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

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

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

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

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!


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

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.