The Small Business Innovation Research (SBIR) program is up for renewal and there is a battle going on over whether or not VC-backed firms should be allowed to win SBIR grants.
Started in 1982, the SBIR program is designed to help small businesses develop and commercialize ground-breaking new technologies that have broad benefits. 11 federal agencies participate by setting aside 2.5% of the research and development budgets for small businesses.
The program provides roughly $2.2 billion in annual grants, and in 2008 about 3600 phase 1 grants were awarded. Until 2003, VC-backed firms were allowed to apply for and win SBIR grants. This was changed, in part, because several SBIR winners were firms backed by the venture arms of large corporations.
There are two SBIR bills currently winding their way through Congress. The House bill eliminates restrictions on VC-backed companies and lets them fully compete for SBIR grants. The Senate bill eases restrictions, but limits VC-backed firms to a maximum of 8% of the grant money (except for the Department of Health and Human Services, which would be capped at 18%).
There are good arguments on both sides of this debate, but missing is a very important point: if the House bill passes, larger VC firms will quickly start providing their portfolio companies with extensive and specialized support helping them identify, bid on and win SBIR grants. The math associated with the grants is simply too good for them not to.
This means the playing field will quickly tilt in favor of VC-backed firms, and we should expect VC-backed firms to win the majority of SBIR grants within a few years.
My view is that a compromise between the House and Senate bills makes sense. Allow VC-backed firms to win SBIR grants, but limit the amount to a maximum of 40% of the total pie. This will provide access to innovative VC-backed firms but also keep SBIR money flowing to other deserving small businesses.
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