SBIR grants and venture capital

June 22, 2009 by David Spenciner

Are government grants and venture backing mutually exclusive?

The controversy over whether small firms with VC funding (resulting in more than 50 percent ownership) should be able to apply for government funding through the Small Business Administration has received much press lately. Non-dilutive financing can be an important part of fundraising for start-ups, but should the Small Business Innovation Research door be shut once a company gets institutional financing?

SBIR grants provide non-dilutive funding at levels ranging from about $100,000 to $1 million. VCs would like their portfolio companies to be able to seek this sort of funding if it can delay or eliminate future rounds of financing, but some feel that SBIR money should go only to those who are truly in boot-strap mode.

One point of debate is whether small businesses that have VC funding of more than 50 percent are "independently owned and operated" (registration required). The main argument for allowing these companies to receive SBIR grants is that VC firms are not typically "controlling" the day-to-day operations of these companies, but rather serving on their boards of Director and assisting with strategic decisions.

VCs are generally active in the management of their portfolio companies, but I don’t think that this is often on a day-to-day basis. Another question is whether whether employees of the funding VCs (or employees of other portfolio companies) should count as employees of the grant applicant company.

Once the number of employees tops 500, a company is no longer considered "small" and SBIR grants are no longer available. But this too is in a bit of a gray area, because under certain conditions employees from the various portfolio companies could cross-pollinate (e.g., CFOs working for multiple companies within a VC’s portfolio).