SBIR Overhaul Stalls In the Senate, to the Detriment of VC-Backed Innovation
Venture capital-backed startups got a slap on the back this week, but that was followed by a slap in the face in the latest round of Washington political gamesmanship over how much lawmakers should or should not encourage venture capital-backed innovation. So far, the battle to enhance U.S. innovation is taking yet another hit.
What I’m talking about is the effort in the capital to help venture capital-backed startups glean a bigger piece of the pie of a federal government multi-agency program that awards R&D contracts to small companies. This is exactly what the United States needs. But as we were once again reminded this week, the way it is being handled in Congress is exactly what the country does not need.
The Senate and the House have been at odds about the funding provisions of the Small Business Innovation Research (SBIR) program. Earlier this week, movement in the House looked promising. On Thursday, however, a cloture vote to bring the matter to the floor of the entire Senate failed, putting the philosophical debate about the access of venture-capital startups to SBIR money back to square one.
This is highly unfortunate. The House of Representatives on Wednesday finally agreed to open up SBIR funding to young companies heavily backed by venture capital. The Senate Committee on Small Business and Entrepreneurship did not share the position that the House now takes, but things might have changed once the measure got before the full Senate.
The latest turn of events underscores once again that the United States has to take steps to aggressively implement innovation, not just talk about the issue or even hotly debate it.
The SBIR program is intended to ensure that federal government and taxpayers have access to cutting edge and cost effective innovation while simultaneously supporting the growth of small business, which generates the vast majority of new jobs in America. Given our current high levels of unemployment and our need to reinvent the U.S. economy, common sense would dictate that the SBIR program be opened to the broadest cross-section of the best qualified candidates.
Unfortunately, special interests have for years sought to restrict participation in the SBIR program based upon how a small business has financed its growth. If a company got much venture capital, its participation in the SBIR program was severely restricted, regardless of its merits. An entrepreneur who financed his company with a loan or savings or investments from friends, family or angel investors has no such restrictions.
This time around, the House has been more active than the Senate in working to open more SBIR funding to VC-backed startups. The House version of the legislation gives VC-backed firms access to 45 percent of SBIC funding, and, with its latest changes, doesn’t mandate that VC interest in these startups be limited to a 49 percent ownership stake, as previous rules did. The Senate at this point not only rejects this provision but would give VC-backed firms access to only 25 percent of the award dollars from three federal agencies, including the National Science Foundation, and to 15 percent from eight others.
So despite movement in the House, entrepreneurs who have been able to attract venture capital in the competitive marketplace of ideas are still being penalized. This is ridiculous. All entrepreneurs should be able to compete on an equal footing for capital. The only parameter should be which put forth the best ideas. The loser in this game of political football is not any particular startup but U.S. innovation in general.
The latest flap in Congress is hardly the only example of government missing the big picture. The U.S. still makes it far too difficult for gifted foreign entrepreneurs to stay in the country, which forces them to return to their home countries to form competing startups. A green card should be stapled to every advanced degree awarded by leading U.S. universities in science, engineering and mathematics. And then there is Sarbanes-Oxley, which burdens small entrepreneurial businesses with the same regulatory and statutory burdens that are applied to multi-billion-dollar enterprises, costing them millions of dollars annually in additional fees they cannot afford.
The U.S. government must view the global economy as it really exists and realize that the twin pillars of innovation—talent and capital—are the two most portable assets in the world, poised to move to whatever environment embraces and rewards them. U.S. venture capital inflows have improved, but they would improve a lot more if an increasing amount of venture capital wasn’t leaving the U.S. for places like China and India.
Venture capital-backed startups have created the backbone of Silicon Valley and continue to do so. Technology giants such as Intel, Apple, Cisco, Google, Salesforce.com and Facebook were all once obscure startups. We have to pull out all the stops to make sure this evolution doesn’t end.
Citizens need to call their congressmen and urge them to vote to level the playing field for entrepreneurs and allow VC-backed startups full access to SBIR program participation. To build the future, America must do everything possible to relentlessly out-innovate the rest of the world.