Editor’s note: “The Angel Connection” is a regular feature in WRAL Local Tech Wire. LTW asked consultant Bill Warner to share with readers advice for entrepreneurs seeking investment. He is chairman of the Triangle Accredited Capital Forum, an angel investor network with over one hundred members throughout the southeast. The Angel Connection is published weekly.

RESEARCH TRIANGLE PARK – Last week I explained some of the perspectives of the House bill for the Small Business Investment Expansion Act of 2007 which makes several amendments to the Small Business Investment Act of 1958. The fact is that the SBIR program is mainly targeted at companies that need money to research their business idea and then prove the concept of their innovation. However, if the entrepreneur has been substantially financed by angels or venture capital money, they may become ineligible for the SBIR program. The idea being that once substantial private money flows into a business, SBIR grants are no longer needed.

The SBIR Edge

For entrepreneurs, the SBIR program is one side of a dual-edged sword. Entrepreneurs that have a great idea for a business and have no way of getting it financed often apply for an SBIR grant. Although the process takes a long time, and a relatively small number of companies qualify, it is a great opportunity for entrepreneurs. In fact, multiple grants can be provided that often take a young business a long way towards a marketing launch. Early private investment money can also be brought into the company, but not enough where the private investors have the majority share of the company. This leaves entrepreneurs in the position of balancing their financing between SBIR grants and private investment, making sure that private investors only have a minority share of the business.

The Private Investment Edge

One would initially think that loosening the private investment threshold would be a good thing. It would make more companies eligible for grants, especially companies that are going to need a lot of money before they are able to generate revenue and become cash flow positive. This is typical of high technology and therapeutic development businesses, where it takes years and millions to bring a product to market. However, the pool of SBIR money that is available is finite. The other edge of the sword is that if more companies become eligible for SBIR grants, long after they have been privately financed, the entrepreneur’s young business is going to have a lower chance of being accepted into one of the grant programs because the pool of money is being spread across a broader base of possible choices. Companies that have private investor backing are probably better bets for SBIR grants. Most entrepreneurs I talk to do not want these thresholds loosened, for this reason.

The Debates Will Continue

The bill is on its way to the Senate where it will probably bump into a lot of resistance, the SBIR debate being only one of the concerns. An outcome where the SBIR program really stays focused on businesses that are really not yet substantially ready for angel or venture investors would be the best. Once a company is ready for product launch, private investment should take the ball and run with it, leaving “grant land” behind as more and more private money flows into the company.

Bill Warner is the managing partner of Paladin and Associates, a business consulting firm in the Research Triangle Park area of central North Carolina, and is the Chairman of the Triangle Accredited Capital Forum, an angel investor network with over 100 members.