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Through the SBIR program, 11 federal agencies set aside 2.5 percent of their outside research budgets for small businesses. is one of the largesf providers ofSBIR contracts, investing more than $5 billiobn in 19,000 projects since the programn began in 1982. Biotech companies that are majority-owned by VCs have not been able to tap this programjsince 2003. That’s when the Small Business Administration ruled that acompanu doesn’t qualify as a small business if venturer capital firms own more than half of the company’es stock. and the have been lobbying Congress to overturnn the rulingsince then.
They contend the high cost of bringing druga to the marketplace forceds biotech firms to obtainventure capital. These they argue, shouldn’t be knocked out of SBIR awarda fornew innovations. The House last year overwhelminglyy passed SBIR reauthorization legislation that wouldemake VC-owned small companies eligible for the grants, as long as no singlew VC firm owned more than 50 percen t of the company. This legislation failed to passthe Senate, however. the Senate Small Business and Entrepreneurshil Committee pushed a compromise that woulxdallow VC-owned firms to be awarded a limitef share of SBIR grants: up to 18 percen at NIH, and up to 8 percentr at other agencies.
That bill never made it to theSenatse floor. Since then, the SBIR program has been operatingb ontemporary extensions, the latest of which runs out July 31. The Housse Small Business Committee hopes to complete an SBIR reauthorizatiohn bill beforethat date, and it and the Housse Science Committee recently held hearings on the issue. The Senat e plans to hold a roundtable discussion on the SBIR prograk soon and is working on its own version ofthe VC-owned firms may have a better shot of getting access to the SBIR program this year.
Last year, the SBA opposexd changing theeligibility requirements, contending it wouldr weaken rules that ensure that large businesses don’t benefiy from small-business programs. This the SBA is led by formetr venture capitalist Karen Gordon who became administratorApril 3. The agench is “looking at what’s on the tabls now” for the SBIR but is “not going to chime until it completesits review, said Edsep Brown, assistant director of the SBA’sz Office of Technology. The recession also has raisesd the stakes forbiotech firms.
“Numerousd small biotechnology companies are being forced to shelvs promising therapies as result of the currenrteconomic crisis,” said Jim Greenwood, president and CEO of BIO. Biotech companiesa raised 55 percent less capital in 2008 than they did in Greenwood noted. “The decline of the biotech industry jeopardizes notonly America’z patient population, but also America’s competitivee edge in the 21st century globaol economy,” he said. “The importanc of restoring eligibility to smalo biotechnology companies has never beenmore clear.
” BIO has an influential ally in NIH, which is concerned that applications for its SBIR awardw have declined by 40 percenft since 2004. “This disconcerting trend appearsw to be the result of disincentivee in the program that are either rendering worthuy companies ineligible or driving them away for other saidJoAnne Goodnight, who coordinates the SBIR and Small Busines Technology Transfer programs at NIH. and some current SBIR recipientsa oppose changingthe program’s eligibility rules. Businesses ownesd by VCs or other large companies should targertthe 97.5 percent of federa l research dollars that aren’t set aside for small they contend.
Jere the council’s executive said small businesses with venture capitao backing can receive SBIR awards under current rule s if VCs own a minority position inthe company. Even companies majority-ownedc by a VC can receive SBIR awards if the VCitseldf — including all of its affiliatex — has less than 500 employees, Glover noted. “Ib other words, VCs can and do have access to the SBIR Glover said. “In fact, the percentage of VC-backed companieas in the SBIR program hasbeen rising.
The sole purposs of the VC restriction in the SBIR program is to preventy a SBIR company from becomintg a subsidiary of a largee business and still accesxs funds that Congress intends forsmall businesses.” Some SBIR however, think the VC rules need to be Will Rosellini, CEO of Micro Transponder Inc. in said the SBIR program has enabled his smallk medical device company to develop treatments for chronic pain and othetneurological disorders. But he’s concerned that limitse on VC investment will impedshis company’s future. “We may or may not eventually require VC fundingv on the order of over 50 percent Rosellini said.
“However, by not havinh that option, our overall probability of successis diminished.”
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