We Don’t Serve Your Kind Here

Posted by on July 25, 2006 at 10:42 am.

The Tampa Bay Business Journal just carried a story on the SBIR/VC-ownership debate and I’ve seen it kicked around enough now that I have some thoughts. At first, I wasn’t sure where to land on this because 1) I start with a skepticism about most large government programs, 2) VC-backed startups are just jostling for their spot at the trough and 3) non-VC startups are just jostling for their spot at the trough.

The “debate” I’m referencing involves the SBA’s Small Business Innovation Research (SBIR) grants that are provided to help spur small business innovation. Around 2001, the SBIR program ruled that startups who were 51%+ owned by venture capital funds no longer qualified for the innovation grants. This is particularly problematic for biotech startups who require large amounts of capital and sell large chunks of their company in the process of researching ways to help us live longer, healthier lives.

The argument in support of that ruling goes that SBIR funds should be targeted at research that otherwise isn’t commercially viable, but could be with government “investment”. Those companies with VCs investing enough to gain 51%+ ownership evidently have research viable enough to garner private sector support. The argument against suggests that the ruling will result in adverse selection for the government dollars — the most promising research (“most promising” here meaning interesting enough to garner private sector investment), could be disqualified and SBIR dollars will flow to the research with a worse cost/benefit balance for society.

There is merit to both viewpoints, and that’s why I harken back to my skepticism of large government programs. To unravel this requires understanding “why” SBIR’s exist in the first place. If SBIR’s exist primarily to advance US research, then why not reward startups with the most promising research, whether VC-funded or not. If SBIR’s exist primarily to provide “gap funding” for the little guy trying to reach private-sector attractiveness, then keep the program exclusive — maybe focused on dollars invested rather than ownership (e.g. a company that sold 51% for $5M is lot more a “little guy” than a company that sold 49% for $100M). If SBIR’s exist because politicians from large research regions just want to “bring home the bacon” then maybe we should go back to the drawing board — too hard, I know.

Because I believe a government program focused on “helping the little guy” could become a race to the bottom, I probably fall on the side of funding the most promising research possible. If those small companies are able to leverage venture dollars along the way then more power to them and, hopefully, better solutions for the world’s ills.

Related posts:
Open Up SBIRs
Are SBIRs a Good Source of GAP Funds?
Mo. legislators and Chlorogen push to change SBIR rules
BIO’s SBIR Comments (great resource site)

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