Grants for VC-Funded Small Businesses?

A Battle Over Venture Capital for Small Businesses
NY Times, Oct. 25, First Business Page
Representative Jason Altmire, a Pennsylvania Democrat, says he was just trying to help the small technology companies blossoming in his district, just north of Pittsburgh.

So when two of his constituents argued that small businesses should be able to qualify for federal research grants without being penalized for accepting venture capital money, he agreed to introduce legislation that would help them.

His bill, the Small Business Expansion Act of 2007, sailed through the Small Business Committee and then the full House of Representatives on a 325-to-73 vote last month. But the House adopted an important change as the measure came up for a vote — it specified that a small business could not give up an ownership stake of “50 percent or more” to a venture capital firm.

The amendment was meant to satisfy critics, among them officials of the Small Business Administration who argued that allowing venture capitalists to pour unlimited amounts of money into these fledgling businesses would fundamentally alter the concept of a small — and independent — business.

But as the legislation awaits Senate action, opponents argue that the amendment did not resolve their concerns. The S.B.A., they say, has long had discretion in determining whether venture capital’s support of a small business represents an investment or whether it crosses the line into control of the company. The legislation, they say, takes away that discretion by spelling out a particular percentage.

In addition, the critics say they fear that the bill will clear the way for venture capital firms to use their investment to take a controlling stake, giving them the potential to masquerade as small firms and tap into billions of dollars in federal research grants and contracts.

Is it possible to discuss this question intelligently without falling back on folklore, mythology, and stereotypes about small businesses -- or venture capitalists? I doubt it, but -- the merits of the legislation aside -- it's a good thing that Rep. Altmire appears to be trying.


2 Responses to "Grants for VC-Funded Small Businesses?"

Jefferson Provost said... 10/26/2007 9:38 AM

As someone who's worked at an SBIR-funded company, this is an interesting problem. I feel as if granting "small business" funds to VC-controlled companies somehow violates the spirit of the original SBIR legislation. Obviously there are other government funding possibilities, or big government contractors would not exist.

On the other hand, the SBIR funding process is fraught with delays. SBIR grants are peer-reviewed like university research grants. It can be a year between submission of the first proposal and receipt of phase-I funding ($100k). To get phase-II funding (~$750K) requires a new proposal, and another review, causing a gap in funding. How is a small company supposed to get through the gap if it doesn't have some other source of funds to draw on?

Frank said... 10/29/2007 2:05 PM

I think it would be interesting to see a real-world analysis of who the venture capitalist ownership provision would exclude. This type of information would go a long way to making this issue tangible to voters, and that kind of analysis would also help move it out of the mythology and folklore arena.

The Blurgh

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