GEN Genetic Engineering &Biotechnology NewsVol. 31, No. 19, Nov. 1, 2011© Mary Ann Liebert, Inc.pp. 6–7DOI: 10.1089/gen.31.19.01

Departments Analysis & Insight

Retooling SBIR Not that Easy

Concerns that Some Firms Will Be Squeezed Out Conflict with Confidenceof Improved Success

Alex Philippidis

he Small Business Innovation Research (SBIR) program has been surviving on thesame $2 billion per year budget since its authorization ended in fiscal 2008 thanks

to three years of temporary spending fixes. The program’s authorization is now set toexpire on November 18, when the first continuing-resolution (CR) for the 2012 fiscalyear, which started October 1, ends.

Set up in 1982, federal agencies with extramural R&D budgets that exceed $100million set aside 2.5% of their R&D budget to the SBIR program. Eleven federalagencies are included. Each sets its own guidelines: NIH, CDC, and FDA, for example,award phase 1 grants of up to $150,000 covering six month’s total costs and phase 2grants of up to $1 million covering one year’s costs. The Department of Defensetypically limits awards to $100,000 in phase 1 and $750,000 in phase 2.

House and Senate leaders are reportedly working on re-authorizing SBIR, fine-tuning how much the program can spend and how. “Progress has been made, and thesituation is still very fluid,” Wendy Knox, a spokeswoman for Rep. Sam Graves (R-MO),chairman of the House Committee on Small Business, said.

While both the House and Senate profess their desire to reauthorize SBIR, theydiffer on key details. One major sticking point in both versions of the reauthorization isthe return of majority investor-owned businesses to the SBIR program, as was the casebefore 2003.

At present, VC-backed companies can access SBIR funds as long as venturefirms own up to 49% of a small business; majority VC-owned businesses are notconsidered “small” businesses, according to the U.S. Small Business Association.

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Opponents of this measure fear the new competition. Proponents, on the otherhand, applaud the possibility of additional participants in the SBIR program and believeit improves chances of success.

In Congress

Rep. Renee Ellmers (R-NC), chairwoman of the House Small BusinessSubcommittee on Healthcare and Technology, introduced the Creating Jobs ThroughSmall Business Innovation Act (HR 1425). The Senate’s SBIR reauthorization measure(S.493) was introduced in March by Sens. Mary Landrieu (D-LA) and Olympia Snowe(R-ME).

The House would allow NIH, NSF, NASA, and the energy department to awardup to 45% of their SBIR funds to small businesses majority-owned by venture capitalfirms, hedge funds, or private equity firms. All other federal agencies could set aside upto 35% of their funds to such businesses.

Under S.493, 25% of SBIR funds from NIH, DOE, and NSF and 15% for all otheragencies would be awarded to businesses majority-owned by investment companies.The Senate would not permit companies where more than half the investors are fromoverseas; the House has no such limit.

Advantages of Focusing on “Small”

Many smaller businesses contend that investor-owned companies will squeezeout funding now going to smaller start-ups with less capital. One umbrella group, SaveSBIR, includes among its members Centrose, a developer of targeted therapeuticsdesigned to fight cancer.

Centrose has won five SBIR awards and one STTR award toward developmentof its extracellular drug conjugate EDC-One, which has shown efficacy againstmetastatic non-small-cell lung cancer.

“Nowadays, you either get some government support so that people say, ‘Look,the government believes in this company,’ or you go and try to build partnerships withpharmaceutical companies. The only problem with this is that no pharmaceuticalcompany is going to give you any money until you’ve actually got some results,” JamesR. Prudent, Ph.D., Centrose’s president and CEO, explained.

“The nice thing about the government is that they’ll look at what you’ve got.They’ll say your company is just getting started, it has a good team, yet it doesn’t haveany money, so why don’t we put some money into this company and see what it cando?”

Centrose spent its first year as a virtual company before receiving its first fourSBIR awards totaling $883,370. “From that, we’ve now brought in over $5 million ininvestment, and we’re now on our way to becoming a real company, where we’reactually getting partnerships and people buying licenses to the technology.”

Another Save SBIR member, CFD Research, won 418 SBIR awards totaling$104.9 million between 1987 and 2010 for innovations in the biomedical, energy, andaerospace sectors. The program has been critical in allowing the company to perfect itstechnologies into some 50 patents, four of which have been licensed to partners, AshokK. Singhal, Ph.D., CFD’s president, noted.

“SBIR is a commendable program as compared to dozens and dozens ofinitiatives of government,” he added. “To me, SBIR is working and producing return oninvestment. It has allowed a company like ours to diversify in response to changingtimes. If it were not for SBIR, there is no way a large corporation would give you even achance to see that you may have a viable idea.”

Proponents Say Investors Are a Filter

Michael Greeley, general partner with Flybridge Capital Partners, counters thatallowing companies owned by investment firms to receive SBIR funds would helpensure that the program funds start-ups with the best prospects of success.

“The venture industry is a fabulous filter,” Greeley said. “We look at hundreds ofcompanies just to make one investment. We are more than passive investors. We hirepeople. We find customers. We give input on strategy. We work to build companies.

“The government should use all input to make a decision, and I think animportant aspect to consider is if private investors have voted with their wallets and putmoney in. To exclude a whole cohort of companies means there’s an adverse selectionissue. The government is going to be picking from a bunch of companies that weren’tgood enough to be backed by sophisticated private investors. That’s a bad allocation ofcapital.”

Greeley also pointed out that “by the second or third round of institutional capital,companies are just not going to bother with SBIR. The reality is, if companies haveraised a lot of money, they just don’t have the time to deal with trying to find another$100,000 grant.” He added that review of SBIR applications can take as many as nineto twelve months. “It’s just a terrible use of time.”

Members of the House who support HR 1425 justify this part of their bill bysaying that they expect it to increase participation in SBIR. “Representative Gravesbelieves that the capital structure of a small business concern is irrelevant for thepurposes of the SBIR program,” his spokeswoman said.

She cited a series of hearings conducted by the small business committee overthe last four years plus a May 2009 study by the National Research Council. They urgeda return to majority VC-owned companies taking part in SBIR.

The current policy of blocking majority investor-owned start-ups from the programdoes not gel with SBIR’s mandate of helping small businesses. Lifting the block,however, may have negative ramifications.

The Senate came closer to balancing both concerns by setting smallerpercentages than the House. As Dr. Prudent correctly notes, the SBIR program is a no-brainer at a time when political leaders are talking about creating jobs. The hope is thatthey get the balancing act right. GEN