definitive list of venture-funded firms available and it is used in the first phase of this study.9

Estimating the “Exclusion Effect”

It is important to keep in mind that simply receiving some venture funding is in itself not disqualifying. To be disqualified from participating in the SBIR program, firms must be owned or controlled by firms that themselves fail one of the two tests—breaching the size requirement and/or the individual ownership requirement—outlined above in Box 1-1.10 Thus, the list of venture-funded firms was then analyzed to determine whether it was likely that these firms would in fact be excluded by the SBA ruling.

Unfortunately, privately owned firms are often very reluctant to provide information about their ownership structure. It is therefore not possible to determine directly which venture-funded firms are owned or controlled by their venture investors (and hence excluded) and which are not. Nor it is practical to examine the ownership structure of every venture capital firm that provides funding in order to determine whether their ownership structure or the collective character of their other investments breach the eligibility requirements.

It is also worth noting that firm ownership and control are by no means synonymous.11 Ownership of a majority of outstanding voting shares is sufficient to provide formal control. However, key personnel may still exert significant—sometimes predominant—control over key decisions. Conversely, 51 percent ownership is not necessarily required in order to exert effective control. However, both because the SBA ruling focuses on 51 percent ownership and because any statistical analysis must find ways to draw bright lines through murky questions, this study assumes that the critical delineator for the purpose of access to SBIR is 51 percent ownership.

After considerable discussion, and drawing on their extensive experiences, the Committee agreed on two proxies for venture control of a firm12:

9

It is important to note that there is considerable heterogeneity among venture capital firms themselves. For a review of some of the differences, see William A. Sahlman, “The Structure and Governance of Venture-capital Organizations,” Journal of Financial Economics, 27(2):473-521, October 1990.

10

There are also small biotechnology companies that are 51 percent owned by individuals but are excluded based on affiliation of a venture capital company’s other portfolio companies.

11

Eugene Fama and Michael Jensen distinguished between ownership and control in their classic 1983 paper. See Eugene Fama and Michael Jensen, “Separation of Ownership and Control,” Journal of Law and Economics, XXVI, 1983. The role of venture capital control of small innovative businesses is discussed in Paul Gompers and Josh Lerner, “The Venture Capital Revolution,” The Journal of Economic Perspectives, 15(2):145-168, Spring 2001.

12

Committee members with extensive knowledge of venture capital include Linda Powers (Toucan Capital Corporation), Michael Borrus (X/Seed Capital), Clark McFadden (Dewey & LeBoeuf, LLP), and Pete Linsert (Columbia Biosciences Corporation).



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