Dear SBIR Insider,

This is by far, the most difficult "SBIR Insider" I have had to write. What you are about to read concerning your SBIR program and the politics involved may turn your stomach, and I may lose you as a reader. I may also lose some of my inside contacts, but this is a price I'm willing to pay to inform you of the real story behind the House Small business Committee's SBIR reauthorization attempt and the odds for failure.

This won't be easy for you either, nor should it, because your program is in serious trouble, and if SBIR is to survive as a small business program with continued opportunities for you, you're going to have to fight for it, and fight hard. We'll explain how later in this article.

DISCLAIMER: I have no horse in the race or any other silly metaphor to infer that I'm a "disinterested" party and have nothing to gain/lose in the SBIR outcome. I have no ill will toward the venture capital community in general, and I even worked for one for several years in the 80's. The VC industry is of significant importance in the SBIR community and compromises for additional and fair participation should be explored. However, a few of the larger, stronger and best "connected" VC organizations are succeeding in hijacking the SBIR program as well as silencing your voice to oppose their cause in the U.S. House of Representatives Small Business Committee.

POLITICAL DISCLAMER and JUICY INSIDER MOMENT:

I have no desire to try and influence you about your choice of political party or candidates. In my non-partisan endeavor for SBIR, I often start my conversation with staffers or their bosses stating: "I hold both parties in equal contempt, so if I say something nice about the �other guys', it's not meant to be at �your guys' expense."

In a casual conversation with a high ranking elected official, I stated, "Individually many people like you guys, but as a ruling body, they think you suck, and that's why the congressional approval rating is so low." The response just floored me, and gave me a new appreciation for this person. They said, "Do you think it is possible that something similar can be said about the American people? As individuals they are great, but as a block of voters, they suck, because they keep voting for the same incumbents, whose work they disapprove of?"

Now let's get down to the real business.

The House Small Business Committee (SBC) has held three hearings since January 2008 concerning the state of SBIR and the needs for change, as part of reauthorization. The SBC has drafted legislation the details of which have been held closely to the vest. It is suggested that they will make a few minor modifications and submit the bill without consultation with others for a quick vote. Here are some of the details of their 3/13/08 draft:

1. There will be no increase in the SBIR funding of 2.5% of the extramural research budgets.
2. Award amounts are doubled, $200k for phase I and $1.5m for phase II.
3. Agencies can exceed these amounts as they wish with no justification or reporting to SBA.
4. Unlimited number of continuing (sequential) phase II awards for the same entity and project
5. Change to the definition of "Independently owned and operated" allowing VC's and/or Universities to have ownership status, and VC syndicates being able to have majority ownership and control (while exempt from affiliation rule).
6. Reauthorization for 2 years only

There are many other details, some of which are very good, but these first 6 items need to be discussed.

With no increase in program funding, and the legitimization of unlimited "Jumbo" awards, the number of awards to small businesses will drop drastically. Some experts calculate it could be as high as a 50% reduction in awards (that's several thousand yearly)!

Many believe it is the jumbo awards and prospect of more jumbo awards that most attract the big 2 VC organizations (BIO and NVCA) to SBIR. Almost everyone agrees that award amounts should be adjusted upward to keep pace with inflation, but few we talked with believe it should be unlimited (as the House SBC proposed). Every year or so representative Bud Kramer (D-AL) floated a bill to increase the size of SBIR awards, but he always set a ceiling and his bills went nowhere.

Some people have talked to the Senate Committee on Small Business and Entrepreneurship (SBE) to try and get the agencies to reduce the number of jumbo awards. Unlike the House SBC, the Senate SBE was interested in hearing various sides of the VC and jumbo awards issues and held hearings featuring witnesses from both sides of the issues.

I got in trouble with the NIH when I mistakenly reported an NIH $8m phase II jumbo award. I apologized but later learned from the April 2006 GAO report that it was actually a $9.6m NIH fast track award! (see GAO-06-565 page 13) The project may have been worthy, and hopefully good things came out of it, but is that the type of project the SBIR was created for? How many other awards were sacrificed for this? What about a good portion of that $9.6m coming out of the other 97.5% of the NIH's extramural budget?

I've discussed the jumbo award issue with several SBIR program managers. I'm told that they need the flexibility for some projects to significantly exceed the current policy directive. These are good people and I believe them and the cases (in abstract) that were shared with me. Flexibility in award amounts should be discussed and provided, but carte blanche such as the House bill authorizes, should be avoided.

The same can be said for flexibility of VC involvement. Perhaps there can be some compromise procedure that would protect the system from "excessive" numbers of jumbo awards and VC ownership issues at the expense of the actual small business community.

For example, how about considering a subset, or something similar to the The North American Industry Classification System (NAICS) codes to be applied for topics? In the small business world, NAICS codes actually vary the SBA eligibility size standards depending on what the classification is. Some limit a business to 500 employees, while others limit their revenue (varying amounts i.e., $6.5m). Others reduce the number of employees to 50. These codes are revisited from time to time and modernized.

NIACS codes are not foreign to SBIR. Did you know the DoD often uses them for their solicitations? Example: The recent DoD STTR 2008a posted 2 solicitation notices for the same solicitation with different NAICS codes:

541711 Research and Development in Biotechnology (see http://www.census.gov/naics/2007/def/ND541711.HTM#N541711)

541712 Research and Development in the Physical, Engineering, and Life Sciences (except Biotechnology) (see http://www.census.gov/naics/2007/def/ND541712.HTM#N541712)

I'm not suggesting something as large and burdensome as the NAICS codes, but perhaps a small number of codes that allow expanded needs, and making sure each agency stays within the allotment (percentage of award $$$).

Without constructive talks about reasonable compromise, many of you, perhaps most, will be shut out of the SBIR program. The powers that be in the House will not allow talks on these issues. In the words of several House SBC staffers, this is a "done deal".

Perhaps my ideas of compromise are not worthy of any consideration. Many of you have far better minds than I for offering potential solutions to the VC and award $$$ issues. Shouldn't your voice, or an alternative view to BIO be heard? Isn't the SBIR program larger than just biotech?

The House SBC wants to negate debate and your input on the aforementioned subjects. One House SBC staffer scoffed at the suggestion that perhaps "the fix was in." I'm willing to give that staffer and his bosses the benefit of the doubt. Perhaps it is too confusing to listen to more than one side of a story, and hence the story worth listening to is the one that greases the skids. You know the word for that, it's called lobbying. Obviously people must think you're unimportant, stupid or they just plain don't care.

The House SBC has held 3 hearings on SBIR since January and these were supposed to help them determine what could be done to improve the program and get it reauthorized. However, each hearing was predominately focused on the area of biotech and was dominated by supporters for BIO, their VC issue and biotech funding. No alternative views were allowed.

The 3 hearings had a total of 16 witnesses, 10 of which were predominately for BIO/VC, 2 more for general biotech issues, 1 for DoD, 1 for overall SBIR, and 1 for state outreach. Although the DoD is by far, the biggest SBIR program, it was severely subordinated in the hearings to BIO and the topic of biotech.

Nobody was asked (or allowed) to give testimony in any of the 3 hearings contrary to the word of BIO and NVCA. In communication with House SBC staffers, the subject of alternatives to VC was "off limits". Some small Maryland based biotech companies wanted to make their side known, but were rebuffed by the committee. They then tried to go through their Congressman Steny Hoyer (D-MD), House Majority Leader's office, but to no avail.

Here's a rundown on the hearings and witnesses. The folks with asterisks were testifying either for BIO or in support of BIO's VC initiative.

www.house.gov/smbiz/hearings/hearing-01-29-08-sbir/hearing-01-29-08-sbir.htm

* Mr. Douglas A. Doerfler - On behalf of the Biotechnology Industry Organization

* Mr. Robert J. Beall, Ph.D. - Cystic Fibrosis Foundation

* Mr. Michael Borrus - X/Seed Capital Management

Lt. General Lawrence P. Farrell, USAF (Ret.) NDIA (the only primarily DoD related witness)

Mr. William E. Bean - The College of William & Mary (overall SBIR view)

Mr. Borrus had a small degree of participation with the National Academy's comprehensive $5m Study on SBIR. He was questioned as if he was the "go to" person on the study, and he answered from the standpoint of a VC, totally supporting BIO. Why didn't the committee invite the study's chair, Dr. Charles Wessner, who knows more about the study than anyone else? Could it be that Dr. Wessner would address the facts of the study (not his opinion) and the facts may not support the various BIO claims? General Farrell gave a DoD perspective and was interesting. Mr. Bean gave a good overall view of SBIR including DoD and offered some excellent suggestions for improvement.

www.house.gov/smbiz/hearings/hearing-02-13-08-sbir-sub/hearing-02-13-08-sbir-sub.htm

Ms. Jo Anne Goodnight � NIH (biotech related)

* Ms. Amy Comstock Rick - Parkinson's Action Network

* Dr. Mel Billingsley, (Ph.D). - On behalf of Pennsylvania BIO

* Dr. James D. Stefansic, - Pathfinder Therapeutics, Inc.

* Dr. Nicholas Franano, M.D. - Proteon Therapeutics, Inc

Again, there were no companies allowed with alternative views even though several good and geographically close companies in Maryland, wanted to provide testimony from a different perspective. It simply was considered "off limits".

www.house.gov/smbiz/hearings/hearing-03-13-08-sbir/hearing-03-13-08-sbir.htm

Mr. Steven C. Preston � Administrator, SBA (overall program related)

* Mr. James C. Greenwood - President and CEO, BIO

* Mr. Mark G. Heesen � President, National Venture Capital Association (NVCA)

* Mr. Mark B. Leahey - Medical Device Manufacturers Association

Dr. Charles H. Matthews - University of Cincinnati (biotech related)

Mr. Mark Skinner - State Science & Technology Institute, SSTI (State SBIR outreach)

Preston, the SBA Administrator was the only person allowed to discuss the SBA view on size standards, but it was limited and he had other support questions to address. No witnesses were there to offer opinions contrary to BIO. Mark Skinner of SSTI was there to discuss the Federal State & Technology Partnership (FAST) SBIR outreach program.

We won't go into other details of the draft bill because there will be changes. Add to that the fact that with all the changes the committee made, it is only a 2 year reauthorization! In my opinion, and the opinion of some notable insiders, this bill won't see the light of day in the Senate.

The House Committee on Science (S&T) has 2 subcommittees that also share in SBIR oversight. They don't always see eye to eye with the House SBC but some are firmly entrenched with BIO and NVCA on this issue. This committee's history on SBIR is mixed, but at least in the past they have given fair hearings. Some on this committee have felt that too many SBIR resources were at the expense of the universities. Some of this has softened because quite a few universities have done pretty well partnering with small businesses in SBIR/STTR. The House SBC extended an olive branch to the S&T committee by including a change that will allow universities to be major investors in small SBIR companies.

It's too soon to know exactly where the House S&T committee will weigh in.

Historically this committee has been the best friend, and most honest broker for the SBIR and small business participants. Led by chair John Kerry (D-MA), this committee is your best friend and brightest hope to get an SBIR reauthorization worthy of being called a small business program.

The committee wants to modernize the program and bring it up to date, but they want clean and fair hearings. Kerry knew it would be challenging to get a new SBIR bill passed before the Sept 30, 2008 sunset, so he worked closely with Senate Armed Services chair Carl Levin (D-MI) who is also an SBE member, and Joe Lieberman (I-CT) to pass an amendment in an Armed Services bill to extend the SBIR "as is" for 2 years, thereby allowing a new SBIR bill to created without the pressure of a major election. The House Armed Services were supportive, but the House Small Business Committee and Science & Technology committees killed it in conference!

The Senate SBE is continuing its work to get something decent passed to keep SBIR going but the two bodies are far apart so don't look for anything soon. Considering all the high profile pressing issues Congress has to deal with, time is running out and SBIR isn't of primary importance. Congress will break May 24-June 1, then again June 28-July 6, then the big one August 9 � September 7 (the convention periods) and then they only have a couple of weeks to pass FY-09 appropriations or do more continuing resolutions.

For several years big pharma funded BIO, and the NVCA have issued press release after press release about how treatments and diseases are not being addressed because the SBA "changed the rules" to disallow VC participation in SBIR. BIO states that the SBA should "Once Again" open the SBIR program up to the VCs.

Although their statement is fallacy, when BIO issues a news release, it gets picked up all over the country in newspapers and the internet. After all, this is BIO, the major organization whose big pharma members include Abbott Laboratories, Pfizer, Merck, Monsanto, Bristol-Myers Squibb, Amgen, Eli Lilly, Schering-Plough, GlaxoSmithKline and many others.

Over the years BIO's reiterated words, not based on facts, actually become the facts (similar to repeating a lie often enough it becomes perceived as the truth) and many good people turned to them and jumped on their bandwagon. As a result, good well meaning groups and organizations rise to support BIO's cause on the SBIR front. These people have no clue as to what's really going on, and in fact, many of you are branded by them as greedy special interest groups only concerned in funding your own "science projects", at the cost of curing or treating major illness.

When the BIO folk walk the halls of Congress, which they do regularly, many staffers salute, clear their calendars, and are very impressed when the likes of BIO chair, former U.S. Congressman Jim Greenwood (R-PA) or one of his assistants stop by to pedal their propaganda.

More importantly, BIO and NVCA also contribute considerable amounts of money to the politicians they need to influence. I am not suggesting any illegality, it's just the system.

I've been asked why House SBC chair, Nydia Velázquez, who claims to champion the little guy, supports the big guys in BIO and NVCA so strongly. Here's my opinion on this subject. When a political party rewards you with a position of committee chair, you are expected to return a favor to the party, usually in the form of fund raising. In Velázquez's case, she comes from a poor district and raising money is a challenge. Organizations such as BIO and NVCA have made significant contributions to her (all legal), and since she is never in a position of not being re-elected, I assume that a significant amount of her fund raising goes to the party. She can support the BIO position because it does not have much meaning to her constituents.

More importantly in my mind is why Speaker of the House, Nancy Pelosi is so VC supportive in trying to revamp all federal small business contracting (including SBIR) to give the VCs (especially in syndication form) unfettered access to small business ownership.

One of my good acquaintances who is quite familiar with a portion of the VC community tells me that I'm way out of line and that he sees nothing in VC publications to show much interest in the small business and SBIR communities. If that's the case, why did we see the House, under Pelosi's direction attempt to make the biggest small business size standard change in the history of the SBA?

No, I can't give you an answer, but I question why the mainstream media hasn't asked this question. I wonder if the fact that Pelosi is the 8th wealthiest person in the House, and the source of her family wealth is her husband's investment activities, plays a role. Perhaps not, but what is driving her special interest to the point that they perform these rituals metaphorically under the cover of darkness.

If you want to try and have an impact, you'll have to roll up your sleeves and take action. Here's what I recommend:

1. Prepare succinctly what you want to convey. Put it in your own words, to convey your thoughts, not mine or others.
2. Find out if your representative is on the House SB committee and/or the House Science committee � For SB go to www.house.gov/smbiz/democrats/members.htm for Science go to www.science.house.gov/about/members.htm If your representative is on either list, you can and should include that information when you talk with your representative, i.e., Congressman "whoever" is on the "blank" committee and I have an issue of great importance I want to discuss.
3. Go to www.house.gov and find your representative. Get their Washington DC Office number, call them, identify yourself as a constituent, and ask to speak to a senior staffer
4. Send them an email or preferably a fax, or as last result, fill out their web contact form.
5. Call the House Small Business Committee � for Democrats: 202-225-4038, for Republicans 202-225-5821. Ask to speak to a senior staffer about your SBIR concern.
6. Find out if your Senators are on the Senate Small Business and Entrepreneurship Committee by going to www.sbc.senate.gov/about If they are, click on their name and find their DC number. Call them!
7. If neither of your Senators are on the committee, go to www.senate.gov and find your Senators. Repeat steps #3 and #4 for your Senators.
8. Call the Senate SBE committee at 202-224-5175

Some staffers are good as gold, some ordinary, and some complete phonies. It is a good idea to have something to verify that you communicated with your Senators and Representative. You can send a copy to a friend, to me [email protected], or to an organization such as the Small Business Technology Council (SBTC) [email protected]

Also, the SBTC has an action alert program on their site www.sbtc.org that will send emails to your Senators and Representative. It has boilerplate language that you can edit and it makes things easy for you. Simply click on the "Take Action" button, fill out the form and go.

There's a downside to this in that boilerplate letters don't carry as much weight as you doing your own. However, there is an advantage in that SBTC, the #1 organization fighting for SBIR reauthorization, will receive a copy and be able to use your participation as additional leverage for SBIR reauthorization.

I recommend you do your own letter and phone calls AND the SBTC boilerplate letter. Also check out SBTC membership and see if it's right for you. It's the only organization that specializes in SBIR/STTR and the Executive Director is Jere Glover, an original at the beginning of SBIR, and a former SBA Chief Counsel for Advocacy.

I apologize for the long windedness of this issue and the fact there was so much commentary involved. There are quite a few things going on currently in SBIR, aside from reauthorization and I'll return to "reporting" in that next issue due out in a few days.

As usual, I welcome your comments, and please respond to this email if you want to be removed from the list.

Here's looking forward to returning to our usual SBIR Insider, and a healthy future for your SBIR program.

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