House Bill Threat to DoD Innovation?

 It’s not often that defense publications cover the small business committees in the House and Senate, but a very interesting issue surfaced at the Office of Naval Research conference last week that requires notice from the bang bang crowd.

A bill in the House may result in what some defense small businessmen are calling a “revolutionary change” in small business investing.  The small business programs administered by the federal government are up for reauthorization this year and the hedge fund and venture capitalists of the world have gotten together and convinced House Speaker Nancy Pelosi (D-Calif.) that change is needed. The result is a bill, HR 5819, that will probably let large investors control a much larger percentage of small business investments overseen by the federal government.

Pelosi, who represents many of the computer world’s investors and CEOs, has been supportive of this, as have most members of the House. We are sure this has nothing with the enormous increase in campaign contributions from hedge funds to House members over the last five years but the two events may be correlated.

The other effect of this bill may well be that hedge fund and venture capitalists would have a much easier time winning earmarks for “small business” investments that really weren’t any longer small businesses since they would be controlled by large investors. This could happen because most of the investments would be less $100 million, ideal size for most earmarks. This, several sources told me, could well lead to a drop in technical innovation because so many of the best ideas come from businesses with less than 500 employees that are not owned or controlled by prime contractors. A good example of this effect are the Virginia class submarines. Roughly $100 million in small business investments resulted in almost $1 billion in technologies used on those boats, according to John Williams, director of the Office of Naval Research’s small business program.

I spoke with two government officials and four small business types about this last week. All said they were troubled by the House bill and hoped the Senate version would prevail.