HispanicBusiness

To the delight of venture capitalists and the chagrin of some small business advocates, the House of Representatives this week approved a bill that would allow venture capitalists to own a greater share of small businesses vying for federal contracts.

The "Enhancing Small Business Innovation and Research (SBIR) Act" was approved handily in a 386-41 vote. Now, it awaits Senate approval.

If recent history is a guide, it could be a challenge: the Senate last year shot down a similar House-approved bill. But some pundits predict this effort stands a better chance for Senate approval than ever.

"It's not so much that the arguments have changed, or the playing field," wrote AllBusiness.com columnist Keith Girard. "But, as a result of the November elections, the key players have. Now, venture capital interests clearly have the upper hand.

The bill seeks to reverse a 2003 decision by the federal Small Business Administration prohibiting venture capitalists from owning a majority share of the companies 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 some groundbreaking 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.

The SBIR program consists of 11 federal agencies -- including the Department of Defense and the National Institutes of Health -- 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 this month, and the clock for re-authorization is ticking.

In 2003, whistle blowers decried how the venture capital arms of large companies -- such as insurance giant AIG -- were the majority owners of reputed small businesses landing large federal SBIR grants.

The discovery put an end to the practice of allowing venture capitalists to own the majority of companies participating in the SBIR program.

If approved by the Senate, the new legislation would reopen the door for venture capitalists to own the majority of the small businesses, but with an important caveat: No single venture capital firm could own more than 50 percent. However, separate venture capital firms could join forces to claim majority ownership.

In essence, the debate pits the notion of keeping the Small Business Administration focused on businesses that are legitimately small versus the need to address what some say is a slump in not only the economy, but also SBIR-inspired innovation.

Advocates of the bill, HR 2965, say the change in 2003 has threatened innovation in that it precipitated a dramatic 40 percent drop in the number of applications for NIH grants since 2005. This, they say, is because the grants doled out by the federal government -- $100,000 for the initial research study phase, and $750,000 for the development phase -- weren't enough to cover the high costs of trying to innovate. Securing more money from venture capitalists would help solve the problem, they say.

"Reauthorizing and updating the SBIR program is a step in the right direction to help our small businesses struggling to find capital during this economic recession," said Rep. Sam Graves (R-MO), an original co-sponsor of the bill and the ranking member of the House Small Business Committee, said in a press release this week. "SBIR should be designed with open competition, and allow the small business with the best idea to be granted an award."

Others, though, say the bill violates the spirit of the federal programs meant to help small businesses, allowing wealthy investors to sponge up tax dollars meant for struggling entrepreneurs. Jere Glover, executive director the Small Business Technology Council, has said that the bill would take an especially heavy toll on minority-owned companies, which tend to be overlooked by venture capital firms.

The bill also would boost the amount of the SBIR grants to $250,000 for phase one (from $100,000) and to $2 million for phase two (from $75,000).

(The new bill also pertains to a similar but smaller program called the Small Business Technology Transfer (STTR) program.)

Last year, a similar bill floated by Rep. Nydia Velazquez passed in the House failed in the Senate.

But critics who fear the bill will have better luck clearing the Senate note that President Obama has appointed two prominent former venture capitalists to the federal Small Business Administration positions: Winslow Sargeant, the Chief Counsel for the SBA Office of Advocacy, and SBA leader Karen Mills, heiress to the Tootsie Roll Company.

They also note that last time around, the chair of the Senate's small business committee was Sen. John Kerry (D-Mass.), who was leery of more venture-capital involvement.

But that has changed, Girard wrote.

"The committee is now chaired by Sen. Mary Landrieu, D-La., and she's co-sponsoring the Senate version of the measure with the committee's ranking member Olympia J. Snowe, R-Maine."

Velazquez, chairwoman of the House small business committee, is a key supporter of the current legislation.

"Innovation has been the key to all of our previous economic recoveries and, with this legislation, we will invest in promising small businesses that produce technological breakthroughs and new jobs," she said in a statement. "At its core, this bill is about creating new jobs by supporting the innovation of America's entrepreneurs."