talented PhDs wallow in unemployment or underemployment, when they could be leveraged into creating just the entrepreneurial spirit the world economy needs!

They simply don't know about SBIR. They simply don't know that such mechanisms exist to fund ideas, without the raiment of a university affiliation. I know this is true, because for five years after my PhD, I was among them.

Small businesses supported by SBIRs are far more productive than the Universities, government labs, and large businesses, which already have access to 97.5% of the R&D funds available!

Sure, abusive "SBIR mills" should be checked, and commercialization should be supported and enforced for multiple Phase II awardees. But, the real issue here is how best to support innovation. Clearly, that's through small businesses, not universities (at least not until those universities provide the framework for employing with dignity the supply of PhDs they overproduce)!

How can we best support the creation and development of those small businesses? One way is to protect the ability of lone researchers and small teams of outside thinkers to obtain small pots of money to enable self-sufficiency long enough to produce proof of feasibility for their concept, and to develop a plan for commercialization beyond the government's coffers.

Tell me, Kirk, speaking of those mistreated firms you talk of who sell $5m in equity... why need those companies be valued at less than $10m. If VCs simply restrict ownership to 49%, there are absolutely no restrictions under current eligibility rules preventing those firms from competing for and receiving SBIRs.

Let's be honest in our arguments, shall we?

What I'm fighting for is the ability of truly small businesses (many of which first come into existence because the one or two researchers behind an idea receive SBIR funding). VCs do not and will not and care not to seed early-stage, pre-prototype, high-risk research, the kind that leads to true innovations. If you know of any, dear friend, please do let me know. In the meantime, I've got a mortgage to pay, and a family to feed. I'm not worried about a quick and substantial ROI, simply about innovation.

Without SBIR to support these efforts, only the rich will have the wherewithal to innovate. Is that what America's all about? I sure hope not.

Kirk Macolini said...

Jonathan,

My main goal is to put a firm cap on the number of Phase IIs that a firm can receive, as a secondary objective I believe that the program could be more effective if it leverage private capital more effectively.
Regardless of what Roland Tibbetts said, the reality is that if a company has received 25 Phase II awards, and at that point has not attracted investment or sales sufficient to fund its own R&D – that company never will be able to. At that point, SBIR is a business in itself – not the seeding of innovation. In 23 years of SBIR existence how many companies that have received more than 25 Phase II’s are:

1. No longer depend on the government to fund their R&D , and

2. Have generated enough sales (and I don’t mean other non-SBIR research contracts) that the economic activity generates federal tax revenues exceeding the federal money they received.
Can you name 50…25…even 10???

Being that there are companies that have received over 200 Phase II awards and still require the taxpayer to fund their R&D, I don’t understand how you can say the system is not broken.

I think the taxpayer should see a positive return on its investment by investing in the companies with the best ideas and best chance of becoming a self-sustaining (meaning not dependent upon the tax-payer to fund their R&D).

I have to also disagree with you about the “thousands of highly-qualified, highly-motivated, highly-trained, innovative PhDs”. By definition - you are neither highly-qualified, nor highly-motivated if you can’t spend 30 minutes on Google looking for ways to fund a company. For those PhDs, wallowing in unemployment or underemployment…the disgrace is their own – not the country’s.

I agree that “VCs do not and will not and care not to seed early-stage, pre-prototype, high-risk research, the kind that leads to true innovations”. But the reality is that this kind of innovation often occurs in those VC backed firms – but these projects will not be pursued. In several instances, I have had clients who won Phase I awards on highly innovative side projects. These firms became ineligible prior to phase II submission as the passed the arbitrary 49% ownership structure. Or I have been approached by 51%+ owned companies that have high risk projects that their investors won’t fund, but they are ineligible. These highly meritorious projects fall into limbo.

My proposal ( http://www.centuriontechnology.com/Reauthorization.pdf ) will enable access by these firms. But it caps access at a low level to prevent abuse, but at the same time it kicks out all the mills which should make it easier for the small companies (particularly with DoD and NASA SBIRs).

Let’s evaluate the ideas based on their innovative merits, and not use this as an entitlement program to pay your mortgage and feed your family. Your decisions to get your Ph.D. (in Music nonetheless), have a family, and buy a home are your own decisions as are the rewards, responsibilities, and burdens that come with them – and they should not influence the SBIR program one bit.

This program should be about generating economic growth by investing in early stage innovative companies. The only way the taxpayer sees a benefit is if we embrace a public/private partnership that ensures a greater % of SBIR companies become self sustaining engines of economic growth..

Kirk