Small Business Grants Could Be Changing

Federal Program Could Expire or Change

Noah Brode August 29, 2011

Josh Tarnoff is the CEO of a small, Pittsburgh-based startup company called Complexa. He’s trying to bring new medicine to market that would help control inflammation.

Tarnoff said the compound was developed at the University of Pittsburgh several years ago, and it has the potential to help people with diabetes, kidney disease, and trauma.

“For years, the pharmaceutical market was dominated by chemical compounds that you put into the body, and a lot of them are foreign substances. What we’ve been able to do is find something that’s a natural, the term that’s used is ‘indogenous,’ compound to treat inflammation the way the body does, just in a more potent way,” said Tarnoff.

Usually, businesses as small as Complexa don’t have the means to fund their own research, which can cost millions of dollars. So, after gathering what they can from family and friends, they ask for handouts from private donors.

Pharmaceutical companies haven’t invested in Complexa. Tarnoff said that’s because in the current economy, no “big pharma” company can afford to risk money on a new research project.

“Once we de-risk it for them, we’ll take the technology to a certain point where they say, ‘I believe in this. It looks good. I’m willing to invest in you,’” said Tarnoff. “But to get to that point is really where we require some help.”

Finding Federal Funding

Traditionally, the federal government has given money to innovative startups in a few ways. First, lawmakers could earmark money in legislation – but, in 2010, it was made illegal to earmark funds for private companies.

A second way of infusing federal cash to startups is by offering “Small Business Innovation Research” grants.

But U.S. Representative Jason Altmire said companies like Complexa are having more trouble getting those grants.

“A problem that’s happened is they’ve been ineligible for federal funding if they’ve received private investment, venture capital funding, and that’s what a lot of these companies rely on,” said Altmire, “so we’ve worked very hard to make sure that they’re not automatically disqualified just because they’ve gotten some private investment up front.”

Altmire recently met with small business leaders in Pittsburgh to discuss the future of federal support for startups. Unfortunately for the mainly high-tech companies emerging from research phases, it appears that a gridlock in Washington may end the small business program entirely.

Dueling Bills

A bill in the Senate reflects the usual renewal of the successful program with some minor tweaks, but a House measure seeks to make drastic changes to SBIR. With Congress on break until September 8, it seems unlikely a bipartisan measure will pass both chambers before the grant program expires on September 30.

The D.C.-based Small Business Technology Council said one House provision would allow for fewer awards. SBTC Executive Director Jere Glover wrote that the new measure would permit grants to go toward projects already past their research phases.

“This is a radical change and eliminates safeguards the founders of the program put into the SBIR Program to prevent abuse and prevent non-scientific, non-merit based decisions,” wrote Glover.

Another clause in that bill would prevent companies from receiving the grants if they’ve gotten a round of SBIR funding in the past year.

Also of concern to startup owners is the smaller number of companies that can accept SBIR funding if they’ve received private money as well.

Tarnoff said that’s bad news for companies like Complexa, which has accepted a quarter of a million dollars from the Pittsburgh Life Sciences Greenhouse.

“I think some of the early philosophies around those were, ‘If you’re getting private money, what do you need the government money for?’” said Tarnoff. “But in reality, small companies really rely on those, and so there’s no free ride when you accept private money.”

Where to Turn?

The narrowing options present tough choices for small companies, especially in an economy of tight purse-strings. With earmarking no longer a possibility for small business, and with changes likely for the SBIR program, it may be more difficult to get government aid as startups vie with larger companies to get cash.

“The way federal money will be available for companies like this is through the competitive grant process,” said Congressman Altmire. “They’ll have to apply, they’ll have to show that they have merit, and then a decision will be made on the best use of public money.”

For a company with a staff of just one, the challenge may be daunting.