Entrepreneurs hopeful for expansion to small-business set-aside program

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Startups are welcoming proposed changes to a $2 billion federal grant program, which are aimed to put an emphasis on technology commercialization and allow venture-owned companies to qualify for funding.

The Small Business Administration on Monday will issue proposed regulations for a federal program that awards more than $2 billion a year in research grants to early-stage technology companies, with final regulations expected by year’s end. Changes on the way for the Small Business Innovation Research program include allowing startup research firms backed by venture capital investors to qualify for SBIR money.

Randy Harmon, who works with the New Jersey Small Business Development Centers to coach entrepreneurs seeking grants from SBIR and from a related, but smaller, program, Small Business Technology Transfer, said it remains to be seen if the changes mandated by Congress when it reauthorized the program last year will result in more money for startup technology ventures.

In addition to allowing venture-backed companies to qualify for SBIR, the program “will put more emphasis on technology commercialization,” Harmon said.

Under the new rules, federal agencies that participate in SBIR and STTR will be required to set aside more of their external research budgets for these programs. Currently, federal agencies that fund more than $100 million in external research, including the Department of Defense, the National Institutes of Health and the National Science Foundation, must set aside 2.5 percent of their external research for small companies eligible for SBIR; that rises to 2.6 percent next year, then gradually increases to 3.2 percent by 2017. In the STTR program, the set aside was raised from 0.3 percent to 0.35 percent, and will be 0.45 percent in 2016.

While the higher SBIR and STTR set-asides for small, startup research ventures is a positive development, “I expect this will be more than offset by declining federal spending by the SBIR agencies,” Harmon said. “The Department of Defense is the biggest player, responsible for about 60 percent of awards, and I think there will be increasing pressure on the extramural R&D budget at the DOD.”

Harmon said the grants “will probably will be a little more competitive, because venture capital-backed companies will be eligible.” Under the new rules, the DOD, the NIH and the NSF may award up to 25 percent of their SBIR funds to small businesses that are majority owned by venture capital companies, hedge funds or private equity firms. For all other agencies, the maximum is 15 percent.

Kelly Slone, of the National Venture Capital Association, said most startups funded by the group’s members are majority owned by venture capital firms, and under the old rules did not qualify for SBIR grants. The rule change “will allow for a more competitive and level playing field for companies to apply for these grants.”

Harmon noted that federal legislation reauthorizing the program ended three years in which SBIR was funded on a temporary basis, which generated considerable uncertainty in the high-tech world. “Now the program is alive and well, and there are some very good things in it,” he said.

According to the SBA, New Jersey companies received 803 SBIR and STTR awards, totaling $274 million, between 2006 and 2010.