By Ronald Rosenberg

Companies in California and Massachusetts top the list of recipients of Small Business Innovation Research grants. But that could change in coming years as budget cutting reduces federal research funds, prompting other states, particularly in the Midwest and Southeast, to go after more of the money.

That was the warning US Senator John F. Kerry and members of the Small Business Administration gave Monday at a meeting on federal programs for small technology companies with SBA administrator Aida Alvarez. Kerry, the senior Democrat on the Senate Small Businesss Committee, urged businesses to help fight proposed congressional cuts in federal research programs.

"The link between federally supported research and small business is crucial to continued job growth in our state," said the Massachusetts senator.

The small business grant program's objective is to produce new high-technology products and services using federal research and development dollars. Aimed at small businesses, recipients receive grants initially up to $ 100,000 in phase 1, which is designed to show technical merit or feasibility of an idea or technology. That is followed by up to $ 750,000 in a phase 2 award that can last up to two years for research and development and evaluating a product's commercial potential.

More than 30 percent of the phase 2 projects will result in a commercial product or service, the SBA says.

The financial source for these projects comes from the federal research and development funds of 11 government agencies, including the Department of Defense, the Department of Transportation, the Department of Energy, and the National Science Foundation. They set aside up to 2.5 percent of their external R&D funds for the SBIR program, which is coordinated by the SBA.

Since the SBIR program began 14 years ago, Massachusetts small businesses received $ 844 million, or about 15.6 percent of the $ 5.41 billion in SBIR funds, second to California, which received about 22 percent. Nationally, 7,000 SBIR awards have been given since the program began in 1983, including some multiple awards to various companies. This fiscal year, more than $ 900 million in SBIR grants will be awarded nationally, of which $ 513 million will come from the Pentagon.

Kerry maintains that the Republican-controlled Congress, in an effort to trim the federal budget, wants to cut the SBIR program and similar research grants, such as the Small Business Technology Transfer Program, without understanding their role in job creation, business formations, and product development.

Moreover, other states, seeing how some technology companies in Massachusetts and California have received multiple grants, may exert pressure to get a bigger piece of the SBIR pie. They could seek changes in the program that call for funding to be spread geographically, ensuring that all states get SBIR money for small companies. That requirement could reduce the amount of federal research money coming to Massachusetts, said Kerry. Venture capital Helping to unite 'angel' investors, entrepreneurs

Looking for "angel" investors - people who can provide between $ 250,000 and $ 5 million to fill what the Small Business Administration calls "the capital chasm"?

Consider the Angel Capital Electronic Network, or ACE-Net, a recently launched Internet service of the Small Business Administration that provides nationwide Internet access for angel investors and entrepreneurs (http://www.sbaonline.sba.gov or http://www.ace-net.unh.edu).

The SBA estimates there are 250,000 angel investors, but there are 5 to 10 times as many potential angels. The capital chasm refers to the gap between seed money - investments of up to $ 250,000 that typically come from friends, family, banks, and SBA loans - and the $ 5 million-plus investments that venture capital firms and initial public offerings provide.

About 50,000 start-ups nationwide and 300,000 growing companies need $ 60 billion of angel financing each year, the SBA says.

"Venture capitalists say there are not enough good deals, and small business say there is not enough venture capital money," said Jere W. Glover, the SBA's chief counsel for advocacy. "We think we can help fill the gap." Software Magazine takes note of Open Market's growth

Open Market Inc. of Cambridge is the nation's fastest-growing software company, according to Software magazine.

The company, which provides Internet commerce software that enables corporations to securely sell products and services, grew 3,620 percent in revenue from 1995 to 1996.

The magazine's Software 500 is a compilation of the largest public and private software companies that develop and market business software for a variety of industries.