CORRECTION: This article incorrectly stated the number of years over which Precision Combustion, Inc. grew 50 percent. The correction has been made to the article below.
Connecticut’s small businesses worry changes in federal innovation funding will take money from start-ups and place it into the hands of large corporations.
But supporters of opening a greater percentage of the federal Small Business Innovation Research program to companies backed by larger firms say the change will make SBIR more efficient and effective at producing quality goods and jobs.
“Right now, it is a small business program,” said Kevin Burns, president of North Haven catalytic manufacturer Precision Combustion Inc., which started in 1986 using SBIR funding. “It is a misdirection of American resources to take away from small business innovation and give it to large companies to help commercialization of established products.”
SBIR started in 1982 with federal agencies allocating 2.5 percent of budgets to fund research and development at qualifying companies helping the agency fill a need. Precision Combustion, for example, won an SBIR award in July to help the U.S. Department of Defense find a way to increase the fuel efficiency of U.S. Navy vehicles.
Small businesses can receive Phase I SBIR grants of $150,000 and Phase II grants of $1 million. Participating federal agencies include departments of Agriculture, Defense, Commerce, Education, Energy, Health and Human Services, Homeland Security, Transportation, Environmental Protection Agency, NASA, and National Science Foundation.
Over the past 10 years, small businesses in Connecticut have received $257 million in SBIR awards. Several large Connecticut companies started as SBIR-funded businesses, including Cheshire drug manufacturer Alexion Pharmaceuticals, Danbury alternative energy firm FuelCell Energy, Inc., Wallingford hydrogen company Proton Onsite and Monroe defense supplier M Cubed Technologies.
“It has been extremely important to us,” said Michael Serio, president of East Hartford-based Advanced Fuel Research, Inc. “I don’t think we would still be in business without this program.”
What has Connecticut small businesses such as Precision Combustion and Advanced Fuel Research concerned is a proposal for the SBIR program opening up a greater percentage of the funding to small businesses with private funding from venture capital firms.
A proposal in the U.S. House of Representatives would allow venture capital-backed firms to receive up to 45 percent of the SBIR funding. A competing proposal in the U.S. Senate limits the inclusion to 15 percent for some federal agencies and 25 percent for others.
“We have to be careful about opening the floodgates where the venture capital firms can grab up all the funding,” said Congressman Chris Murphy, D-CT, 5th District, who supports the Senate proposal. “The whole point of SBIR is to provide seed funding for companies that have no other access to capital.”
Small businesses back by venture capital firms have received private venture funding, but they are still small businesses and should be eligible for SBIR, said Mark Heesen, president of the National Venture Capital Association.
“The idea put forth by the (U.S. Small Business Administration) that ‘If you’re venture-backed, you’re rich’ is a fallacy,” Heesen said.
Small businesses with venture funding have been vetted by firms showing their innovation is sound and their management has a business mindset, said Heesen. They will do a better job with SBIR funding.
For companies rejected by venture capitalists for having bad management or a poor idea to receive SBIR funding over a vetted-and-approved business is highly questionable, Heesen said. The National Venture Capital Association has pushed for changes in the SBIR program since 2009, but Heesen said the congressional support is greater this year.
“We are in such a budget-conscious environment, and members of the House and the Senate want to see how effective these programs are,” Heesen said.
Congress passed on taking any action on SBIR reauthorization in August and September, but Murphy said the issue could be resolved by the end of the year.
“We need to take this bill up sooner rather than later. We don’t want to delay innovation at America’s small companies,” Murphy said. “This has been one of the least productive Congresses in modern history.”
Burns of Precision Combustion argues venture-funded businesses have the money needed to develop their ideas. He said the venture capital-based firms will use the SBIR money to commercialize their products, instead of pushing toward new innovations.
Small businesses without venture funding have no alternative to SBIR, so giving a portion of the money to venture-backed firms takes away small businesses ability to bring their ideas to fruition, Burns said.
“The true driver for growth is innovative products,” said Burns, whose 40-employee company grew 50 percent over the past two years.
The SBIR program accounts for 4 percent of all federal research and development dollars, Burns said, with the rest going to large companies, colleges and universities. Despite their size, small businesses created five times as many patents as large companies and 20 times as many patents as colleges and universities.
Advanced Fuel Research of East Hartford started receiving SBIR funding in 1982, mostly from NASA and the Departments of Defense and Energy. With the help of this funding, the company has spun off three businesses, two in Connecticut and one in Massachusetts employing 60 total people.
“SBIR is a merit-based program, and it is very competitive; and we think we’ve done a very good job with the program,” Serio said.
Opening up the program to small businesses with venture funding will hurt other companies’ ability to get the money, Serio said. Plus, with other proposed changes such as handing out larger amounts over fewer awards will decrease innovation at small businesses.
“You get fewer companies involved, which we don’t think is good,” Serio said.