TRP Trying For Venture Capitalists

Technology Reinvestment Project officials are talking to private venture capitalists and bankers to explore possible new alliances, hoping to leverage more of the Pentagon's dual-use money.

TRP management is eager to see more small and medium businesses apply to the program, but the high matching funds have proven an entry barrier. Venture capitalists have plenty of bucks, but are traditionally wary of Department of Defense-related projects.

In the TRP's rarefied inner sanctum, interest in private venture capital is growing. But nearly everyone agrees the pitfalls are as plentiful as the opportunities.

The ideal scenario, from the TRP's perspective, is to get venture capitalists teamed with small and medium-sized companies early on, before a proposal is made. So far that hasn't happened.

"We've learned that in general [venture capitalists] approach life very differently than we do... our objectives are not always parallel," TRP director Lee Buchanan said in a recent interview.

For one, venture capitalists want quick money and a clear exit route. TRP projects are by nature research-intensive and far from commercialization. Nor are they guaranteed money-makers, since the dual-use mandate of the TRP favors technology over profits.

"The objective of this program is not to make money," Buchanan said. "[TRP] companies need to be healthy enough to supply the DoD."

These differences aside, a few hearty venture types say there is hope for synergy. Jon Kutler of Quarterdeck Investment Partners Inc. is making a splash in the press with a proposal to pool DoD and venture capital money in a private corporation. That would leverage DoD funds and tap the company-picking prowess of experienced venture capitalists.

"That's what you're ultimately looking for," said Mike Daniels of SAIC, who is working closely with the TRP on the issue. "[But] do we have the legal and regulatory ability to allow new models to work?"

The answer is not clear so far. The TRP appears to have the authority to design such a plan without congressional approval, but privacy could be a problem.

All TRP proposals are closely guarded as proprietary, and opening the process up to venture capitalists poses intellectual property risks.

"Everything new we've thought of has a problem associated with it," said Buchanan.

On Capitol Hill, ideas abound. Rep. Pat Schroeder, D-Colo., is "very supportive" of getting venture capitalists involved early in the TRP process and recently added language to the 1995 defense authorization bill to encourage it.

It directs the TRP to consider proposals from small businesses "without regard to the ability of the small business concern to immediately meet its share of the anticipated partnership costs."

If the company wins a grant, it would have up to 90 days to secure the matching funds--ideally from venture capitalists.

The bill has been marked up and awaits a floor vote in the House. Senate defense authorization staffers say the new TRP language has merit at first glance.

The small business issue was also addressed by Congress last year when it amended TRP bylaws to allow Small Business Innovative Research awards to be counted as matching funds by TRP proposers.

Federal encouragement of high-tech venture capitalism is also part of the National Competitiveness Act of 1994, known before its contentious Senate passage as S-4. Sen. Jay Rockefeller, D-W.Va., secured a provision for a new $100 million pilot program to provide loan guarantees to specially selected "civilian technology investment companies." These companies, in turn, would provide venture capital and loans specifically to high tech start-ups. Hill staffers say the prognosis for the provision is "guarded."

Rep. George Hochbrueckner, D-N.Y., has gone one step further by offering language for $50 million in direct working capital loan guarantees to defense companies in the fiscal 1995 defense authorization bill.

The provision, written specifically to help TRP companies move into commercialization, has gone unfunded in past years.

Hill enthusiasm aside, the problems of matching venture capitalists with federal programs remain. "It's going to be harder than it sounds," said Jon Kutler.

"You're really looking at uncharted territory here," said SAIC's Daniels, "But there's interest."