Should VC-backed startups qualify for federal small business benefits?
By Alain Sherter
August 14, 2008
A small business advocacy group is calling out U.S. House of Representatives Speaker Nancy Pelosi, D.-Calif., for pushing through legislation that would help companies backed by venture capital to qualify for federal loan guarantees, fee waiver grants and other benefits available under the U.S. Small Business Administration's "innovation research," or SBIR, program. Among other effects, the bills modify the definition of a small enterprise under the Small Business Act, which extends only to companies that are independently owned. In effect, that would allow companies financed by well-heeled VCs to elbow aside genuinely needy small businesses for access to the federal program, the group says, accusing Pelosi of acting on behalf of the many venture investors that operate near her home district in San Francisco.
"After receiving significant campaign contributions from the National Venture Capital Association and special interests representing the biotechnology industry, [Pelosi] has ramrodded legislation through the House of Representatives that will allow billionaire venture capitalists to hijack federal small business contracting programs," says the American Small Business League in a statement today. "Thousands of legitimate small businesses across America could be forced to close their doors if the legislation becomes law."
Pelosi press secretary Drew Hamill characterizes the ASBL's contentions as a "non-story," noting that the two House bills that would amend the Small Business Act to the benefit of venture-funded companies--H.R. 3567 and H.R. 5819--passed the chamber with broad support. "Both these bills went through full committee process and had amendments on the floor, and they both passed the House with significant bipartisan support," he says by e-mail. "Under H.R. 5819, the SBIR program would be opened to venture-backed small businesses, but the grants are awarded competitively."
Indeed, the bills had broad support, passing by margins of 325-72 and 368-43, respectively, with 112 Republican House members voting for H.R. 3567 and 149 Republicans supporting H.R. 5819.
But the issue here is not ideology, but money, namely, the kind that ends up in lawmakers' pockets, says Chris Gunn, director of communications at the ASBL. The National Venture Capital Association, which supports expanding the definition of small businesses to include VC-supported companies, in the 2008 election cycle has made financial contributions to 13 of the members on the House Committee on Small Business, according to the Center for Responsive Politics. One of the largest recipients of the NVCA's largesse: Rep. Nydia Velázquez, D., N.Y., who chairs the panel and who is chief sponsor of H.R. 5819. The venture group also gives money to Rep. Jason Altmire, D.-Pa., who sponsored H.R. 3567 (co-sponsored by Velazquez), and to Sen. John Kerry, D.-Mass., chair of the U.S. Senate Committee on Small Business and Entrepreneurship, which last month passed S. 3362, the companion measure to H.R. 5819.
The American way? No doubt. Under our political system, groups such as the NVCA are perfectly entitled to grease whomever they please, just as our elected officials are entitled to sop up contributions. Technology startups also will argue that they are, in fact, small businesses, regardless of their financial backers. In other words, why should a solar power company with five employees be disqualified for federal contracts available to other small businesses just because it's partly owned by Kleiner Perkins Caufield & Byers?
Because, the ASBL argues, that disadvantages real "mom and pop" businesses that depend on federal support and that have no chance in hell of getting a sit-down with John Doerr. A related question is whether extending federal small business status to VC-backed companies effectively subsidizes venture firms by using government monies to support private R&D.
Of course, such issues appear moot so far as the legislation in question is concerned. The House is on board, and the Senate small business panel passed S. 3362 only one day after it was introduced. Expect the full Senate to approve the bill when lawmakers return from the summer recess. Time will tell if the result is that U.S. small business owners suffer in the name of championing innovation. --