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.