A U.S. Senate committee has boosted the biotechnology industry's hope that legislation will soon again allow many venture-backed companies to win research grants set aside for small businesses.

The venture capital and biotechnology industries have aggressively lobbied for legislation to reverse a 2003 U.S. Small Business Administration ruling that companies with 51 percent or more ownership by venture investors did not qualify as small businesses and were ineligible to receive Small Business Innovation Research grants.

But the Senate Committee on Small Business and Entrepreneurship on July 27 approved an amendment to legislation reauthorizing the SBA to exempt biotech companies from the requirement that they be majority owned by individuals. The legislation is expected to pass in the fall.

"Early-stage companies are finding it harder these days to find seed and early sources of capital. Re-opening the pathway to SBIR is critical to next-generation innovators," said Matt Gardner. "In Northern California, the amount invested at the seed stage in the last five years has been cut in half, and those companies have been scrambling to find help. This will extend a very meaningful vine for them."

Some small business advocates said the SBA interpretation that rendered many venture-backed companies ineligible for SBIR grants restored the program to its original intent: to help in funding high-risk research by true small businesses rather than those that were majority-owned by large institutions and corporations. But biotechnology executives complained it deprived their companies of millions of dollars in funding needed to advance important new therapies and fuel the growth of the industry.

The Senate committee vote comes as young biotechnology companies continue to struggle to find funding for research that might not yield commercial benefit to investors for many years. The grants are especially attractive because they don't add to debt loads or dilution of stock and fund early-stage, high-risk research that venture investors might otherwise discourage.

SBIR grants are issued by several government agencies that participate in the program, such as the National Institutes of Health. These agencies issued $2 billion in SBIR grants to more than 6,300 companies in 2004, the most recent year for which data was available.

Though venture-backed biotech companies have long won SBIR grants, in 2003 the SBA closed the spigot when it denied Salt Lake City-based Cognetix Inc. a phase II SBIR grant because the majority of its stock was held by institutional investors rather than individuals.

"The arbitrary 2003 change in eligibility standards inequitably penalized biotech firms and has delayed -- in some cases even prevented -- lifesaving drugs and life-enhancing medical innovations from reaching patients and consumers," said Jim Greenwood, president of the Biotechnology Industry Organization, the trade group that has led the charge for the legislation.

But not everyone thinks the legislation is good news. Lloyd Chapman, president of the Petaluma-based nonprofit advocacy group the American Small Business League, said the legislation will help companies that appear to be small, but are owned by large corporations.