The House of Representatives and the Senate have resolved a three-year battle over the future of two important federal initiatives to aid small businesses: the Small Business Innovation Research program and the Small Business Technology Transfer program. On the particulars, the Senate seems to have carried the day, but the House has won long-term changes to the innovation research program that open it up to companies backed by venture capital. In their dispute, the House and Senate have served as proxies for opposing views of the program’s purpose: whether it should funnel funds to small businesses otherwise neglected by the markets, or maximize the return to the economy in job and wealth creation.
The two initiatives are popular programs that steer federal technology research f unds to small businesses. The Small Business Innovation Research program directs the 11 government agencies that spend more than $100 million on research grants to set aside 2.5 percent of that pool for companies with fewer than 500 employees. Agencies generally grant up to $100,000 in the early, exploratory stage of a project, and up to $750,000 for a two-year follow-on phase. In 2010, agencies reported that $2.2 billion in the program’s funds went to small firms, according to the Small Business Administration, which oversees the initiative. The technology transfer program requires the five agencies that spend more than $1 billion on outside research to set aside 0.3 percent of their budgets for partnerships between small firms and nonprofit institutions, which amounted to $276 million in 2009.
“The consensus view is that S.B.I.R. is probably the best R.&D. program in the federal government,” said Jere Glover, executive director of the Small Business Technology Council, an affiliate of the National Small Business Association. A 2008 study by researchers from the University of California found that S.B.I.R. recipients accounted for between 20 and 25 percent of top American innovations since 1997. (The study was financed by the Information Technology and Innovation Foundation, a Washington-based research group that backs activist innovation policies by government.)
But when the program’s authorization expired in 2008, members of the House Small Business Committee sought to restructure it, making companies that are majority-owned by venture-capital firms eligible to participate as well as increasing the size of the grants. “The reauthorization focuses the program on the best ideas with the greatest chance of success and not a company’s financial structure,” said Rep. Sam Graves, Republican of Missouri and committee chairman, upon the introduction of legislation to change the program earlier this year. “Given the difficulty in acquiring capital to support innovative ideas, we thought the current program was overly restrictive and needed to be changed.”
Senators were not eager to embrace this remaking, but though the disagreement over reauthorizing the programs pit chamber against chamber, this was not a partisan dispute. The most recent House bill, advanced by Republicans, in fact backs away from even more radical changes that were proposed by House Democrats in 2009 and that passed the chamber with broad bipartisan support. The Senate offered an alternative (which passed unanimously) that set aside a small percentage of the innovation research program’s funds for venture-backed companies and scaled back the increase in award sizes, while increasing the size of both programs, something the House opposed. In 2010, the Senate sweetened its offer by making more financing for innovation research available to venture-backed companies.
That was essentially the deal the House accepted this week, as part of the National Defense Authorization Act. Companies in which a group of venture funds owns a majority stake are now eligible to compete for up to 25 percent of the S.B.I.R. funds from the National Institutes of Health, the National Science Foundation, and the Department of Energy, and up to 15 percent from the eight other federal agencies that participate in the program. The ceiling on individual grants in both the innnovation research and the technology transfer programs will increase to $150,000 for projects in the first phase; for second phase grants it will grow to $1 million. And over the next six years — the length of the new authorization — the share of external research funds agencies will have to set aside for S.B.I.R. will grow from 2.5 percent to 3.2 percent. The allocation for the technology transfer program will rise from 0.3 percent to 0.45 percent.
In exchange for having its vision curtailed, the House did win other concessions, said Darrell Jordan, Mr. Graves’s spokesman — for one, companies backed by private equity and hedge funds will also be able to participate in the innovation-research program alongside venture-backed companies.
Mr. Glover’s organization, the Small Business Technology Council, opposed allowing venture financing into the program, but on Tuesday Mr. Glover said he was satisfied with the deal. “We are very pleased to have stability in the program and a long-term understanding of where the program is going over the six years,” he said. “We recognize that in Washington there needs to be compromise to move forward.” Since the S.B.I.R. program lapsed in 2008, it has been renewed with temporary extensions 14 times. The latest temporary extension is set to expire Friday evening.
Still, Mr. Glover wondered whether the presence of venture money might move the program’s focus away from the more conceptual stage of innovation, when an idea is riskiest. “The idea behind the S.B.I.R. program was to fund projects at an earlier stage in the cycle, when they wouldn’t be considered eligible for funding by anybody else,” he said. In the first nine months of 2011, venture capitalists reported directing less than four percent of their total investments to the seed stage of development, according to figures from the National Venture Capital Association.
But in an e-mailed statement, Mr. Jordan disputed Mr. Glover’s characterization of the research program’s goals. “Yes, the S.B.I.R. program is designed to help innovative small businesses get ‘seed funding,’ but it is also focused on the commercial potential of the product,” he said. “And most VC-backed companies have already demonstrated their ability to develop good products, making them a good investment for taxpayers.”
Restructuring the Small Business Innovation Research program is not the only instance of Congress making small-business assistance available to more — and larger — companies. Last year, Congress increased both the loan limit and the size standards for eligibility for Small Business Administration loan programs. In October, S.B.A. officials reported that in a year of record lending, the number of small loans — presumably going to the smallest borrowers — declined.