Small-business owners sounded off yesterday on a surprisingly complex question: What is a small business? Billions of federal dollars ride...

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Small-business owners sounded off yesterday on a surprisingly complex question: What is a small business?

Billions of federal dollars ride on the answer, money awarded under a decades-old quota system that seeks to direct 23 percent of contracts from federal agencies such as the Pentagon and Veterans Administration to small businesses.

Through public hearings that began yesterday in Seattle and St. Louis, the federal Small Business Administration is trying to hammer out an answer.

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The agency is considering changing the definition of small business, in part as a response to accusations that some federal money meant for small businesses has gone to large ones instead.

The SBA also is hearing complaints about its move in recent years to limit grants to technology startup companies for research under the Small Business Innovation Research program.

Previously, the SBA allowed awarding funds to companies controlled by venture capitalists. But it stopped that after 2002, officials said, because of complaints that venture backers weren’t “individuals” as required in the rules.

The SBA, set up in 1953 to “aid, counsel, assist and protect” small businesses, also is considering whether to redefine a small business as having no more than 100 employees.

Under current rules, the definition ranges considerably — between $750,000 and $28.5 million in average annual sales and between 100 and 1,500 employees, depending on the industry. Most are defined as having 500 or fewer employees. Last summer, SBA withdrew a proposed rule that would have generally defined the limit of “small” at 100 employees, and eliminated sales as a factor.

A number of speakers at the Seattle hearing said firms with 500 employees shouldn’t qualify for contracts. The American Small Business League, an association of small businesses, said 98 percent of all U.S. companies have fewer than 100 employees.

But others said reducing the standard would hurt them.

“To drop it under 100 would be a lot of layoffs,” said Dave Densley, branch manager in Bellevue for San Diego-based Technology Integration Group, an IT services and hardware company, with 274 employees.

As a subcontractor to Battelle, a primary contractor with the Department of Energy, TIG is providing new PCs and servers to the Pacific Northwest National Laboratory in Richland, Densley said.

“That’s a contract I won as a small business,” he said. “Without small business certification that goes away.”

The exclusion of VC-backed startups from research grants stirred strong reaction at the Seattle hearing, where U.S. Rep. Jay Inslee, D-Bainbridge, said the change had “caused great, great anxiety and grief” in his district, which includes Kirkland, Woodinville, Bothell, Kenmore and parts of Redmond.

“I’m the messenger for a lot of silent victims,” Inslee said.

For example, Seattle biotech company Xcyte Therapies won $1.2 million in government funding to study cancer treatments for leukemia last year.

But because of the policy change, Xcyte, which went public in the spring of 2004, can’t get the money.

“We have over one million in funds that we can’t use because of a change in the law,” said Ron Berenson, Xcyte chief executive. “We’re blacklisted.”

Venture capitalists felt the leukemia research was too risky to fund with their own money. But an earlier grant of $150,000 helped Xcyte test the treatment in labs. With the additional funds, it could have begun further testing.

Catherine Innes, a director at UW Tech Transfer, and Jack Faris, president of the Washington Biotechnology and Biomedical Association, also spoke in favor of reversing the rule. Venture investors typically back the strongest companies. Excluding those startups “means taking the best prospects and saying, ‘You’re not eligible,’ ” Faris said.

Carl Jordan, a program analyst with SBA in Washington, D.C., stressed that the law hadn’t changed, only the view that venture-backed firms could receive money. “There was an enforcement of the correct interpretation,” he said.

Inslee said that if the SBA doesn’t change its policy, legislation pending in the SBA’s reauthorization bill in Congress could accomplish the same thing.

The hearings continue in Denver, Atlanta, New York, Chicago, Los Angeles, Dallas and other cities through the month.

Gary Jackson, assistant administrator for size standards at the SBA, said the agency might propose new rules on size and other issues by the end of the year.

Alwyn Scott: 206-464-3329 or ascott@seattletimes.com