Plan to Provide Federal Funding for Early-Stage Investments Perfect for San Diego’s Innovation Economy, Says Connect’s Roth

Xconomy San Diego — 

Back in August, Connect CEO Duane Roth outlined an initiative to address a dearth of venture capital investment by seeking to develop alternative funding sources for San Diego’s early-stage technology companies. A key part of the non-profit group’s initiative is to pursue additional federal support—and now that effort is facing its first major test as Congress takes up a bill that would provide funding through the Small Business Administration for equity investments in certain types of technology startups.

A House bill dubbed “The Small Business Early Stage Investment Act of 2009” would basically make the federal government a limited partner in qualified investment firms that make venture capital investments in early-stage companies in targeted industries. Roth tells me the bill, which was introduced by Democratic Rep. Glenn Nye of Virginia, fits his initiative “perfectly.”

Roth says he also helped recruit Martin Sabarsky, the San Diego-based chief operating officer for biofuels startup HR BioPetroleum, to testify yesterday before the House Small Business Committee in support of the bill. Roth describes HR BioPetroleum as an ideal case study that explains why federal funding is needed to boost venture investing. The company, which has offices in Hawaii and San Diego, saw its plans to build a commercial algae facility on Maui indefinitely postponed in September 2008, when financing for the project collapsed amid the free fall on Wall Street.

“Our subsequent attempts to attract additional venture capital/private equity investment to continue development in the midst of the continuing financial crisis have thus far failed,” Sabarsky said in his prepared testimony, which was submitted on behalf of BIO, the Biotechnology Industry Organization. BIO contends in a recent statement that venture investors have become especially risk averse when it comes to providing capital to small, early-stage biotechs and biofuels startups.

“Even in more ‘normal’ financial times, the private equity and capital markets have increasingly failed to fund promising, early stage scientific research beyond the basic research stage and before the revenue-generation stage,” Sabarsky said in his testimony.

The bill that Sabarsky, BIO, and Connect are supporting is H.R. 3738, which was introduced last week, and would amend the Small Business Investment Act of 1958 to provide funding for investments in technology startups in eight targeted industries: energy; environmental; life sciences, information technology; digital media; cleantech; and defense. The measure authorizes $250 million in federal funding for the first fiscal year after enactment, but Roth says sponsors want to provide $3 billion to $5 billion for venture investments over a five-year period.

To get federal funding, a participating investment firm must make all of its investments in small businesses, with at least half in early-stage small businesses in the eight targeted industries.

Connect’s Roth says the Early Stage Investment Act would also reinstate the federal government’s Small Business Investment Company (SBIC) program, which provided federal funding to certain venture funds.

Roth says firms that participated in the SBIC program in the 1990s incurred huge losses when the dot-com crash hit, and the federal government was forced to write off much of its funding. “The Bush Administration got nervous and stopped funding the program in 2004,” Roth says. “So now the Obama Administration is trying to revisit this with lots” of federal stimulus funding.

Roth, who was back in Washington, D.C., last week when the bill was marked up, says he’s “guardedly optimistic” about the measure’s prospects. So far, the bill seems to have bipartisan support, and Roth says there’s no indication that anyone intends to oppose the measure.