WASHINGTON — The St. Louis biotech firm Kereos Inc. might seem an ideal
candidate to receive a special federal grant designed to encourage small
businesses to pursue cutting-edge research.

The 15-employee company is studying promising new methods to detect and treat
cancer.

But Kereos is excluded from the innovation-grant program. That's because the
firm has raised $22 million in venture capital, making it about 70 percent
controlled by outside investors — and such firms are barred from getting the
small-business grant money.

Congress is on the cusp of loosening that requirement, a move critics have
blasted as a potential boon to multimillion-dollar venture-capital companies.
Small- business advocates say the proposal could squeeze out fledgling startup
firms that can't attract big-dollar investors.

At the center of the legislative storm is Sen. Christopher "Kit" Bond, R-Mo.,
who is pushing the measure to open the small-business grant program to firms
that are majority owned by multiple venture-capital companies.

Bond and other proponents say the move will give a vital boost to small
businesses, especially biotech companies that can't get regular bank loans for
early stage research.

"Our best hope for lifesaving cures and medicines is biotechnology," Bond said
in a written response to questions about the issue. "We should be encouraging
our nation's small businesses to develop these breakthroughs and to take these
breakthroughs from the lab to patients, not throwing up roadblocks."

Robert "Al" Beardsley, CEO of Kereos, said making the grants available to firms
like his could break open new avenues of research for top-notch scientists, who
otherwise may be hamstrung by restrictions that come with venture-capital
backing.

While $22 million might sound like a lot, Beardsley said, it is a fraction of
the cost of developing a new drug therapy. "It sounds ridiculous, but I'm
scraping by by the skin of my teeth to make it to the next milestone," he said.

"There's no room for mistakes and if you have a second idea, you have to put it
on the shelf," he said. "Having that (extra federal grant money) would allow us
to pursue some very exciting parallel paths."

But other small-business advocates say Bond's proposal would hurt nascent firms
engaged in high-risk innovation, benefiting well-heeled investors instead.

"It would allow venture capital firms to participate in a program that was not
intended for them," said Chris Gunn, a spokesman for the American Small
Business League. "It could be very bad for small businesses."

The stakes are high. The program steers more than $2 billion annually in
federal grants to small businesses. And at a time of heightened concern about
America's place in the global economy, the grants are designed to bolster U.S.
innovation, funding front-line research to cure chronic diseases, developing
new defense applications and bolstering alternative energy sources, among other
things.

CLOCK IS TICKING

With the program set to expire on Sept. 30, the clock is ticking for lawmakers
to reach an agreement.

After months of delicate closed-door negotiations, Bond and Sen. John Kerry,
chairman of the Senate Committee on Small Business and Entrepreneurship,
reached a compromise on a bill to reauthorize and expand the grant program just
two days before lawmakers left Washington for the August break.

On July 30, the small-business committee approved the measure, which would
reauthorize the Small Business Innovation Research program and a second
technology grant program. But the fate of that deal remains in limbo.

The innovation research grant program was started more than two decades ago in
an effort to channel precious federal research dollars to small businesses for
vanguard projects, at a time when the bulk of federal contracting dollars was
going to universities or big corporations.

The current program mandates that any federal agency with more than $100
million external R&D budget has to direct at least 2.5 percent of those dollars
to the innovation research grants.

The Kerry-Bond compromise would increase the allocations, steering more money
to small businesses. The more contentious element, pushed by Bond, would allow
firms that are majority owned and controlled by multiple venture-capital
companies to compete for a chunk of the small-business grant money — 18 percent
from the National Institutes of Health and 8 percent from other agencies.

WHO WON?

At the July 30 committee meeting, Kerry, D-Mass., was decidedly lukewarm about
the agreement. "Neither of us really like it … and everyone is still trying to
figure out who won," Kerry said. "I am told that is the sign of a good
compromise."

Kerry initially did not want any set-asides for majority-backed venture capital
firms, arguing that it puts entrepreneurs who are pursuing truly high-risk
ideas at a disadvantage and changes the nature of innovation, forcing small
firms to go after bigger market shares and faster returns.

"Venture capitalists have told us that they don't invest in early stage
research because it is too high risk," Kerry said in a statement to the
Post-Dispatch.

If government grants are going to small businesses with significant
venture-capital backing, Kerry said, it may steer the program away from
cutting-edge research and toward projects that are designed more to attract
investors than to meet military, medical or energy needs.

"Furthermore," Kerry said, "research from high-tech firms and start-up firms in
rural states, like Missouri, where there is very little venture-capital
activity, could also suffer."

Bond disputes that assessment, and he's been adamant about his position.

SBA's current rule "excludes too many small businesses from competing for funds
to develop life-saving cures and medicines," Bond said. "Everyone will be a
winner when one of these companies finds a breakthrough to curing cancer,
Parkinson's or other life-threatening and debilitating diseases."

LOBBYING

The venture-capital provision has been the target of an intense, years-long
lobbying campaign by the Biotechnology Industry Organization and the National
Venture Capital Association.

Biotechnology and venture capital lobbyists argue that current restrictions
hamper innovation and direct money to wasteful projects that will never get off
the ground.

Under the program now, small businesses that have minority venture capital
investment are eligible for the grants; the program only excludes small
businesses that are majority-owned, 51 percent or more, by multiple venture
capital companies.

Alan Eisenberg, an executive vice president at BIO, said it can take 10 to 15
years, and $1 billion, to turn a scientific concept into a commercial product.

"During that time, a company can't go to a bank for a normal small-business
loan. These are not normal small businesses . . . because there's no revenue
coming in," Eisenberg said. "So small businesses have to turn to investors,
selling parts of the company, to raise the funds they need. That's why venture
capital is so important."

He also said small businesses often get venture-capital investment for
mid-stage projects but need government assistance for other nascent initiatives.

MISCONCEPTIONS

And Mark Heesen, president of the venture-capital association, said there are
misconceptions about what venture-capital backing means.

"The premise that you cannot be a small company if you're receiving venture
capital is just ridiculous," Heesen said. "We fund a huge number of small
companies all across the United States, and simply because a company receives
venture capital doesn't mean they're rolling in the dough."

If a small business hasn't secured venture investment, Heesen said, it's
probably for good reason. Investors have decided that "the science is not good,
the management team is not good, or a combination of that," Heesen said, so the
government probably shouldn't invest, either.

Beardsley, of Kereos, said the restrictions "are like saying we're only going
to support people who haven't won the gold medal in the Olympics."

PRAISE FOR BOND

Both BIO and the NCVA heaped praise on Bond for pressing the issue so hard.

"We love him. He really carried our water here," said Ellen Dadisman, a BIO
spokeswoman.

The groups have contributed to Bond's campaign, but only small amounts. BIO's
political action committee donated $1,000 to Bond in 2004, when he last ran for
re-election. And the venture-capital group gave him $8,000 that cycle. In
addition, a former legislative aide to Bond, Brent Franzel, is a top lobbyist
for the Missouri Biotechnology Association, an affiliate of the national
group.

Still, neither group has endorsed the deal. That's because the House bill goes
even further, with almost no restrictions on the ability of venture
capital-backed firms to win small-business grant money.

Officials with the American Small Business League say both proposals will tilt
the playing field toward well-heeled firms.

In the current economic slump, small businesses need as much help as they can
get, said Lloyd Chapman, ASBL's president, in a release after the Senate
committee vote. But the House and Senate bills are "pandering to wealthy
venture capitalists."

The House has passed its version of the legislation. The Senate has yet to take
up the Kerry-Bond bill.

It will compete for time on a crowded and short legislative calendar when
lawmakers return next month. With only a few weeks remaining in this
congressional session to secure final passage, lawmakers may opt for a
short-term renewal of the current program, leaving the venture-capital
restrictions in place.

But both Bond and Kerry said they are committed to pushing through the
compromise.

dshesgreen@post-dispatch.com

202-298-6880

Source:  www.stltoday.com