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House Committee Goes Rogue on Small Business Grants

By Keith Girard
May 24, 2011

The House Small Business Committee is fast becoming known as a Billionaires' Club for its ardent support of venture capital groups and high-flying hedge funds in what amounts to a raw grab for millions of dollars earmarked for small, high-tech research and development companies.

The battle over two key federal research conduits, the Small Business Innovation Research (SBIR) program and the Small Business Technical Transfer (STTR) program, has not only been one of the longest running on Capitol Hill, but now it's also one of the more bizarre.

Why so strange? For starters, Committee Chairman Sam Graves, R-Mo., and ranking member Democrat Nydia Velazquez, D-N.Y., are teaming up on the issue -- but not for small businesses. Instead they're trying to crack open the programs for some of the nation's wealthiest, high-rolling financiers.

"Getting SBIR reauthorization is not a partisan issue. It's a funding issue," said Rick Shindell, who has doggedly followed the fight for the SBIR Insider, a trade newsletter. "These Wall St. interests carry a lot more clout (money to contribute) than the small business community."

Oddly, federal agencies are only required to earmark 2.5 percent of their grant funds for the small business programs. Companies substantially owned by VC firms are free to compete for the rest. Still, the set-aside amounts to about $2 billion a year, and the VC industry, left devastated by the recession, wants every dollar it can get to bolster returns and attract new capital.

Things looked brighter last year after the biomedical industry, venture capitalists, and small business technology groups finally worked out a compromise. The deal was incorporated into a Senate bill that extended the programs for eight years. It offered the best chance to finally end a fight that began in 2003, when an administrative law judge ruled that companies substantially owned by large venture capital funds violated the programs' size standards.

Since then, the programs have limped along through a series of short-term, continuing resolutions while the two sides battled it out over the ruling. The political hard-balling came within a whisker of halting the programs when the compromise bill failed in the last hours of the lame-duck session last year, forcing the need for yet another short-term resolution to push the issue into the current Congress.

Sens. Mary Landrieu, D-La., and Olympia Snowe, R-Maine, reintroduced the compromise bill, known as the SBIR/STTR Reauthorization Act of 2011 (S. 493). But it failed again after lawmakers bombarded it with more than 120 amendments and Snowe became embroiled in a dispute with Majority Leader Harry Reid, D-Nev.

Finally, on May 19, the Senate passed yet another resolution -- the 12th since 2008 -- to extend the programs until May 2012.

With the current resolution set to expire this month, the political infighting has only grown more intense. The new Senate resolution must be approved by the House, where the long knives have been waiting. Graves and Velazquez have thrown their weight behind a House bill called the Creating Jobs Through Small Business Innovation Act (H.R. 1425). Critics, however, cynically call it the "Bailing Out Billionaires Act."

It would allow companies majority-owned by venture capital firms, private equity firms, and hedge funds to compete for 45 percent of SBIR funds administered through the National Institutes of Health (NIH), the National Science Foundation (NSF) and the Department of Energy (DOE). Up to 35 percent of the funds would be made available at eight other agencies. The provision would force small, independent companies to compete against VC-backed firms for as much as $886 million in grants, according to Shindell.

In contrast, the Senate bill limits participation solely to companies substantially owned by venture capital firms. To appease the House, the upper chamber raised VC majority ownership participation in NIH, DOE, and NSF grants to 25 percent from 18 percent, but kept a 15 percent cap on participation at other agencies.

The House measure would also reauthorize the program for just three years instead of eight years, despite the protest of small business groups. "Congress' repeated short-term extensions have wreaked havoc on agencies' ability to make strategic decisions in regard to the program and have failed to provide potential participants and investors with a sufficient level of stability," said a statement from the National Small Business Association, which opposes the House bill.

The House and Senate bills both lift the cap on grant size, but the House measure doesn't increase the total amount of money set aside for the program. That means bigger companies would be able to compete for larger grants, leaving fewer grants available for independent companies.

Meanwhile, Velazquez is reportedly working behind the scenes against the House bill, hoping that opposition will open the door to unlimited participation in the programs by Wall Street high-rollers, Shindell said.

Back when Democrats controlled the House and Velazquez chaired the committee, her efforts on behalf of the VC industry at least had the tacit support of then-Speaker Nancy Pelosi. A number of venture capital moguls live in Pelosi's wealthy suburban San Francisco district. But Graves, who represents a largely rural district, doesn't have that cover.

Current Speaker John Boehner, R-Ohio, has sided with small businesses on SBIR in the past, which means Graves is essentially going rogue in the House. So far, Boehner hasn't made a move publicly to rein in his committee chairman, leaving Graves to go all out for Wall Street. The question is, will Boehner stand up for Main Street?

Footnote: The House, according to Shindell, is expected to vote this week on the Senate's SBIR continuing resolution (S.990). It will extend the programs "as is" for one year, until May 31, 2012.

Source: http://www.allbusiness.com/banking-finance/financial-markets-investing/15606993-1.html



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