Proposed changes to a $2 billion federal program designed to bolster research and development at U.S. small businesses could land a significant portion of the funding in the hands of large and foreign-owned companies.
Connecticut small businesses are worried about the U.S. Small Business Administration's interpretation of a congressional bill passed in December reauthorizing the Small Business Innovation Research program.
In writing the regulations following SBIR reauthorization, SBA created a new type of entity eligible for the program called a domestic business concern. This new entity must be organized in the U.S. and operate in this country, but doesn't have to be owned by American citizens. The proposed SBA rules also leave the door open for large domestic businesses to seize SBIR grants, as long as the grants go to affiliates or small businesses only partially owned by large companies.
“A number of small businesses have let the SBA know that they are not happy with that provision,” said Deb Santy, director of Small Business Innovation at semi-public agency Connecticut Innovations. “The feeling is pretty strongly that is not what Congress intended.”
SBA's regulations still are in draft form, although the public comment period ended in July. The final rules will roll out by the end of the year.
“The SBA was off-base by changing the ownership basis of SBIR,” said Kevin Burns, president of North Haven catalytic manufacturer Precision-Combustion, Inc., who has received SBIR grants. “There is no need to let in the huge companies or the foreign companies.”
SBIR started in 1982 with federal agencies allocating 2.5 percent of budgets to fund research and development at qualifying companies helping the government fill a need, which equates to $2 billion annually for small business research and development.
In May, for example, New London pharmaceutical firm LifePharms received a $300,000 SBIR grant from the U.S. Department of Health & Human Services to develop compounds to fight drug-resistant fungi in HIV patients.
Small businesses 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 Wallingford electrochemical manufacturer Proton Onsite, Enfield solar manufacturer STR Holdings, Milford spacesuit maker Air Lock, and Bloomfield laser developer DeMaria ElectroOptics.
In December, Congress reauthorized the SBIR program and its smaller sister program Small Business Technology Transfer. In extending the program through at least 2017, Congress for the first time allowed small businesses owned by venture capital firms to compete for 15 to 25 percent of the SBIR funds, with the percentage depending on the federal agency.
The new law called on SBA to write the rules on how venture-capital companies could compete for their percentage, but instead SBA rewrote the eligibility rules for the entire program and proposed opening it up for foreign-owned and large domestic businesses.
“It is important you let SBA know how these new changes will impact you before they become final,” said Susan Nichols, small business program director for the Defense Advanced Research Projects Agency, which administers SBIR for the U.S. Department of Defense.
By opening up the program to businesses already with financial backing or that are part of larger corporations, the new rules will squeeze out the smaller start-up operations SBIR was intended to foster, Burns said.
“It takes ingenuity, creativity and sometimes desperation to come up with the best ideas,” Burns said.
Giving SBIR grants to small businesses owned by foreign companies creates a bigger problem, as the intellectual property from the research and development ultimately will lie with a non-U.S. entity, Burns said.
“The odds of the production sticking in the U.S. are much smaller than if it was awarded to an American small business,” Burns said.
Keeping SBIR grants with small Connecticut businesses drives research and development at Connecticut's largest companies as well.
Stratford helicopter maker Sikorsky Aircraft Corp. is in the midst of revamping its technology to make its products faster, more automated, aware and adaptive. While the company has its own research and development into these areas, Sikorsky also relies on its many vendors to improve the components.
“You being the rocket fuel in driving innovation at larger companies,” said Christopher Van Buiten, Sikorsky vice president for technology and innovation research and engineering, to the attendees at the SBIR & Global Trade Summit on July 25 at Mohegan Sun resort casino in Uncasville.
East Hartford aerospace manufacturer Pratt & Whitney is working on several new generations of engines for the military and commercial markets, needing to delivery 1,000 engines in 2018. Pratt's Connecticut supply chain — numbering more than 600 companies — is more important than ever, said Thomas Masters, Pratt manager for strategy and business development.
“There is greater supply chain diversity because we outsource more than we did in the 70s and 80s,” Masters said. “Technology is the absolute key to our competitiveness.”
The congressional reauthorization of SBIR also changed a number of other aspects of the program, including shortening the decision making period, offering more commercialization assistance, weeding out waste and fraud, and establishing an evaluation system for SBIR awardees.
“Obviously, there is a very, very small percentage of waste vendors in the program, and it is in everybody's best interest that they get caught,” said Matthew Portnoy, SBIR program manager for the National Institutes of Health. “There is going to be a lot more scrutinizing in this area.”
The biggest concern for Connecticut's small business remains that the program will open up to foreign-owned and large domestic companies, Santy said. Everyone will know by the end of the year whether SBA heard all their concerns and altered the proposed changes to the program rules.
“We are all kind of breathlessly waiting,” Santy said.