ANN ARBOR ? Proposed changes to how the U.S. Small Business Administration defines a small business has Ardesta co-founder Chris Rizik worried that technology companies Ardesta has invested in won?t be able to win any more Small Business Innovation Research grants from the federal government.
The grants have become a lucrative way for companies, like those owned by Ardesta, to commercialize cutting edge technologies for federal agencies ? federal subsidies that often make the difference in whether a new technology comes to market.
The concern among the SBA is with so many SBIR-backed technology companies losing operational control to Venture Capital Companies that the federal government has begun backing the private equity finance industry and big business ? rather than the small businesses the grants were suppose to underwrite.
Since June 2003, the SBA has been studying whether to modify and restrict the number of SBIR grants going to venture-backed companies. Eighty nine Michigan SBIR grants were awarded in fiscal 2002 totaling some $9 million While in Ohio, 152 grants were awarded for $15.5 million.
The proposed modifications could mean a company seeking an SBIR grant would have to meet one of the two following criteria:
It must either be a for-profit business concern that is at least 51 percent owned and controlled by one or more individuals who are citizens of, or permanent resident aliens in, the United States;
It must be a for-profit business concern that is 100 percent owned and controlled by another for-profit business concern that is itself at least 51 percent owned and controlled by one or more individuals who are citizens of, or permanent resident aliens in, the United States.
The modifications were to have gone into effect in January, but a moratorium for additional comments extended the deadline until April 3. It will be June before the SBA decides what to do, said Edsel Brown, assistant administer in the SBA?s Office of Technology in Washington D.C.
?Nothing has changed yet,?? he said. ?And all we?re evaluating is changing the eligibility requirements to restrict company ownership to individuals.?
But by restricting SBIR grants to companies owned by individuals essentially means fewer VC funds ? typically owned by institutions, not individuals ? will seek SBIR grants. Then the issue becomes will the government?s most important technology development program fail to deliver the goods?
?A company may be forced to make a choice,?? Rizik said. ?If I?m going to raise money, I may take myself out of the SBIR market. In the nano world, a company may raise some near-term money, but also need money for projects 5 to 7 years before they turn cash positive. So these companies need both SBIR grants and Venture money. If they have to make a choice, they may shut themselves out of the SBIR world.?
Other technology sectors that could be hard hit by the changing definitions are pharmaceuticals and biotech, said Anna Bier, the SBIR specialist for the Michigan Small Business & Technology Development Center.
?They need a huge influx of cash,?? Bier said. ?And they typically have to give up the majority of ownership to get that kind of money. Drug related companies are where you?ll find the majority of these situations.?
But the changes are necessary because some Venture Capital Companies bent the rules by setting up shell companies to go after multiple SBIR grants to underwrite their deals, said Mark Clevey, Vice President, Entrepreneurial Development Center, at the Small Business Association of Michigan.
Clevey said the SBIR program was designed to get small businesses ? where most of the technological innovation starts – participating in helping the federal government meet its research needs. The program was not meant to become an industrial subsidy. He said federal government used to pay only big business, private research and big universities to help with its technological research needs. In 1982, the federal government got the small business sector involved through the SBIR program.
With the dominance of Venture Capital Companies in the small businesses that win SBIR grants, the questions for Clevey become: ?How do they get the federal government?s research needs met?? and; ?Whether a VC firm that is only interested in taking companies public is best suited to helping the government get its research met?
?Small business can now get federal research grants,?? Clevey said. ?The VCs want total control of the business they invest in. The SBA has said previously that scientists running development projects should have control over the commercialization of their technology. VCs are not scientists. So it?s become a question of control.?
