Wednesday, December 23, 2009

Lending to small businesses

The December 12th issue of The Economist includes an article "Small business, big problem" regarding the continuing difficulties small businesses have in obtaining financing. A few pithy bits:

"America's large firms get 30% of their financing from the banks; its smaller enterprises rely on them for 90% of their financing needs."

"Small businesses account for the majority of private-sector employment in America and Europe."

"Firms with fewer than 500 workers accounted for 64% of the net new jobs created in America between 1993 and the third quarter of 2008."

The article in particular proposes that governments "offer relief on payroll taxes for firms that are vibrant enough to make new hires."

Is anybody in government listening?

Social Networking for Innovators

A year ago at the Connecticut SBIR conference, I met Ryan Bloom, Vice President & Cofounder of Boliven, a social networking site for "Innovators at Work". It took me the year to follow up on his invitaiton to join the site. But I heartily recommend it as a venue for researchers, PIs, entrepreneurs, and innovators.

The basis behind it is to link people with each other based on a portfolio of their work, their contracts and grants, their patents and journal articles. The network is based on these tools of the trade. Their on-board searches are intended to find your efforts, and permit you to add them to your portfolio. Your coauthors are linked as part of your network. You receive updates when one of them is listed on a patent or has received a grant.

It's still a young network, but they seem open to and eager for further refinements. For instance, there is definitely room for improvement to their automated searches. A great deal that should show up doesn't, and there isn't yet sufficient facility for adding things. But I'm convinced it will continue to improve, and will prove a useful resource for those of us involved in innovation. Check it out.

Tuesday, December 22, 2009

Still not quite convinced

Understanding motivation can be key. My friend Fred Patterson, the SBIR Coach, calls it WIIFM: What's in it for me?

Only... we're sold a bill of goods by common assumption, that it's we, the entrepreneurs, the inventors, the scientists, the researchers, who must go as supplicants to the trough of Investors, tripping over ourselves to convince the moneyed that we are worthy of their largess.

I'm still not quite convinced. Turning the tables, I wonder "what's in it for me"? See, I'm a lone researcher, a radical, an oddball, who after several years as supplicant at the trough of Academia, after 150 faculty applications, and a miserable stint of Adjunct Servitude, decided to shirk the bonds I had willingly taken on, and head out on my own.

I stumbled into SBIR. And, now, little more than a year and a half later, my firm is growing from one, to a staff of six (four full-time). We're patent pending, about to start our first Phase II, and our second Phase I with a different agency on a related but distinct project.

I believe in the mission of SBIR to support innovation wherever it lurks. I believe in SBIR as an open competition of ideas, not as earmarks. I believe in the wise use of public funds to spur and stimulate and foster and fertilize the fragile seeds of innovation. What a wonderful idea: small pots of money for outstanding ideas, to support a short path to proof-of-concept.

What's in it for me? I have learned. A spare six months to delve whole heartedly into the realm of my passions, to test the mettle of my ideas, to drive those naked thoughts into evidence. Yes, indeed, this will work, and it will solve your problem. Then, the chance to compete for Phase II funding, to support a full-scale R&D effort for a couple years, creating high-quality jobs along the way. Finally, the chance to make those dreams a reality by commercializing the results of those ideas and that passion, solving real-world problems, paying back the largess of public coffers. That's a win for everyone.

But what's in it for me to (possibly prematurely) sell off parts of my firm to investors, whose interest may more likely begin and end with dollar signs, not passion, or ideas, or public interest? I'm not much for knocking on doors, beating the bushes, and doing a song and dance for investment.

I'm not much for paper entrepreneurship, writing dazzling business plans. Sure, I can project millions in profits like the best of them. Only, it's far more interesting (and difficult) to actually achieve it. Do I need private investment to get there? Will private investment ensure I get there? Will it help?

Those are the important questions. I can't say I know the answer just yet. I'll answer a knock at the door, and listen in earnest to the pitch. But for now, I think I prefer if they work to convince me. I always enjoy a good song and dance.

Monday, December 7, 2009

Separation of State & Science

The November 28, 2009 issue of The Economist includes a pithy opinion piece, ostensibly addressing the need for allowing the voice of a skeptical minority of climate scientists to be heard in the midst of political wrangling over climate change. More significant than the specifics of the context however is the broad-reaching argument regarding the necessity of separating scientific debate from political maneuvering. Here is a concise formulation from the end of the article:
There are no certainties in science. Prevailing theories must be constantly tested against evidence, and refined, and more evidence collected, and the theories tested again. That is the job of the scientists. When they stop questioning orthodoxy, mankind will have given up the search for truth. The sceptics should not be silenced.
Well said, indeed!

Friday, November 27, 2009

Tax break on profits again in jeopardy - The Boston Globe

Interesting headline on the front page of today's Boston Globe (Tax break on profits again in jeapordy). What reasonable justification is there for treating the investments by some few in the potential of someone else's ideas to provide a handsome return-on-investment as different and better than the investments of entrepreneurs in their own creations? Why is that tax incentives go to hedge fund managers, and venture capitalists, and angel investors, but not directly to the entrepreneurs themselves who invest not only sweat equity but often stake their own savings and the safety of their families?

What is the motivation behind such tax incentives? The argument in their favor is that "raising taxes on investment" will "weaken the economy". But how? Look at yesterday's post, and the opinion piece by Josh Kosman. Are hedge fund and VC investments really benefiting the economy at large? That's quite a debatable point.

Perhaps we should look at the sustainable and broad benefits of an entrepreneurial economy, about the benefits that accrue from seeding innovation at the earliest stages, and supporting research entrepreneurs in pursuing and maintaining their passions for bettering society. Perhaps by focusing our energies and tax incentives on these individuals themselves instead, we'll more likely strenghten the economy!

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Thursday, November 26, 2009

A case study in profits and job losses - The Boston Globe

Josh Kosman, author of a new book predicting the impact of private equity in the next financial meltdown, has penned an interesting opinion piece in today's Boston Globe. He uses a local political debate as a jumping off point to discuss how a certain approach to equity investment has proven quite adept at creating profits for a very few, at the expense of both investors and the firms whose takeover they have financed. Notable is his presentation of how gutting a firm's R&D has negatively impacted its competitiveness and profitability.

Yet another argument for keeping a firm in the hands of those who believe in its mission, rather than those whose sole motive is to exit, with paper profits, at all costs.

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Thursday, November 19, 2009

Interest for Small Business Checking

Who would have thought that legislators would institute a law to forbid banks from paying interest on small business checking accounts? Apparently, the Banking Act of 1933 contains just such a rule. A couple legislators however have stepped up to redress this imbalance. Let's hope this reflects some positive momentum in support of small businesses.

Thursday, October 22, 2009

Anyone opposed to increased access to capital?

Landrieu to Introduce Bill Increasing Loan Limits for Small Businesses.
(Thanks to Fred Patterson, the SBIR Coach, for spotting this):

Included in the bill is language to remove the "Small Business Innovation Research/Small Business Technology Transfer (SBIR/STTR) contracting exemption that was included in the Recovery Act." If you haven't been following along, someone (mysteriously, multiple hearings have been unable to unmask the culprit, as noone is taking credit) inserted language into H.R. 1, the American Recovery and Reinvestment Act, that effectively exempted $229 million of stimulus funds from being spent on small high-tech businesses for R&D under the SBIR/STTR funding mechansims (known as R41/R42 and R43/R44).

This action was arguably illegal, certainly unethical, as the language was inserted while the bill was under the authority of a conference committee, after having been passed by both Houses of Congress without it. As per the rules of Congress, the purview of a conference committee is to reconcile differences between House & Senate versions of a bill, not to introduce any substantive changes that were not a part of either bill.

If Landrieu's new bill passes, those $229 million* will be restored as per statutory requirements under the Small Business Act and numerous SBIR/STTR reauthorizations to set aside a small percentage (currently 2.8% total for both programs) of certain federal agencies' extramural R&D budget to provide seed (Phase I) and transition-to-commercialization (Phase II) funding for small business-led efforts. American recovery & reinvestment: it's even in the title of the act.

Access to capital means much more than providing loans to small businesses. And it means more than letting Venture Capital interest and investment serve as a proxy for a business' worth. There is a reason that SBIR/STTR have been so successful in stimulating the creation of new technologies, and getting those technologies to the end users where they will have the greatest effect, more effective than Venture Capital.

I've said it before, but it warrants repeating: it's all about seed funding, and continued support to get those sprouts to market!

* UPDATE * Actually the language of Landrieu's bill, S. 1832, would only restore $150m of the stimulus funds to SBIR/STTR. Apparently, according to Fred Patterson, this may have been a compromise NIH was willing to agree to. Considering Jo Anne Goodnight's current detail, away from her desk as NIH Coordinator for SBIR/STTR, to the Senate's Committee on Small Business & Entrepreneurship, it's not too far fetched that there is close (albeit tight-lipped) coordination between the activities of the SBE and NIH administrative personnel.

Thursday, October 8, 2009

DoD-only SBIR reauthorization for 1 year!

Rick Shindell gives the scoop (via SBIR Insider):

Wednesday, October 7, 2009 the House & Senate Armed Service Committees reached agreement on the conference report to H.R. 2647, the Fiscal Year 2010 National Defense Authorization Act (NDAA).

In this conference report ... there are 2 pages of language that in essence, reauthorize the DoD's SBIR and STTR programs for 1 year (ending September 30, 2010), and extending the Commercialization Pilot Program (CPP) for the same period.

This has no effect on the other ten agency SBIR/STTR programs that will expire on October 31, 2009 unless extended by another CR or reauthorized.

The NDAA should come to the floor of both bodies quickly for a vote, perhaps Thursday. There are some provisions that are controversial and a few that the President didn't want, so the bill's passage and the President's signing, although likely, will not be a slam dunk. We have a copy of the SBIR portion of the report at
http://www.zyn.com/sbir/insider/SBIR-Armed_Services_Report-100709.pdf

... Obviously the Senate Armed Services Committee (SASC) and the House Armed Services Committee (HASC) actions reflect a vote of "no confidence" in the ability or likelihood of the other committees to reach SBIR reauthorization in a timely manner.

INSIDE STUFF: Senator Carl Levin (D-MI), chair of the SASC, who is also a member of the SBE, worked closely with SBE committee chair Mary Landrieu (D-LA) as did their staffers, to incorporate the entirety of the Senate's SBIR reauthorization bill (S.1233) into the NDAA. Some SBIR changes were made by the SASC including making the reauthorization for 14 years, making the CPP permanent (rather than its pilot program status), and expanding the CPP to the STTR program.

... Once it came to light that this action was for real and was gaining traction, HSBC chair Nydia Velazquez (D-NY), and HS&T subcommittee chair David Wu (D-OR) fired off a strong letter of complaint to HASC chair Ike Skelton (D-MO) and ranking member Buck McKeon (R-CA), along with a CC to Nancy Pelosi. (see http://www.zyn.com/sbir/insider/HASC_letter-9-25-09.pdf )

In the House, there was great pressure on Armed Services to stand down on the SBIR issue. Chairman Skelton would not cave but he would compromise. The 14 years were reduced to 1, CPP was also only 1 year and was not expanded to STTR.

This compromise should serve notice the other House committees that SBIR must be reauthorized properly or the DoD may run with their own program next year.

Tuesday, October 6, 2009

NIH Director seeks comments!

NIH Director Welcomes Public Comments (via Genetic Alliance)

Earlier this month, National Institutes of Health (NIH) Director Dr. Francis Collins held a town hall meeting with constituency groups to outline a vision for the NIH, including putting science to work for the benefit of healthcare reform and advocating for a stronger US global health presence. In addition to responding to input during the meeting, Dr. Collins invited members of constituency groups to follow up with additional comments about issues facing their organization or community that should be brought to the attention of Dr. Collins and the NIH. The Institute is accepting comments on a rolling basis, and Genetic Alliance is collecting individual responses to inform our comments until Friday, October 9.

To submit your comments, please send them to the NIH at NIH-LISTENS@nih.gov and copy NCIAdvocacy@mail.nih.gov. To submit them to Genetic Alliance, please send them to Kristi Zonno, Director of Genetics and Health Policy, at kzonno@geneticalliance.org.

Monday, September 21, 2009

Sprouting Seeds

My friend, the SBIR Coach, recently posted reflections from attending the Conference of the National Association of Seed and Venture Funds (NASVF). He mentioned a recent conversation he had with Laurence Briggs, CEO of a private investor network:
What they look for is a proved-out concept for a product or solution addressing a significant market with scalability, and a good coachable team appropriate for their stage of development.
I read those words, and wonder at the first requirement for private investment: a proved-out concept. The image that comes to mind, reasonably enough I presume, is that of a seed, for a seed undoubtedly predates such proof.

Last I checked my botany, a seed by itself is anything but proved-out, especially the seed of a new hybrid or an untested variety. But what a wonderful package it is! All potential and for explosive growth at that. A seed is quite resilient, enduring a great many torments, even years of neglect. But a seed needs a few things to realize that potential.
  1. A seed needs warmth and moisture to sprout, which provides proof of its viability.
  2. But a viable seed may still die without the proper nurturing. Once we've obtained proof of viability, the seed needs the suitable conditions to root and leaf and grow. This is the testing stage, where a viable seed is coaxed into a relatively mature specimen, a prototype if you will of the field or forest it might become. Now we have a plant, but what sort of fruits will it produce?
  3. If a mature specimen warrants our further interest, we need to attend to the task of reproducing it, distributing it, continuing to examine and study it to discover the ideal conditions and create them in field or farm or greenhouse.

You may notice something in the image: It mirrors the process of seed capital as represented by SBIR.

  1. Phase I is the seed-sprouting stage, where we take an unproven concept and prove it out.
  2. Phase II is the stage where a viable seed is taken to prototype.
  3. Phase III is the stage where a prototype is brought to commercialization in a broader market.

It would seem then that Phase I, the true seed stage, is the untouchable part to private investors. The greatest value of SBIR is its ability to leverage public funding, through a highly competitive process to identify the most promising kernels of ideas, along with the appropriate team to take it from unproven concept, through proof, prototype, then commercialization.

If SBIR is transformed--as many in the House Small Business & Science Committees are intending and entrenched to do--to preference the later stages of business development and growth (the stages preferred by Angels and VCs), then what source would remain for the true seed stage of innovation?

Some might argue that seeds are in too great abundance to be sorted by non-experts. Surely, it is the risk factor involved that stays many Angels and VCs from entering the fray at this early stage. Yet innovative science and technology take time, sustained effort, and commitment: often more of these three than most realize or would care to support.

This is perhaps the genius of SBIR: it allows Program Managers to define high priorities for their particular programs, to solicit proposals that address those specific priorities, have these proposals evaluated by experts, if not experts in the fields of research at least expert in the problems that need resolution. It permits federal agencies that spend billions of taxpayer dollars to reserve a small portion of those funds for work by small businesses, to serve the greater good, to stimulate innovations that might otherwise sprout and die on the sidewalks of neglect and indirection, ones which large corporations and universities have not or could not achieve.

It focuses the minds of innovative researchers to solve realworld problems, fertilizing the growth of the entrepreneurs who will create and lead new industries built on new technologies that remain unimaginable today. Innovation by definition has no peers. Again, I ask, if SBIR will no longer support this earliest stage, then who or what will?

Friday, September 4, 2009

Nota Bene: we judge small businesses differently

First, a disclaimer: my firm currently has an SBIR Phase I proposal under review at the NSF, submitted in early June, for which, if selected, the author of this post would serve as PI. That said, I respect the integrity of the process and trust that my comments here should have little to no bearing on the merit review of the proposal, either positively or negatively.

The NSF website prominently notes:
Consideration of proposals usually requires up to six months.
From the viewpoint of a small business seeking support for R&D, I would welcome the passage into law of §204 (3) (B) of H.R. 2965 EAS :
...a final decision on each proposal shall be rendered not later than 90 days after the date on which the solicitation closes unless the Administrator determines, on a case by case basis, that a decision may be extended from 90 days to 180 days
That's old news (though we still await the final version of the SBIR/STTR Reauthorization Act)! What caught my eye today however was a passage on the NSF website, from their instructions to the Phase I Technical/Commercial Peer Review Panel. Here it is verbatim [emphasis theirs]:
(N.B.,SBIR/STTR INTERPRETS THE NSF CRITERIA SLIGHTLY DIFFERENTLY THAN THE REST OF THE FOUNDATION BECAUSE WE ARE LOOKING AT RESEARCH THAT IS CLOSE TO PRODUCING A MARKETABLE PRODUCT (i.e., "Advanced Applied Research,") NOT BASIC RESEARCH. The science/engineering entailed in the project may be well understood; the novelty may lie in the application.)
Interesting use of the word may there. What if... let's be radical here... what if the science and engineering were cutting edge, rather than "well understood" despite its origin in a small business, rather than a university? What if the novelty lay not merely in the application, but in the approach itself? Let's just say it does. Let's just posit the possibility that a small business enterprise might be truly innovative. What then?

I'd like to think that my firm fits that latter description, because frankly it doesn't well fit the former. The science and engineering is not well understood (at least not outside my company), because it's novel. I have argued on this blog rather passionately for seed-stage funding through SBIR and perhaps other mechanisms. I admit this passion is in part self-interest. Seed funding is hard to come by.

VCs and others are aligned to invest in businesses "close to a marketable product," but not, as it turns out, in potentially transformative but yet unproven ideas. Why should NSF SBIR fill that same niche, when true seed funding is remarkably scarce? Does the cited guidance to NSF technical reviewers hint at a presumption that small businesses are not capable of scientific innovation?

The requirement is well established that SBIR applicants must justify their proposals with a strategy toward commercialization (which already distinguishes SBIR from other NSF programs). It is a requirement that we in the small business community embrace. The guidance seems to go beyond that however. It is not merely asking for commercializability, but in essence preferencing later stage efforts over early-stage R&D, but doing so merely for small businesses, asking us to compete not to a higher bar, but on another track.

How different from the stance of the DoD :
Our appropriated funds are designated for research and development. By law, we cannot spend them for anything else.
What leads to such disparity by different agencies both authorized to fund innovative research by small businesses? Let us only hope in the end that innovation leads, not guidance.

Thursday, September 3, 2009

Who wants to be average?

The August 27th issue of The Economist leads with an article on the return of the corporate giant. Here is a pithy bit from the article:
You might suppose that the return of the mighty, now better equipped to crush the competition, is something to worry about. Not necessarily. Big is not always ugly just as small is not always beautiful. Most entrepreneurs dream of turning their start-ups into giants (or at least of selling them to giants for a fortune).
I'd like to parse that out a little bit. Let's do a little editing, shall we? Take the statistical sentence: most entrepreneurs. Hmmm. Let's, do let's take out that "most" and replace it with... average... or better yet run-of-the-mill. Yeah, that's the ticket:
Average, run-of-the-mill entrepreneurs follow the pattern that is often fed to them (like fattening of ducks for foie gras), accepting that the ultimate goal of all passion, innovation, and drive is TO EXIT from their dreams, eventually selling their start-ups to corporate giants.
Unusually, perhaps (but then, who wants to be average?), I am an entrepreneur to PURSUE those passions, drive, and innovations, rather than to escape from them. My motivation is transforming what is in the world into what might be. Funny, take that sentence: you won't notice any reference to small investment or large payout.

Sure, I'm interested in developing practical products and applications for my innovations, and indeed in profiting from them, but the profit motive is incidental to the innovations and their contribution to real-world needs. If my firm balloons into a giant, I only hope that it maintains its core of passion, drive, and innovation. I don't prejudge whether or not it might one day be sold to a giant or other investor. An exit just isn't top on my priorities.

Friday, August 14, 2009

A Matter of Stage

The terms seed stage, early stage, and startup are bantied about as if their definitions were self-evident (or more likely as if their use were intended to evoke an emotional response without regard to the precision of their meaning). But the meaning of these terms in context is crucial to understanding the availability of funding for innovation, and just why SBIR and similar resources are so critical to the well-being of our economy.

The following definitions come from PriceWaterhouseCooper's MoneyTree™ report:

Seed/Start-Up Stage: The initial stage. The company has a concept or product under development, but is probably not fully operational. Usually in existence less than 18 months.

Early Stage: The company has a product or service in testing or pilot production. In some cases, the product may be commercially available. May or may not be generating revenues. Usually in business less than three years.

Expansion Stage: Product or service is in production and commercially available. The company demonstrates significant revenue growth, but may or may not be showing a profit. Usually in business more than three years.

I attended a luncheon yesterday ostensibly addressing "The State of Angel Investing." Oddly, the speaker, Joe Kremer, director of the Wisconsin Angel Network, insisted against all evidence to the contrary (and providing none of his own) that "Venture Capital is entering into more and more earlier stage deals."

Um... what? He provided a chart of the "Financing Continuum" (which to his credit is a very clear and useful resource -- a larger version of the chart can be found on p. 4 of the Wisconsin Technology Council's report "Wisconsin Portfolio"). If you look at Kremer's version, you'll note a line running through the middle of "Product Development" and toward the end of "Start-Up Funding". To the left of that line is what Kremer called "early stage". Venture Capital is almost entirely above that line.

"Do you mean that VCs are funding more deals below that line, because my understanding and experience say that VCs have no interest, 0% in funding pre-prototype R&D." Uh... well, I consider prototype a pretty early stage event, was his reply.

Down at the earliest level of funding is SBIR/STTR. It rivals only the Four Fs. In other words, without SBIR for seed stage funding, only the wealthy can afford to enter the realm of innovation. Anyone can have a great idea, regardless of their present financial status.

If founders, family, and friends are simply not able to provide the seed capital to develop that idea into a proof-of-concept then a prototype, and no other source of funding is available, that idea will die. Period!

SBIR provides a means for open competition of ideas to gain such funding that is simply not otherwise available: no where, no how.

It's all about seed capital!

Wednesday, August 12, 2009

Claiming stakes

Worthy of note:

Growthology reports on an NVCA study that
"claims that VC-backed companies accounted for ten percent of employment in 2006 and some large share of recent job growth. Yet when you scroll down to the data tables, you see that they take year 2000 employment of a company that once received venture capital (e.g. Intel), then year 2006 employment in that company, and attribute the change to the fact that company once received venture capital. Voila! Are you telling me that the VC investors in Intel played a role in the company's job growth between 2000 and 2006".
NVCA has a penchant for staking claims on all the good that has ever been done by anyone once affiliated with a company that at some point in its life cycle had permitted itself to take some funding from an organization that at least had some association with a relative of someone who once walked in front of a building that was in part owned by a future or former venture capitalist.

Look! Let's make this clear: good ideas become innovations. Good businesses are built on the foundation of those innovations. Researchers and entrepreneurs provide the ideas that become those foundations. At best, venture capitalists provide some funding, insight, marketing, and business sense to contribute to the success of a venture based on the good ideas that emanate from a researcher or entrepreneur. It is possible for a symbiotic relationship to accrue, whereby a mutual respect permits innovators and VCs to collaborate on building great businesses. But it is in no way a foregone conclusion that a good idea requires VC funding to become a great business, nor is it in any way assured that the receipt of VC funding will positively impact such a company's potential success.

Period! Full stop!

Legislative Process & Authority

The following is an extract from the OpenCongress pages on "how a bill becomes a law". This is relevant not only to HR 2965, which is currently in Conference Committee, but also importantly to the deceitful, harmful, and arguably unauthorized actions by the Conference Committee that was entrusted to reconcile the House & Senate versions of the bill that became HR 1, the American Recovery and Reinvestment Act (ARRA). Those actions excluded NIH from its statutory obligation to provide $229 million for SBIR/STTR from the stimulus funds alloted to the agency.

Authority of Conferees

The conference committee is sometimes popularly referred to as the "Third House of Congress". Although the managers on the part of each House meet together as one committee they are in effect two separate committees, each of which votes separately and acts by a majority vote. For this reason, the number of managers from each House is largely immaterial.

The House conferees are strictly limited in their consideration to matters in disagreement between the two Houses. Consequently, they may not strike out or amend any portion of the bill that was not amended by the other House. Furthermore, they may not insert new matter that is not germane to or that is beyond the scope of the differences between the two Houses. Where the Senate amendment revises a figure or an amount contained in the bill, the conferees are limited to the difference between the two numbers and may neither increase the greater nor decrease the smaller figure. Neither House may alone, by instructions, empower its managers to make a change in the text to which both Houses have agreed.

When a disagreement to an amendment in the nature of a substitute is committed to a conference committee, managers on the part of the House may propose a substitute that is a germane modification of the matter in disagreement, but the introduction of any language in that substitute presenting specific additional matter not committed to the conference committee by either House is not in order. Moreover, their report may not include matter not committed to the conference committee by either House. The report may not include a modification of any specific matter committed to the conference committee by either or both Houses if that modification is beyond the scope of that specific matter as committed to the conference committee.

Under a recent reassertion of a Senate rule, Senate conferees are bound to consider only those matters that bare a certain relevancy to a House or Senate provision in conference.

The managers on the part of the House are under specific guidelines when in conference on general appropriation bills. An amendment by the Senate to a general appropriation bill which would be in violation of the rules of the House, if such amendment had originated in the House, including an amendment changing existing law, providing appropriations not authorized by law, or providing reappropriations of unexpended balances, or an amendment by the Senate providing for an appropriation on a bill other than a general appropriation bill, may not be agreed to by the managers on the part of the House. However, the House may grant specific authority to agree to such an amendment by a separate vote on a motion to instruct on each specific amendment.

Tuesday, August 11, 2009

H.R. 2965 EAS

As far as I can tell, S. 1233 is no longer under consideration. The current bill is H.R. 2965 as passed in the Senate (dubbed "Engrossed Amendment Senate"). This version of H.R. 2965 includes several alterations from the original House version, incorporating certain aspects of S. 1233 (as for example "Sec. 103 SBIR allocation increase" which appears in H.R. 2965 EAS, but not in the version "Received in Senate").

To see these differences visit the link above, and click "Show Changes". GovTrack is also covering the progress of H.R. 2965.

Those more experienced with how laws are made may have greater insight, but the best I can gather is that in order to constitute a Conference Committee, one of the bills needed to be passed by the other House of Congress. That was done, when the Senate voted on and passed H.R. 2965 on July 13. What remains are for the differences between these versions to be resolved, then it goes to the President for his signature.

Thursday, August 6, 2009

Commercial Real Estate: expanding the office headquarters

Worthy of note:

"At the moment transactions have dried up in the commercial-property market as owners try to avoid selling at a loss. Those owners are implicitly assuming that a rebound is imminent, yet the downturn may be prolonged."

--"Commercial Property: A concrete problem," The Economist, August 1, 2009

This is of particular relevance to me today, as I'm looking to obtain a new headquarters for my company. I'm increasing staff and need a larger space. Lease vs. buy is a relevant consideration. Because prices are somewhat depressed, it would seem a reasonable time to buy. But as the article cited points out, low prices may be around for a while:
"In Japan land prices are still nearly 60% below the peak they reached in 1991."
Granted, I'm not in a market that was among those severely overheated. Cost of living here is about 15% below the U.S. average. Asking prices for small commercial office space (2000-5000 sq. ft.) are around $45-60/ sq. ft. That said, the general principle is to compare rent vs. buy on similar properties. There's little point in locking up cash in real estate equity if you can rent a comparable space for less. It's just finding comparables that's the trouble.

The jury's still out. I'm leaning toward putting down an offer to purchase, knowing full well that it might not become much of an investment. But I'm prepared to walk away if I can't transact on my terms. I'm counting on the prospect that I will be needing office space for my business for the long haul; I'm betting on the success of my company, and the assumption that it'd be better to own the space than rent from some unknown landlord. But leasing remains an option.

The advice I've been given, from attorney and accountant, is to establish a separate LLC as holding company for any real estate purchase, then lease back the property to the main business under a triple-net lease. The key is establishing a reasonable fix on going lease rates in the area so as to neither overcharge nor undercharge in rent. That separates the office property from the core business, and permits additional investors in the real estate to be distinct from the ownership of the core business.

We'll see how it goes.

Tuesday, August 4, 2009

The Color of Money

DefenseSolutions.gov is a relatively new website described as "The U.S. Department of Defense New Idea Portal". Thanks to the SBIR Coach, where I first read about this resource. This morning, I received an email notification of their latest update, removing some fulfilled requirements, and adding a few others.

Of note was the following statement regarding why some worthy endeavors were not funded:
... because DefenseSolutions.gov is a research-oriented endeavor, we could not fund some good ideas because they required little or no research to complete the associated development. This is a legal, "color" of money restraint. Our appropriated funds are designated for research and development. By law, we cannot spend them for anything else.

Whatever legal restraints exist on their funding ought naturally to be part of SBIR as well. Small Business... Innovation... Research. The argument I have been making all along is that SBIR represents a pot of funds for early stage research. Without a funding source for independent researchers, innovation suffers, simply because established researchers affiliated with established institutions, have established expectations and established assumptions, regarding established practice.

If SBIR fades as a resource for seed funding, what alternatives exist for independent researchers, entrepreneurs, and small businesses to pursue early stage R&D? Will organizations like the National Association of Seed and Venture Funds step up to the plate? Will agencies, like the DoD continue to provide alternative sources, like DefenseSolutions.gov? What other resources are out there?

Friday, July 31, 2009

First rule of warfare

The first rule of engagement is to have your adversary amass forces on the wrong line of defense: have them defend the waterways, while you attack the armory; or watch them sandbag the city, while you take out their food supply by burning the fields in the countryside.

The battle lines are drawn. Let us not be seduced into thinking the skirmish over eligibility rules is the main conflict. I reiterate:

This is not about protecting the little guy!
This is about preserving SBIR as a source for seed-capital!


This is about retaining the ability of the United States to lead the world in innovation. There are precious few resources available to support early stage research & development, especially by those unaffiliated with a university or large corporation. Yet this is the work that truly pushes the envelope, that tests unproven theories, that alters not only the answers but the questions themselves.

This is principally about IDEAS! Profits and jobs are secondary. What opportunities, besides SBIR, are there for individuals to prove or falsify an idea, with the potential to transform a field or remedy a yet-unsolved quandary? The greatest beauty of SBIR is its ability to water those kernels, until they sprout or wither; and to render those that sprout into a test crop on a couple of acres.

The battle is here: will SBIR remain an open competition among innovative ideas, fought on their own merits and their potential to rapidly outgrow their government sponsors or not?

The real battle is about:
  1. keeping award sizes appropriate (the Senate's proposal of capping Phase I at $150k and Phase II at $1m does that: the House proposals do not!)
  2. ensuring the integrity of the merit-based open competition--no earmarks, or loopholes that will lead to them; no special preferences for groups (this is a competition of ideas to solve problems!);
  3. retaining access to small awards for a large number of projects to get off the ground--no to free-reign for multiple sequential Phase IIs; no to jumbo awards; yes to increasing the allocation percentage (S.1233 calls for a very modest increase from 2.5% to 3.5% graduated over 10 years).

The issues are simple. Will the Conference Committee, tasked with hammering out a resolution between these widely divergent reauthorization bills, work to support and sustain innovation, or abdicate that responsibility? Only time shall tell.

Beer summit

Of note: Obama Beer Summit Choices Make For A Happy Hour.

I confess Gates' choice of Red Stripe and Crowley's Blue Moon are more my speed than the President's Bud Light.

Now if only we could get the relevant parties in the House and Senate to sit down with high-tech small business leaders to hash out just what it is we're so concerned over regarding SBIR reauthorization. A sit-down honest, open discussion of policy would be far more beneficial than the closed door, shut out debate and discussion tactics that we've seen from Velázquez and friends these past couple years.

Thursday, July 30, 2009

Women-owned high tech firms and external capital

Of note: A recent study [summary, full report] by the Ewing Marion Kauffmann foundation highlights differences by gender of owners in the sources of financing and financial strategy for high-tech startups. I wonder what the results would be if gender were removed from the statistics, and replaced simply with the differences in source funding and financial strategy. Would the same differences in performance-related measures hold over time? The answer may rest in the full data set, but I've not the time to sleuth it just now.

Where's the bootstrap?

There's an old principle that if you don't come to the table knowing what you want, someone is sure to sell you a bill of goods and convince you it's just what you need. The circle is self-perpetuating: If I've been sold that bill of goods, I just may come to believe it is indeed what I always wanted; and I'll go on to persuade others as well.

What I'm familiar with just seems right: sauerkraut on hot dogs; corned beef on rye; the home team, because they're mine, not because it makes any objective sense. If I'm told over and over that raising investment capital is how you build a business, it seems backed by generations of experience. I may be inclined to believe it.

But then, innovation requires challenging underlying assumptions, finding alternate routes to the same destination. The goal is to build a successful company. What is needed to get there? Sure, capital: you need money to purchase equipment; to pay for an office; to hire and retain staff. But as they say "it all pays the same".

Interestingly, however, it doesn't all cost the same. What is the trade-off for any given source of capital? SBIR provides funds in exchange for the sponsoring agency's royalty-free access to the resultant technology; Banks provide loans (well, mythically at least) in exchange for a percentage of interest to be paid on top of the principal; Angels & VCs offer funding in exchange for a percentage of ownership. Each has its place. Which makes most sense for your business needs, and most especially your long-term plans?

Matt Storms at AlphaTech Counsel has penned an article about a study on how companies with various sources of startup capital fare at their Initial Public Offering (IPO). Among the pithy bits that he relates [emphasis is mine]:

The average size IPO for venture capital backed companies was smaller than any other group of companies. The highest average size IPO came from companies that were neither angel investor nor venture capital backed; in fact, the average size IPO of this group of companies was more than 2.5 times that of venture backed firms.

VC & Angel backed enterprises were quicker to go public (and likely quicker to be sold off or shutter their doors as well--they do call it an "exit strategy" after all). So, if you want quick and small rewards, VC funding is the best bet. But, if you're planning for the long haul, accomplishing something lasting, and garnering the greatest gains, perhaps a bootstrap is for you. And do bear in mind: even a bootstrap may someday come to seek outside investors. While conventional wisdom advises to seek capital before you need it, the longer you delay (assuming you remain successful and viable), the more valuable your company will be, when you do eventually seek it, reducing the cost of that capital in terms of ownership.

Wednesday, July 29, 2009

Another extension... postponed

Senators Mary Landrieu and Olympia Snowe, chair and ranking member respectively of the Senate Committee on Small Business & Entrepreneurship co-sponsored S. 1513, which passed the Senate last Friday by unanimous consent, to extend yet again SBIR and various other SBA programs until September 30, preventing an expiration on July 31, when the last Continuing Resolution runs out. That makes three CRs in a row, rather than concrete resolution of the continuing saga of SBIR reauthorization.

Rumor has it that the House passed the same today by voice vote. However, the information available on OpenCongress, GovTrack and Thomas and elsewhere show that it was offered for debate on the floor of the House, with commentary by Nydia Velazquez and Glenn Thompson, that a voice vote was initiated, but that due to a point of order raised by Rep. Thompson regarding a lack of quorom, further action was postponed (via publicinvestment.net).

***UPDATE***
There is confirmation that S.1513 was passed in the House by voice vote on 29 July 2009, keeping SBIR and some other SBA programs alive through the end of September.

Letting another NIH deadline slip

I've been meaning to submit an SBIR Phase I proposal to the NIH for about a year now. I first let the August 2008 deadline slip, then December and April. The project continues to clarify. I had every intention of submitting a proposal this time around. But a few things stay my hand.

First, I'm in the midst of negotiating a DoD Phase II SBIR, which really must take precedence. Along with that, I'm planning three new full-time hires around the start of 2010. There are a great many administrative details to attend to, in addition to reviewing applications and scheduling interviews. I'm looking to move into larger office quarters to accomodate a larger staff.

I recently prepared and submitted two new Phase I proposals for different agencies. There are still several irons in the fire, pending review. Once I have that new staff in place, and the Phase II underway, I'll have more time and energy to dedicate to new projects.

That said, the NIH's reticence, indeed seeming disdain for small business research gives me pause. They have made it clear that they have little interest in funding research beyond the walls of academic institutions. If there were no SBIR mandate, I suspect there'd be little room in their R&D budget for truly small businesses. But why?

I bring some baggage with me, I admit. Academia dumped me unceremoniously as soon as I received my PhD. I was given my diploma, then ushered out the door. There's little place for the unrepentant interdisciplinarian within the walls of the ivory tower (at least there was little room for me). Nearly every independent review of my CV came back with the following remark: "You look like a researcher." I was told point blank that hiring committees are uninterested in research for a junior faculty position. "They want someone to teach 101 and 102 and 103. They'll look at your research after you're tenured."

After five years of seeking, 150 applications, a handful of interviews, and a semester of adjunct servitude at a private institution that refused to hire full-time adjuncts with benefits for full-time work, I finally struck out on my own. I see the great value in programs like SBIR to provide an alternate source of support for open and fair competition among dedicated, innovative scholars, whose ideas are just that bit out of the mainstream.

I guess we'll see what the coming SBIR reauthorization has to offer. I still have an NIH proposal in me. Just not this time around.

Monday, July 27, 2009

New Continuing Resolution

Rumor has it that the Senate has passed yet another Continuing Resolution to extend SBIR, for another two months through September 30, 2009. The CR still has to pass in the House, which is expected in a vote tomorrow (Tuesday, August 28), to carry us through the recess.

Negotiations between the principal parties and staffers continues. Word is that negotiations are in good faith, and that a compromise between H.R. 2965 and S. 1233 will result before SBIR is allowed to expire. Let's just hope this is all done sooner than later, and better than worse, so we can all get back with clear heads to doing what we'd prefer to be doing: innovating!

Lost in the shuffle?

I guess if it isn't health care reform... it may not matter in today's Washington, DC.

SBIR is not health care reform (though certainly there are health-care related topics and projects, I'm sure). Deadline for a pre-August resolution to be voted on in the House is tomorrow. What will we get? Anybody's guess.

Friday, July 24, 2009

Midas where my mouth is

It's like I have the Midas touch, only it's not everything I touch turns to gold -- it only turns to gold after I sell it. A month ago, I wrote about Intuitive Surgical to illustrate a point about stratospheric price/earnings ratios, and the absence of rational pricing. I noted that while I believe in the company, I have little confidence in the stock market, where values are determined more by Ponzi-like expectations (othewise known as capital appreciation) than anything else.

I mentioned how a year ago I sold half my holdings in ISRG only to see it skyrocket 50% overnight (after I sold). Well, it happened again. On July 21st, I sold my remaining shares in the company, at about a 70% profit over my purchase price three years ago (but about half the price I sold shares for a year ago). A decent return, but not enough to buy a yacht. Funny thing happened (again!): it's now trading for about 30% more.

Now, my point is not to lament lost paper profits. At a P/E ratio currently of 44, it's less attractive to me now than it was a month ago at 35. Sure, I'd have been happier to lock in the extra profit. But that's the trick. How do you know when a mob of buyers will top up the price, or when a mob of sellers will trash it? If behavior were rational, then the potential for profits would be much reduced. It's like running with the bulls in Pamplona: it's hard to know just where those horns will be facing at any given time.

Buy low/sell high for sure... but real profits beat paper ones any day! I put my money where my mouth is: I've been selling stock holdings, and plan to shift much of it into an office building for my business. My business is the one I most wish to invest in.

Thursday, July 23, 2009

Worthy of Note (23 July 2009)

A refreshingly clear statement:
"Money is a form of government debt..."
"A special report on the euro area: Soft centre," The Economist, 13 June 2009.

Shared via AddThis

Wednesday, July 22, 2009

A bunch of fools

SBIR reauthorization has moved into high-gear negotiations between the principals of the Senate Committee on Small Business & Entrepreneurship, the House Large Venture Capital Small Business Committee, the House Only-Universities-Do Science & Technology Commitee. The aim is to reconcile the disparate legislation represented by H.R. 2965 and S. 1233.

Apparently, both sides are "negotiating in good faith." Though, from this blogger's perspective, the proof will be in the pudding. Compromise is the only game we have to play at this point. Rather, it's the only game we have to observe from the sidelines, rooting, cheering, and booing as we see fit.

Looking ahead, the issue remains: how can we as a nation, as a people, best support and sustain innovation? I worry at a closed system that sets up unnecessary and counterproductive hurdles to new ideas, shutting out the outsider rather than establishing a meritocracy of ideas. There is a dangerous set of assumptions out there that: the best (indeed the only quality) science is conducted at universities and guided by peer-review; and that investment from large Venture Capital firms can serve as a meaningful proxy for the value of innovative ideas. Both assumptions are verifiably and patently false!

Let me illustrate from the world of science:

  • If you want to go into research, you need to get into the best school as an undergraduate, serving under the best adviser.
  • If you fail at that--when you're eighteen and fresh out of high school--you'll have greater difficulty getting accepted at a top ranked graduate school to serve under a big-name researcher in the field.
  • If you fail at that, you'll be hard pressed to obtain a high-quality post-doc.
  • Without a high-profile post-doctoral appointment, you'll have trouble getting a respectable research appointment... etc. etc.

Every step of the way, it is easier to move further from the goal. And funny that, because the goal is not (or at least ought not to be) getting into the right school, or serving under the right person, but rather conducting high-quality research, to achieve a breakthrough.

The Wright brothers weren't established ornithologists. They didn't study under the biggest names in aeronautics. They made and repaired bicycles! But they had a dream, and a vision, and the dedication to see it through. Innovation comes from great ideas, being pursued to their logical extremes, often against all odds, and subject to an enormous amount of persistence and perseverance on the part of the innovators.

It does not spring miraculously from following all the rules, fitting in, standing in line! "Innovation has no peers--by definition!" Which leads us to the question: how best can we stimulate and sustain innovation?

A year and a half ago, I attended a workshop at the University of Wisconsin-Madison on starting a high-tech business. It was there that I first learned about SBIR. But it was also there that I first heard a description of the "four Fs" of startup investing:

  • Founders
  • Family
  • Friends
  • and Fools

This, coming from an Angel Investor who was lead instructor. Fools? There's that aphorism: A fool and his money are easily parted.

Perhaps the biggest hurdle faced by research entrepreneurs is the view that early-stage investment in the form of seed-capital is a fool's errand. Indeed, the three decades of SBIR success, the tens of thousands of patents, the hundreds of thousands of jobs created, the thousands of companies that got their start from SBIR alone, all attest to the wisdom of seed-stage investing (when done well, which SBIR does).

The question is: if we weaken the ability of SBIR to provide seed capital to sprout a field of ideas (Phase I), remove the wilted seedlings and prune back the weaker branches (Phase II), then transition to harvest (Phase III), what will replace the resource? Will those large venture capital firms that have spent millions of dollars lobbying for nearly unfettered access to ownership and control of SBIR-eligible firms step up to the plate and prove the wisdom of folly? And if they did, would that be the best resource for research entrepreneurs?

It's funny that the argument most popular among those Representatives railroading through a change in eligibility rules has it that the proposed change is intended to make it easier for small businesses to obtain funding, and to allow small businesses rather than Washington bureaucrats to make decisions regarding the source of their funding, whereas the opposite is the likely result. Reality is, if the changes pass into law--furthering the trend toward later stage growth businesses, rather than continuing to support early-stage ideas--fewer high-tech small businesses will have any chance whatsoever, and those that do will more often be forced to take venture capital investment (which has been described as the most expensive money you will ever take, because of the hefty equity stake VCs require for their investments).

What a pity that would be!

Saturday, July 18, 2009

A glimmer

One tiny beacon of hope in all this is that the purpose of an informal conference committee might be to allow those Representatives who railroaded through H.R. 2965 to simply wipe their hands clean of the compromise. They can go back to their puppet-masters at BIO and NVCA and declare they did their part, regardless of what compromise occurs.

Is that how politics works? I couldn't say. But it does offer a glimmer of hope that the staffers (who, in their defense, are mostly dedicated and well-intentioned though unsung public servants) might be better able to rise above the fray (and the worry over campaign contributions) to hammer out a compromise solution that will serve the interests of the United States, the economy, and the innovative small businesses the program was designed to support.

As ever, only time will tell.

Friday, July 17, 2009

Worthy of Note (17 July 2009)

From the SBTC:

Now that both the Senate and House have passed this bill [SBIR reauthorization bills H.R. 2965 & S. 1233], it goes to conference committee, a joint Senate-House committee that will work out a compromise bill that both chambers can agree on. There are two types of conferences: a formal conference, where Senators and Representatives from the committees with jurisdiction over this legislation will be selected to meet and work out the details of the bill, or an informal conference, which is usually conducted by staff. It has been indicated that an informal conference is most likely to occur.

Thursday, July 16, 2009

Worthy of Note (16 July 2009)

Posted on Politics in Minnesota [via Wisconsin Technology Network] is a story about a small development-stage biotech firm, VitalMedix, leaving Minnesota for Wisconsin, purportedly to gain a more favorable investment climate, since Wisconsin offers tax incentives to Angel Investors: Legislator says company's exodus shows need for 'angel investor' tax credit.

Wednesday, July 15, 2009

Russ Feingold's statement on S. 1233

SENATE PASSES FEINGOLD’S SMALL BUSINESS PRIORITIES, PART OF E4 INITIATIVE
Feingold Helps Prioritize Federal Funding for Small Business Research and Development of Energy, Water, Domestic Security and Transportation Projects

For Immediate Release – July 14, 2009 Contact: Zach Lowe or Katie Rowley – (202) 224-8657

Washington, D.C. – Last night the U.S. Senate passed an amendment by U.S. Senators Russ Feingold (D-WI) and Tom Coburn (R-OK) to prioritize federal funding for energy, water quality, domestic security and transportation projects – top national priorities where Wisconsin has a strategic advantage. Feingold’s amendment, an important piece of his E4 Initiative launched last year to help fuel job creation and spur economic development, was included in legislation reauthorizing the Small Business Innovation Research Act (SBIR) that the Senate approved. Wisconsin has numerous small businesses, universities and other research institutions that have strengths in these critical national priorities. With Feingold’s amendment, Wisconsin will be well positioned to compete for resources to further these national priorities, while creating jobs and stimulating the economy.

“I am pleased the Senate passed my amendment to help guide federal funding to research and development projects that address our nation’s needs,” Feingold said. “By prioritizing energy, water, domestic security and transportation projects, federal funds will help stimulate small business innovation and job creation, particularly in areas where Wisconsin is a national leader. Not only will this help get people back to work in the short term, it will also address some urgent domestic challenges facing our country.”

In addition to funding priorities, Feingold’s E4 SBIR legislation calls for a boost in total federal spending for the SBIR program. The SBIR legislation passed by the Senate increases the funding allocation for the program from 2.5 percent to 3.5 percent, while also increasing the cap on Phase I and Phase II awards. Since the SBIR program was created in 1982 to promote small business innovation, more than 94,660 projects have been funded totaling more than $20.7 billion. The Senate bill reauthorizes the SBIR program through 2017.

“Increasing funding for the SBIR program and reauthorizing it for another eight years is great news,” Feingold said. “While we still have more work to do ensure there is adequate funding for the SBIR program, the bill passed by the Senate today is a step in the right direction. Small businesses are the engines that drive our economy and I will continue to work to ensure they receive the resources they need.”

Feingold introduced the Strengthening Our Economy Through Small Business Innovation Act to boost funding for the Small Business Innovation Research (SBIR) grant program on September 8, 2008. This E4 victory comes on the heels of another Feingold E4 provision that was signed into law that boosts job growth and helps businesses and homeowners go green by expanding the types of projects that are eligible for the Qualified Energy Conservation Bond (QECB) program.

More information about Feingold’s E4 initiative is available at http://feingold.senate.gov/e4.

Tuesday, July 14, 2009

The fight begins: S. 1233 passes by unanimous consent

Last night, the U.S. Senate passed S. 1233 ("the SBIR/STTR Reauthorization Act of 2009") with a single amendment by unanimous consent.

The amendment was offered by Sen. Thomas Coburn (R-OK) and co-sponsored by Sen. Russell Feingold (D-WI), to include the following changes:
  • The expiration date was changed from 2023 to 2017.
  • Preference ("to the extent that such projects relate to the mission of the Federal agency") is established for "projects relating to security, energy, transportation, or improving the security and quality of the water supply of the United States ."
  • A "science-based and statistically driven" annual report is required, to evaluate the effectiveness of the program.
  • Open and fair competition is reinforced with the requiremen that all funds "must be awarded pursuant to competitive and merit-based selection procedures.''

This is a good bill.

Now how to reconcile the House's disaster of H.R. 2965 with the Senate's S. 1233? THAT is the question!

Saturday, July 11, 2009

Baseball Bats & Tennis Courts

Yesterday, my friend and colleague Fred Patterson, "the SBIR Coach" sent out an email with article links regarding SBIR reauthorization. The odd and infuriating thing about those articles was that nearly every one of them plied disinformation. Some were bizarre in their reporting, making free with the details. It's as if an historian talked about Ben Franklin being caught at a red light on his way to the airport. Some were honest mistakes. Others were intentional, like the repeated argument that changes were intended to "modernize" SBIR to make it easier for small companies to raise capital.

Here again is the link to the floor discussion on the "structured rule" of H.R. 2965. You can read many of the political arguments there. Bear in mind however that the voices heard represent only those which were allowed by the two chairs presiding: Jared Polis and Virginia Foxx. Moderate voices like Ed Markey's were not heard. We heard opposition mostly or entirely from Republicans, making it seem like a partisan tussle. Unfortunately, some of those Republicans used their spare minutes to bash the Democrats, rather than address the issues, reinforcing that false impression. Representative Donald Manzullo from Illinois was a refreshing exception, making clear that reasoned opposition came from members of both parties, singling out proposed amendments by Democrat Ed Markey and Republican John Gingrey.

But I want to clarify the issue here:

This is not about protecting the little guy!
This is about preserving SBIR as a source for seed-capital!

Imagine this: Barry Bonds meets Serena Williams at Wimbledon. Barry represents VCs; Serena stands in for innovative small businesses. Barry brings a bat. What's the deal?

Some will see a big bully with an unfair advantage. But the issue is certainly not that Serena Williams couldn't take Barry in a tennis match. The problem is that he's brought a baseball bat on a tennis court! There's no question whether Barry could knock that little yellow ball out of the ballpark. It's not that VCs are big and burly, that they're unfair competition. It's that they're playing a different game!

GET OFF THE TENNIS COURT WITH YOUR BAT, YOU MORON!

SBIR was created to provide seed capital for promising early-stage ideas. That's Phase I. Bring us an idea that hasn't yet been tried, to solve some problem in the world that wants resolution. We'll give you a small pot of cash to fund one or two researchers for 6 months to a year, to test the feasibility of that idea. And while you're at it, give us a commercialization plan: what's your market? Don't worry, it doesn't have to be big, it just has to be realistic, large enough to get you independent of federal dollars in a couple years.

If your idea proves feasible, we'll give you a medium-sized pot of cash for a couple years to fund the development of your idea into a prototype. That's Phase II. If your prototype delivers on what it promises we'll help you along to get your prototype in the hands of end-users who need it. We'll acquire it if we need it, and we'll encourage you to find strategic partners and investors to make it commercially viable. That's Phase III. It's a system that has worked for three decades.

You see the pattern here? SBIR is for seeding ideas, proving out their feasibility, developing prototype solutions, and culminating in commercialization. That's not new. That's the way it's been. Many of the changes proposed by H.R. 2965 are not modernization, they are destroying a valuable resource. VCs follow another model, say the rules of baseball vs. the rules of tennis. They're both worthy sports. It's just baseball doesn't belong on a tennis court.

VCs want big markets, rapid growth, and a clear and short-fused exit strategy. If your idea will save 200 lives a year, and garner $3m in annual sales, no VC or large corporation will touch it. That's why we need small businesses as well. That's why we need seed-capital. VCs invest in companies; SBIR invests in ideas (at least it had before H.R. 2965). That's the issue!

Here's the fact: A higher percentage of independently-held SBIR firms commercialize their SBIR-sponsored products than VC-held firms do. [Venture Funding and the NIH SBIR Program, National Research Council of the National Academies of Science, June 2009: Figure 6-1, p. 49.]

If SBIR is transformed in the way that H.R. 2965 intends, the last vestige of reliable seed-funding for promising ideas in the United States will have dried up. Mark my words: if this becomes law, the U.S. will lose a great many research entrepreneurs to foreign countries that are more amenable to innovative ideas, and fewer foreign innovators will be migrating to America, choosing more welcoming destinations.

Friday, July 10, 2009

Parody of Debate and Discussion

Posted on GovTrack is the transcript from the farcical floor discussion of H.R. 2965.
Don't read it if you have a weak stomach.

Thursday, July 9, 2009

Flying the bird

Yesterday morning, my main hard drive failed. Booted up and [gebleep gebleep] Disk Drive 0 not detected. After a long talk with tech support, it would seem that the hard drive is simply dead to my computer. Fortunately, I had had the forethought to back up all my important business and research files before my vacation last week. So, I lost only a couple days worth of work. I suppose it's more like three and half days if you count the time I spent yesterday and today reinstalling all the software and restoring backups. Frustrating, but not catastrophic.

Since I recently joined the Microsoft Partners Program and signed up for the Microsoft Action Pack Subscription (MAPS) the business now has 10 licenses for a whole slew of MS software for about $300 year! I took the opportunity to upgrade the computer from Windows XP to Vista. I gave up on my earlier plans to migrate to Linux, at least for now. Sometimes, running a business means making a judgment call re: priorities. I might like to see a marketplace where software providers are more fairly diversified. But I've been seduced by the fact that Windows is far better supported for plug-and-play functionality. For now, I can't justify the effort to make the change.

I had quite a bit to install and reinstall. On top of trying out the latest offerings by Microsoft, I'm giving the new IBM Lotus Symphony a whirl. IBM doesn't include email and calendaring as part of their free offerings though. I've been using Thunderbird, but thought I might give Outlook a chance again. I started using Thunderbird about the same time I quit using Microsoft Office. But I've realized migrating my emails would be a near herculean feat. I'm not convinced it'd be worth it. Outlook may be more broadly integrated (I noticed even Quicken 2009 offers a "Sync with Outlook" box-though I haven't the slightest idea what it does).

For now, I think I'll stick with Thunderbird, with the Lightning add-on for calendaring. I've experienced some odd problems now and again with saving and editing events... but they're transient and minor. One reason I had left Outlook was that it was such a memory hog, slowing everything down. My guess is Thunderbird is still sleeker in that regard. And it works. What more could you need?

Paul Ryan statement on H.R. 2965

Rep. Paul Ryan (WI-1) has issued a statement following the passing of the flawed H.R. 2965, including the following remark:

I was troubled by the Majority’s rejection of a commonsense improvement that would have gone further in support of small businesses. Legitimate concerns were raised on the impact on venture capital ownership restrictions, and I was eager to support an amendment to address this issue introduced by Representative Ed Markey, my Democratic colleague from Massachusetts. Unfortunately, the Speaker did not allow a vote on this provision.

Wednesday, July 8, 2009

Huff and puff and...

The great strength and value of the Small Business Innovation Research program (SBIR) has always been its ability to seed promising ideas that otherwise might never get off the ground. The innovations that have resulted from SBIR seed funding have saved lives, have saved money, and have provided the federal government and the economy at large with an enormous and incomparable return on investment. This return has taken the form of high-quality and enduring jobs, and transformative innovations that have reached the marketplace where they can benefit the general public as well as the sponsoring agencies.

The overwhelming majority of these innovations have been achieved by independently held small businesses with little to no venture investment. If you don't believe it, the Small Business Technology Council and Anne Eskesen's Innovation Development Institute have compiled extensive statistics on the matter.

The argument that venture capital involvement can be used as a proxy for validity of a small company's viability is a false one. VC investment strongly favors only those companies that are poised for rapid and significant growth. Both the tortoise and the hare finish the race, sometimes in ways you might not expect. Growth and expansion are not the best measures of innovation or value to society.

How many Boston Markets, Circuit Cities, and Starbucks have we seen over-expand and grow too rapidly, resulting not in benefit to society but in the rapid loss of millions of jobs, despite a few shareholders making millions. Winning the lottery provides rapid and significant ROI as well, but its beneficiaries are few, and their largess often smaller. If the principal focus is on short-term financial gain, innovation often suffers. According to the prominent Venture Capitalist Marc Andreesen: "When companies are acquired quickly, innovation slows down."

The greatest threat posed by H.R. 2965 is not its weakening of the eligibility rules, to remove all restrictions to VC participation. If their participation in the end supports the aim of stimulating innovation, creating jobs, and benefiting society, there should be little to complain of. But that's a big "if". The greatest threat is that the proven effective three-tiered system (Phase I: feasibility; Phase II: development; Phase III: commercialization) will be dismantled and discarded.

H.R. 2965 does far more than alter eligibility requirements (perhaps the least of its vices). It raises the caps for funding far beyond what can be justified by inflation (are wages really 250% higher today than a decade ago?), without increasing the pool of funds (by means of raising the allocation percentage of existing expenditures). $10 million can be 100 awards at $100k or five at $2 million each. The math is pretty simple. The net effect of this change will be an immediate and lasting reduction in the number of awards issued (meaning fewer promising ideas will get the chance to move ahead).

But it's worse than that: H.R. 2965 mealy-mouths a requirement for Phase I, opening the door for "justifications" to bypass the crucial feasibility phase, and the bill explicitly authorizes concurrent Phase I/Phase II awards, as well as perpetual consecutive Phase II awards. This means discarding the requirement to prove feasibility before garnering larger awards (as proposed to be on the order of $2 million), and removing any oversight that might enforce that the ideas funded hold commercial viability beyond perpetual government subsidy.

This is not about protecting small businesses from the Big Bad Wolf. Entrepreneurs can hold our own. It's about safeguarding that American taxpayer dollars will be well spent, that the investments made to stimulate innovation will be sufficiently diversified to ensure that in the end the American taxpayer is the greatest beneficiary. What a refreshing change from recent policy that would be!

Tuesday, July 7, 2009

Appropriate names

I've mused at how Bernie Madoff has an appropriate surname, having made off with so many people's cash.

Now, I come to reflect on just how appropriate a name Slaughter is for the chairwoman of the House Rules committee, which just flagged the railroad through the station. Get this, absolutely no debate, no opposition to the leadership of the House Committee on Shafting Small Businesses and the House Committee for Remanding Science and Technology to the Sole Discretion of Universities and Profit-Takers. It figures that the Honorable Louise M. Slaughter hails from New York, the only state in the Union which receives more seed funding from VCs than from SBIR!

I just don't get it, really I don't. Government of the people, by the people, for the people only permits the wealthy and the established to participate. New ideas need not apply! Innovation? Check it at the door, unless it can guarantee our friends here a hefty ROI in short order. Who do these people work for, anyway? How can no debate serve anyone's best interest? How can legislators honestly expect to arrive at the best resolution to contentious matters without open discussion of the issues? I begin to believe that isn't their motivation. Then, what is?

Victor's justice! I am so ashamed of this government! Not even the decency of open debate! Really, I thought only countries like Iran and Venezuela permitted such stifling of democracy.

Marc Andreesen: "...innovation slows down"

Claire Cain Miller of The New York Times has been covering the new venture by Marc Andreesen & Ben Horowitz. Today's installment includes the remarkable quote:
When companies are acquired quickly, innovation slows down, Mr. Andreessen said.
Isn't that what we've been arguing all along? Isn't that the linchpin in the case against a VC takeover of the Small Business Innovation Research program (SBIR)? Small, independently held businesses are the most innovative around!

SBIR represents the last great opportunity for seed funding. Even with the "secret plan" of Andreesen Horowitz (as Claire Cain Miller puts it), it is clear that the overwhelming majority of us will not benefit from their largess. Why? As her article from yesterday put it:
Almost all of the companies in which they invest will be in Silicon Valley, they said.
So, what's new about that? While I would heartily welcome the participation of Venture Capital in seeding promising ideas, taking a minority stake in companies and entrepreneurs proving out their ideas (pre-prototype, pre-growth), it seems unlikely that VCs will suddenly branch out from their tiny coastal enclaves, doling out largess to sponsor yet-unproven ideas.

In the meantime, SBIR remains the only game in town (that is, unless the leadership of the House Small Business Committee and House Science & Technology Committee succeeds in railroading through HR 2965 without amendment). That remains to be seen.

Monday, July 6, 2009

Hope for SBIR in the House

Rep. Ed Markey of Massachusetts has submitted an amendment to H.R. 2965 which:
  1. Allows NIH to direct up to 15% of its SBIR budget to majority venture owned businesses and allows every other agency to direct up to 5% of its SBIR budget to majority venture owned businesses instead of allowing majority venture owned businesses unfettered access to all SBIR funding.
  2. Increases Phase I and Phase II award sizes from $100,000 to $150,000 and Phase II award sizes from $750,000 to $1,000,000 instead of $100,000 to $250,000 and $750,000 to $2,000,000 as proposed by H.R. 2965.
This is a good amendment to an otherwise destructive bill. SBIR must be reauthorized for the sake of innovation, for the sake of small businesses, for the sake of job creation, for the sake of our national economic well-being. H.R. 2965 as submitted without amendment would transform the more than quarter-century proven success of SBIR into a neo-SBIR, far less inclined to support seed funding for truly innovative businesses, and far more likely to subsidize the risk mitigation interests of large venture capital firms, and the tiny portfolio of companies they own. Markey's proposal allows for a reasonable accommodation of VC-majority ownership without gutting the strengths of SBIR.

Most importantly:
  • SBIR must be retained in Phase I for early-stage seed funding, to support pre-prototype feasibility studies--Phase I should be sacrosanct; This issue is not directly addressed in Markey's amendment. H.R. 2965 allows for dangerous precedents in weakening the status of Phase I.
  • Increases to allocations should reflect inflation and the higher cost of doing business today, but not raised so high as to severely reduce the number of awards under the program.
  • The SBIR allocation as a percentage of agencies' budgets should reflect the value of SBIR for the greater economy, principally it's ability to create and sustain high-quality employment. In this light, a significant increase (at least a doubling or tripling of the current 2.5%) could be easily justified.

Saturday, June 27, 2009

Fed prizes for innovation

The Office of Science and Technology Policy (OSTP) blog posted a challenge today to propose ideas for government sponsored competitions, á la the X Prize Foundation. Among their reasons for considering this approach was that it might allow the government to: "Attract new entrants such as small entrepreneurial firms."

Um... doesn't SBIR do that? Don't get me wrong: it's an interesting proposal, and certainly worth consideration as part of the arsenal the government uses to stimulate innovation. But... I'm not sure I see how this would attract "small entrepreneurial firms," at least those without another significant source of funding.

Science and R&D take time, and effort, and creativity, and persistence, and a willingness to endure lots and lots of failure before arriving at a novel solution to a long-standing problem. Thing is, small entrepreneurial firms still need to make payroll. At present, there are two ways to be an innovative entrepreneur:
  1. Be independently wealthy, and therefore afford the leisure to pursue your passions.
  2. Obtain funding from an outside source to cover the essentials (mortgage and utilities and food) long enough to make a breakthrough that's self-sustaining.
At present, what outside sources of funding are available to sustain the majority of us who fall into category 2? Well, let's see, there's Angel Investors and Venture Capital. The latter of these is constitutionally allergic to early-stage pre-prototype research, preferring a significant ROI in general by about the fifth year; the former of these is marginally more open to it, seeking an exit at around 7 years, but represents a vanishingly small pot of funds, and therefore is accessible to only a very few firms.

Then, there's SBIR! Now, just why would we think that shifting the focus of SBIR away from early-stage seed funding would be good for innovation?

And just why is OSTP Director John Holdren writing to the Chair of the Senate Small Business Committee to argue against increasing the allocation percentage for SBIR by contending President Obama "is committed to increasing federal investment in R&D ... which will increase the total funding available to the SBIR/STTR programs" and that the current pathetically low allocation of 2.5% of extramural R&D funding from qualifying agencies to small businesses (which incidentally account for the overwhelming majority of new jobs created in this country) therefore provides "a sufficient floor for agencies to invest in innovation from small businesses”?

Is that where the Administration thinks innovative entrepreneurs belong: on the floor?

Supply + Demand + Invisible Hand

At the risk of perverting Adam Smith's metaphor, the Invisible Hand seems quite an apt image for that force of economics that distorts the surface of things.

If only Supply vs. Demand were a complete picture! This is how one might view the world: Merchant Abe has a supply of 100 units of Quagmire Oil, a very useful substance for releasing oneself from quagmires. One unit suffices for a single use. There are 200 residents in Abe's village of Borbor, who are prone to getting enmired, thus a market is born.

The first week, Abe charges 2 Boreals per unit. He sells out in a day to 100 patrons. He gets a fresh supply the following week, and raises his rates to 3 Boreals. Of the initial 100 units, 50 remain, so eager buyers have diminished to 150. Still he sells out in a day.

The next week, he brings 200 units to market, but only sells 75. The following week, he has competition, and a total of 400 units are for sale. Suddenly, the price drops to 1 Boreal per unit, and supplies stock up. Voilá, an economic theory.

But, see this:
ECONOMISTS tend to think that an industry divided between hundreds of players, each with a tiny market share, should be fiercely competitive, with prices cut to the bone. But economic theory struggles to explain the bizarre world of fund management, where the market is fragmented but fees stay stubbornly high.
-- "Competitive failure," The Economist, June 18, 2009

The only surprise here is that this sort of social and economic complexity would surprise anyone. Perhaps economists would benefit from talking to psychologists and sociologists. Perhaps the world would become a clearer place, or at least a less perplexing one if we encouraged the cross-fertilization of ideas across multiple disciplines, calling on a wealth of methodologies, backgrounds, and approaches. Therein lies true innovation.

Truth is, there are pernicious pockets of irrational pricing that pervade the market, which have seemingly less to do with any supply vs. demand calculations, and more to do with established expectations. One would be inclined to suspect that cost is relative to worth, and that worth is easily calculated by supply vs. demand. How much is it worth? is a question we often ask, wishing to buy and sell at a fair market price.

The greater the supply or lower the demand, the lower the worth; the lower the supply or greater the demand, the higher worth. But, we've seen how that tack was not sufficient to determine appropriate pricing of housing markets across the world (or for that matter appropriate pricing of company shares). Why? Because we all began to expect the value to be justified by the prices others were willing to pay. It became less what do I need? What's it worth to me? and more:
Alright, so I need a house... and this one's sufficient, but that family bought a bigger house, sold it in two years for a handsome profit, and moved to an even bigger one. Gosh, I'd sure like to do that.
And so... a market is born. Only, it was never sustainable. When I was living in Santa Barbara, looking at house prices with multiples of 12, 15, or even more of average household income, I scratched my head, and decided to sit out the market for a while. The old rule of thumb I learned was a house should cost on average 2-3 x a household's annual gross income. Our current house in Wisconsin is 1-2 times current earnings. And we're happy. Sure the weather is nicer year round in SB than here. But now I can afford to visit when the weather gets rough.

More importantly, in Santa Barbara, renting was cheaper, MUCH cheaper. The cost to buy a comparable property carried a premium of at least 40-60%. The calculation is a rather simple one, but so few people did it. But it's not just house prices.

How do we explain that two professors at the same university, with the same experience, teaching the same load of classes, to the same number of students, who each pay the same tuition, can receive widely divergent salaries based on nothing more than their discipline? The argument is that an economist or engineer or lawyer for instance can make far more "in industry" than, say a sociologist or historian, and thus their wages must be higher to compete for talent. But why? They're not working in industry now are they?

Here's a bid for the free market. If people are simply unwilling to pay the higher prices for goods, or houses, or in wages, the market will revert. The article cited above continues:
If enough investors focus on cost, not performance, the fund-management industry will have to give them a better deal.
I've made a similar argument about wages. When I taught adjunct at Chapman University in Orange, California--a private university where tuition is around $30,000 a year--I was appalled that they could offer a PhD a mere $15,000 gross a year to teach 80 students per term, call it part-time employment, and refuse to offer any benefits whatsoever (including an office to fulfill their requirement of office hours). Even more appalling was that, a week after I resigned, being willing to endure those conditions for only one term, two instructors were hired to fill my shoes, one for each of my two classes.

The point is, so long as people are willing to accept the expectations they've been given, the more those expectations are reinforced. If they cue up (providing supply) to receive low wages, low wages will continue. If they cue up to buy overpriced goods, or services, or houses, the prices will continue to rise. That is... until they can no longer. That's the free market. It will correct itself, if we permit it to.

Don't buy when the prices are too dear: whether it's a house, or an accountant or attorney. And don't take less than you or your company is worth. Simple lessons, but they all come down to one enormously powerful ability we all possess: the power to say no! Use it, but use it wisely.

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