A bigger Voice for Small Business

New Bill to Give Billions In Federal Small Business Contracts to Venture Capital Firms

by | Sep 17, 2007 | Press Releases

Press Release

New Bill to Give Billions In Federal Small Business Contracts to Venture Capital Firms

Venture capital companies could receive billions of dollars in federal small business contracts under new bill

September 17, 2007

Petaluma, Calif. - A bill tentatively titled the, "Small Business Investment Expansion Act of 2007," could be proposed in congress during the next several months and will allow some of the largest venture capital companies in the world to receive billions of dollars in federal small business contracts.  Under the new bill, venture capital firms will be allowed to acquire controlling interest in a small business and retain that firm's small business status indefinitely.

During the last four years, 15 federal investigations have found that billions of dollars in contracts intended for small businesses were diverted to large firms such as Lockheed Martin, Boeing and Bechtel through similar programs.

In 2005, the Small Business Administration proposed a similar policy and aired it for public comment.  During the comment period, the SBA received the largest response in the agency's history, with 95 percent of respondents strongly opposed to the provision. The provision would have given venture capital firms an exemption in federal small business size determination.

Small business advocate, the American Small Business League has opposed giving any exemption for venture capital companies for small business size determination since it was initially proposed in 2005.

"I cannot believe that Congress is looking at creating another loophole that will allow billions of dollars in federal small business contracts to be diverted to large companies," President of the ASBL, Lloyd Chapman said. "This is not about access to capital, it is about allowing large businesses to acquire controlling interest in small businesses. It is going to be detrimental to small businesses in every industry."

If the legislation is passed, the ASBL vows to file suit in an attempt to overturn the legislation on the grounds that it is inconsistent with the congressional intent of passing the Small Business Act.

"In the last ten years, every policy that the government has passed that has diverted small business contracts to Fortune 500 companies was done under the guise of helping small businesses and this appears to be more of the same thing," Chapman said.

###

Contentious Debate Looms Over Small Business Venture Capital

by | Sep 14, 2007 | ASBL News

News

Contentious Debate Looms Over Small Business Venture Capital

By Keith Girard
AllBusiness.com
September 14, 2007

In the parlance of venture capitalists, it's known as the "valley of death," a place that small technology companies fear. No matter how good their science, the valley awaits if they can't bridge the financial gap between the lab and their first commercial product.

In many cases, however, nascent tech firms can bridge the valley by tapping the government's small business programs, which provide everything from loan guarantees and grants to fee waivers for government services. But therein lies the rub. Can a small business still be considered small if it's substantially owned by a venture capital firm with hundreds, if not thousands, of employees?

The question is at the heart of a brewing debate on Capitol Hill that could become one of the most contentious facing small businesses in recent memory. Right now, the correct answer is "no." But a legislative proposal would amend the landmark Small Business Act to make it possible for venture-backed companies to be considered small businesses.

While the measure would be a boon to the venture capital industry, a recent hearing on Capitol Hill previewed just how heated the issue will be. Rep. Steve Chabot, R-Ohio, the ranking minority member on the House Small Business Committee, called the proposal "eviscerating." It would, he said, "drastically change the long-held standard [under the act] that a small business is one that is 'independently owned and operated.'"

Small business advocates are equally up in arms. "I'm violently opposed. It's essentially a partial repeal of the Small Business Act," said Lloyd Chapman, president and founder of the American Small Business League (ASBL). Chapman has long criticized the federal Small Business Administration for allowing large corporations to take advantage of programs earmarked for small firms.

But this time, Chapman has an unlikely ally. SBA Administrator Steven Preston also opposes the change. "The basic premise of small business-size status is circumvented by the provision," he told lawmakers. "We must object."

Normally, such fierce opposition might spell a quick end to the debate. But the National Venture Capital Association, a powerful lobbying force with strong ties to Democrats on Capitol Hill, is spearheading efforts to amend the law. The group represents 460 firms that oversee about 90 percent of all the venture capital under management in the United States.

More significantly, the lion's share of the money (79 percent) is concentrated in just 10 states, according to the Information Technology and Innovation Foundation, a nonpartisan research and educational institute. Heading the list is California, home to House Speaker Nancy Pelosi, who represents the wealthy San Francisco warrens of many high tech moguls. Second on the list is Massachusetts, home to Sen. John Kerry, who chairs the Senate small business committee. It's hard to believe either would brush off such high-powered constituencies.

Venture capitalists, of course, assert that nothing less than the nation's competitive position in the global economy is at stake, not to mention the next big medical breakthrough or technology innovation. The heart of the problem, they say, is the act itself, which was enacted in 1958, a time when tailfins and transistor radios were considered cutting edge.

Under the act, which the SBA is charged with administering, a small business must be "independently owned and operated" with no more than 500 employees "including all employees of all affiliates" to qualify for government programs.

Robert J. More, a partner in Domain Associates, a San Diego-based venture capital company, cited a recent episode to illustrate how the SBA's definition is flawed. A small biotech company with eight employees applied for a waiver the government offers to small businesses to avoid a $900,000 fee. But the SBA ruled that the company was ineligible because Domain's 34 percent stake in the firm qualified it as an "affiliate." As such, Domain's employees and the employees of all its other holdings were applied to the company, which put it over the 500-employee threshold.

"This process has clearly harmed the kind of small business that the SBA was established to help," More told the committee. "It is clear the SBA does not deal in the real world and, by its actions, is presenting a significant barrier to innovation."

Both Congress and small business advocates, however, have put intense pressure on the SBA to prohibit large firms from obtaining small business contracts, grants, and other assistance by applying through small subsidiaries. As a result the agency has tightened up its interpretation of what constitutes a small business. Preston told the committee the amendment would present a "potential conflict" with the SBA's effort.

"Legitimately, small biotech companies are opposed to this. It puts them at a complete disadvantage when a Fortune 500 company comes in and takes over a small biotech company," adds Chapman.

A committee staffer told me this week that the bill has yet to be introduced because some "kinks" still need to be worked out. Beside the question at hand, the measure, tentatively known as the "Small Business Investment Expansion Act of 2007," contains a lot of technical changes to other small business programs. But my source said it will likely be introduced next week because a committee markup has already been scheduled.

House Small Business Committee Chairwoman Nydia Velázquez, D-N.Y., will most likely sponsor the bill. If it contains the venture capital provision, expect to be hearing a lot more about the "valley of death."

Half of federal agencies miss contract goals

by | Sep 6, 2007 | ASBL News

News

Half of federal agencies miss contract goals

By Cyndia Zwahlen
The Los Angeles Times
September 6, 2007

School may just be getting started, but federal agencies have already received their first report card tracking how well they did in meeting their small-business contracting goals last year. And many of them must have been snoozing in the back of the classroom.

Half of the 24 agencies were rated "red," as in needs improvement, in the report issued Aug. 17 by the Small Business Administration.

Five received a passing "yellow" grade for attaining their contracting goals. The top "green" score went to seven agencies, including the SBA, that met additional specific criteria.

The score card is based on data supplied by the agencies for the fiscal year that ended Sept. 30.

The point of the report card, which will be updated every six months, is to increase transparency and pressure the agencies to be more accountable for accurate contracting numbers, according to the SBA.

Inflated numbers that incorrectly classify some large companies as small businesses in the government's contract database, whether through fraud or error, give agencies less incentive to find genuine small companies that can meet their contracting needs. That means less opportunity for the small firms that have traditionally been the source of much of the country's job growth and innovation.

The SBA has come under heavy criticism over the accuracy of its numbers. Its recently revised report for 2005, based on revised data supplied by the agencies, chopped $4.6 billion off the $79.6-billion value of contracts previously reported as being held by small businesses.

"The truth is that small businesses in America are not getting their fair share of federal contracts. That's the bottom line," said Lloyd Chapman, president of the American Small Business League and a frequent critic of the SBA.

In addition to the score card, the SBA has rolled out several other initiatives under its new chief, Steve Preston, to address the problem.

Since June 30, small companies that hold federal contracts have had to recertify that they still qualify as a small entity after they are involved in a merger or acquisition. They also have to recertify their size whenever their contract options are exercised, which is usually in a series of one-year increments.

What concerns Chapman, among others, is the new rule that allows existing small-business contractors to avoid recertifying for up to five years under a long-term contract.

Some critics back annual recertification. Other players in the $340-billion federal small-business contracting arena say small businesses shouldn't be penalized so quickly for growing.

The SBA score card also took into account how well agencies met contracting goals for several subcategories of small businesses: 5% of contracts to small disadvantaged businesses, 5% to small businesses owned by women, 3% to companies owned by veterans with disabilities related to military service and 3% to small businesses that operate in areas designated as historically underutilized business zones. To win a green rating, an agency had to meet its overall small-business contracting objective as well as goals for at least three of the four subcategories.

The government's general goal for small-business contracting is 23%, although individual agencies negotiate their own goals with the SBA. An agency's percentage applies only to contracts designated as eligible for small businesses.

The report on which the score card is based includes data from 85 federal entities. Among those entities are the 24 agencies, which account for 98% of federal small-business contracting, along with other organizations such as the Peace Corps.

The government also now requires that federal agencies set up and document procedures to validate the contract information they put into the federal database. Agency officials will have to attest to the integrity of their fiscal year 2007 numbers by Dec. 15., just in time for the next score card due from the SBA.

Government tax experts have tips Clear up confusion about your tax responsibilities as a small-business owner with the help of government tax experts. They'll be available at several seminars this fall.

Agencies participating in the Small Business Fair seminars include the state Board of Equalization, the Internal Revenue Service, the Franchise Tax Board and the Employment Development Department.

The seminars, which run from 9 a.m. to 2:30 p.m., will be held in the San Gabriel Valley on Sept. 26, in San Diego on Oct. 12 and in Torrance on Oct. 26.

For more information, call (213) 593-1311 or go to the Board of Equalization website at www.boe.ca.gov and click on Free Tax Seminars.

Learn how to find venture capital If you are a small-business owner, you know only too well how important capital is to the survival of your venture. What you may be less sure about is how best to raise the money you need.

To help bridge that knowledge gap, a business group is offering free training for 150 small-business owners and executives. The Access to Business Capital program will teach owners about venture capital and how to expand their businesses through equity investment.

The two-year pilot program is sponsored by the California Hispanic Chambers of Commerce and is open to all small businesses. It is funded by a $50,000 state grant.

The Saturday training classes, to be led by venture capital firm principals and executives, will be held in Los Angeles, Orange County and Fresno during the first phase of the program. More locations will be added later.

For more information, contact the chamber group at (916) 444-2221 or visit its website at www.cahcc.com.

Franchise expo set for next month Buying a franchise is the ticket to business ownership for many would-be entrepreneurs. In California there are 80,340 franchise establishments, according to the International Franchise Assn.

For those who want to learn more about the pros and cons of joining their ranks, the association will hold its West Cost expo next month at the Los Angeles Convention Center.

Smoothie bars, maid services, tool sales, sandwich shops -- you can learn about these and other franchised businesses at the Oct. 19-21 event. Seminars will be offered on legal, financial, marketing and other franchise management skills. Some are free, including Franchising 101 for Veterans.

More information is available at www.wcfexpo.com and www.franchise.org.

cyndia.zwahlen@latimes.com