House passes legislation enabling VC-owned biotech firms to access federal SBIR funds

Memphis Business Journal
October 5, 2007
By Kent Hoover

The House gave the biotechnology industry a long-awaited victory when it passed legislation that allows small companies majority-owned by venture capital firms to be eligible for federal small business programs.

The legislation, part of a bill that expands the Small Business Administration's investment programs, passed the House by a 375-72 vote Sept. 27. Similar legislation is pending in the Senate.

The bill's supporters contend the legislation is necessary because current SBA rules make many small biotech companies ineligible for Small Business Innovation Research awards, a critical source of funding for early-stage development of new drugs.

Biotech companies often don't generate revenue "for a decade or more," says Scott Koenig, president and CEO of MacroGenics, a Rockville, Md.-based company that is developing monoclonal antibodies to treat patients with cancer and other diseases.

As a result, many biotech firms depend on venture capital. Often, Koenig says, VC firms end up owning more than 50% of a company. Under the SBA's current rules, these companies are no longer considered to be independently owned and operated, and therefore aren't eligible for SBIR awards.

The new legislation would change that. Under the bill, VC funding wouldn't change a small company's size status as long as one VC firm doesn't own 50% or more of it.

The SBA and many small business groups, however, contend ownership equals control when it comes to business.

Small businesses can receive venture capital and still be eligible for SBIR awards under current rules -- as long as majority ownership stays in small businesses' hands. 17% of the SBIR grants awarded by the National Institutes of Health in 2004 went to venture-backed small businesses, according to the Government Accountability Office.

The House legislation would allow large corporations to establish venture capital subsidiaries, invest in small firms and get advantages designed for small businesses -- not just SBIR awards, but other federal contracts as well, critics contend.

The bill also would, for the first time, allow universities, which already receive more than half of the federal government's research dollars, to access SBIR grants through investments by VC subsidiaries.