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If Federal R&D Grants for Small Business Get Cut

Two popular federal programs, each of which sets aside government research and development money for small businesses, are set to expire on Sept. 30 if Congress does not act to renew them. The Small Business Innovation Research (SBIR) and Small Business Technical Transfer (STTR) programs set aside 2.5 percent of federal R&D dollars for small business innovations that benefit 11 federal agencies, including the Health and Human Services Dept. and the National Science Foundation.

The programs, which were established nearly 30 years ago and must be reauthorized about once a decade, funneled about $2.2 billion to small companies in fiscal 2011. While they generally receive bipartisan support, the programs have come close to expiring and been extended on a short-term basis a dozen times since 2008, with the latest quick fix taking place last May.

At issue in long-term reauthorization is whether the programs should be open to small businesses majority-owned by venture capital and hedge funds, an idea pushed by biotech and venture capital groups and their allies in Congress, but opposed by independent small business advocates, who fear that non-venture-capital-backed companies would lose out in the competition for government dollars.

When a compromise bill that would have reauthorized the programs for eight years failed last spring, they were saved by a last-minute congressional continuing resolution. This time, however, even a short-term fix looks remote, says Rick Shindell, a technology consultant in Washington state who publishes a trade newsletter called SBIR Insider.

Targeted for Spending Cuts?

Although the small companies that benefit from SBIR and STTR have previously rallied at the 11th hour to save the programs, “there’s fatigue this time around,” Shindell says. “I would not be surprised if they lapsed.” Although they are funding conduits, SBIR and STTR are often mislabeled as “free government money” or excess spending, a particularly potent idea for Tea Party Republicans intent on cutting government programs. And Shindell notes that partisan gridlock has resulted in other programs lapsing recently, including funding for the Federal Aviation Administration.

The programs briefly lapsed in 2000 but were reinstated. If that happens this time around, Shindell says, currently funded contracts would go forward but unspent 2011 funds and set-asides for fiscal year 2012 would be put on hold.

That would be devastating for companies like Modus Operandi, an $8 million Melbourne (Fla.) defense contractor with 60 employees. Currently, the company is working on 14 SBIR contracts worth about $3 million, says George Eanes, vice-president of business development. It was founded 25 years ago with no outside funding and sold off its commercial division after it began focusing on developing intelligence analysis software for the Defense Dept. nine years ago, he says.

“If SBIR is not renewed, it would really hurt this company bad. We employ engineers and PhDs and I don’t have the luxury of being able to keep them on overhead like a big company would. The only reason we can pursue this work is because of the SBIR grants. Otherwise, I’d have to look at facing some tough challenges of maybe letting some of these people go,” Eanes says.

Venture Capital Warning

Alex Laats, a general partner at venture capital firm Commonwealth Capital Ventures in Waltham, Mass., worries that if the programs are put on hold they may never return. “It’s hazardous if these programs are not really thoughtfully addressed now. If reinstituting SBIR is put on the back burner, it may stay there forever. There’s always something more pressing that comes first before small business,” he says.

Until a year ago, Laats was a division president at a small business that worked hand-in-hand in the 1960s with the Defense Dept. to develop early Internet routers and Cold War technology. In his venture capital job, he is tasked with finding small companies whose initial research has been funded by SBIR grants and whose resulting technology is ready to be developed commercially.

“We will always have a healthy defense budget, even if there are cuts. The issue here is whether it should be mandatory that a portion actually go to small business,” Laats says. “Saying that we have to make cuts and we’re going to cut the small business part—that is the most innovative, fast-moving segment of business research—seems un-American.”

Klein is a Los Angeles-based writer who covers entrepreneurship and small-business issues.

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