July 19, 2005--A controversial proposal to allow VC-owned biotechnology firms to compete for Small Business Administration grants is inching its way through Congress and headed for a hearing in a House small business subcommittee early next week.

On the surface, the issue pits independently-funded companies against more established firms in a debate over whether the latter group should have access to the SBA's Small Business Innovation Research (SBIR) program, which is worth between $1 and $2 billion a year in grants to small businesses. Currently, only companies that are majority-owned by individuals are eligible, a rule that has been in effect for the past two years.

But backers of the change, including the Biotechnology Industry Organization and the National Venture Capital Association say that industry realities -- including an exceedingly long time to market and high levels of investment needed -- mean that biotech firms rely heavily on VC funding. "In biotech it's much easier for a number of venture capital firms to own a majority of the company," said Mark Heesen, NVCA president. "It often takes five or six rounds of financing to make the company viable."

Gail Maderis, CEO of Five Prime Therapeutics, agreed, adding that companies, which attract heavy VC investment are some of the best and should not be punished. She said that companies like Five Prime, which has raised $85 million from VCs, need SBIR grants to pursue early stage research generally not supported by VC money.

But Frederic Abramson, CEO of AlphaGenics, a company with no VC funding, takes issue with the claim. "The venture capital firms are becoming very risk averse. They want the federal government to subsidize their ability to make good decisions," he said. "If you have $20 million in venture funding, you can swim with the big guys."

What makes the issue sticky, said Stan Mandel, director of the entrepreneurship center at Wake Forest University, is that biotech start-ups with even the most promising ideas need all the help they can get. "It's really a conundrum. The companies that have received venture funding and show promise will usually continue to get more venture capital funding. On the other hand, if these are the best ventures, why should the SBA turn its back on them?"

While lawmakers prepare to debate the plan, its fate is far from certain. An SBA spokesperson said that the agency does not plan on altering its interpretation of the SBIR rules. And those hoping to force a change through legislation may have a difficult time getting it through the House Small Business Committee, where it is opposed by Chairman Donald Manzullo (R-Ill.).