The National Venture Capital Association wants Congress to reauthorize Small Business Innovative Research grants and make small venture-backed firms eligible for the program, a move that alarms the American Small Business League.

The SBIR program, set to expire in March, funds basic research by independently-owned small businesses. The grants go to basic research, which VCs won't fund. But firms can't apply if a VC owns more than 51 percent of the company.

"We want them to have the opportunity to apply and let the government decide which projects are worthy," said Emily Mendell, VP of strategic affairs at the NVCA.

The American Small Business League, an advocacy group devoted to small businesses getting federal contracts, opposes the move. President Lloyd Chapman argues the shift would put small businesses at a competitive disadvantage.

Chapman is especially concerned about VC competition for federal contracting dollars given Obama's selection of Karen Mills, a venture capitalist, to head the SBA.

"This is not just about the SBIR program, this is about the venture capital industry trying to have the definition of small business changed to include firms owned by venture capitalists, which will just divert federal contracting dollars to VC-owned firms," he said.

But Mendell counters the firms they want included are not well-funded juggernauts.

"These are really, really small companies, and just because they got some venture funding to bring one project forward does not mean they hit the jackpot," she said.

They support measures to prevent grants from going to large corporations, she added.