Small businesses and venture capital are a natural pair. While many small businesses are born of technical expertise and innovation, few are well financed. One of the reasons for this lack of financing is that small concerns are often viewed as risky investments. Small businesses are rarely led by experienced business people and, as many statistics demonstrate, are more likely than not to fail. Unlike their under financed counterparts, venture capital companies (“VCCs”) are well financed and what they lack in technical capability, they make up for in business acumen and financial wherewithal. Moreover, risky investments with large upsides are exactly the type of opportunities that can produce significant returns for venture capital funds
In the commercial marketplace, many small businesses receive venture capital infusions to transform their ideas and research into viable products. This same principle should apply to federal procurement, where Government procurement policies favor small business contracting, but early stage research and development funding is difficult to come by. VCC investment would be utilized to fill the gap between Government policy and economic reality. This type of investment would increase the pool of potential small businesses for federal procurement and help to diversify the government’s contractor portfolio. Overall, this would have a positive impact on competition, a fundamental tenet of government procurement. There are also technological benefits: with the assistance of venture capital investments, small companies would have the freedom to develop cutting-edge technologies that larger, more established corporations are either unwilling or unable to develop.
The mutually beneficial relationship between small business contractors and VCCs has been frustrated due to a complicated web of government regulations that, while well intended, have the effect of holding back promising small businesses in the federal marketplace. In this harsh economic climate, venture capital is crucial to small, innovative businesses. Although VCCs have felt the impact of the recession, they remain well equipped to aid small concerns and their assistance is imperative. As a result, now is the time to advance a compromise position that protects small business programs while encouraging venture capital investment in federal contractors.
GW Paper Series
GWU Legal Studies Research Paper No. 2012-69, GWU Law School Public Law Research Paper No. 2012-69
Jessica Tillipman & Damian Specht, Venture Capital Investment and Small Business Affiliation Rules, Contract Management, Feb. 2011 at 30.