HispanicBusiness

In 2003, watchdogs of the U.S. Small Business Administration cried foul over what they viewed to be a big-business wolf cloaked as a little guy in need of a government grant.

A federal grant for $750,000 from a program meant to foster innovation among small businesses went to a Utah-based biopharmaceutical firm called Cognetix that, at first blush, appeared to be a qualified small business.

But whistle blowers noted that the business was majority-owned by a pair of venture capital firms, one of which belonged to insurance behemoth AIG.

Not only this, but the venture capital companies were foreign: AIG Global was from Switzerland, and the other, MDS Capital, was from Canada.

In short, this meant that a taxpayer-funded federal program designed to help small businesses was lining the pockets of what was then the world's 18th largest company, whose venture-capital arm wasn't even based in the United States.

The discovery effectively ended the practice of allowing venture capitalists to own the majority of companies participating in the federal Small Business Innovation Research (SBIR) program, which is meant to spur research-and-development projects among small businesses.

The 27-year-old program has led to innovations such as advances in state-of-the-art lithium ion batteries for hybrid engine technology, life-saving therapies and drugs and the unmanned predator drones used in the U.S.'s two ongoing wars.

Now, a battle is brewing on Capitol Hill over whether the federal government should invite more venture capitalists back to the party.

The clash centers on the SBIR program, which consists of 11 federal agencies that set aside 2.5 percent of their research and development budgets for small businesses. Launched in 1982, the $2.2 billion-a-year program expires at the end of July, and the clock for re-authorization is ticking.

In one corner of the dispute are small business advocates who say the proposed change -- introduced this week in the form of a bill -- would violate the spirit of the federal programs meant to help small businesses, allowing wealthy investors to sponge up tax dollars meant for struggling entrepreneurs. What's more, they say, giving venture capitalists more control would take an especially heavy toll on minority-owned businesses, because venture-capital firms tend to favor companies owned by white males.

"Venture capitalists make just 2 percent of their investments in minority-owned businesses," said Jere Glover, executive director the Small Business Technology Council -- and the former head of the federal Small Business Administration's "office of advocacy" -- told HispanicBusiness.com. "It's saying 'Let's give more money to people who don't give money to minorities.' It's a strange irony, isn't it?"

In the other corner are the supporters -- some of them Hispanic politicians, such as U.S. Rep. Nydia Velazquez (D-NY) -- who say current caps on venture-capital participation have come at the expense of the kind of innovation that leads to better treatments for cancer and protections against bio-chemical warfare. In addition, they say, widening the door for venture capitalists could create jobs amid economic duress.