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!

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