The Department of Defense, in partnership with the Small Business Administration, issued licenses to the first group of investors under the Small Business Investment Company Critical Technology initiative, which will inject more than $2.8 billion into innovative startups and small businesses developing technologies deemed vital for the country. security.

The first 13 approved funds approved under the SBICCT initiative are now eligible to receive government-guaranteed loans from the SBA, which they can use to invest in technology-focused companies in 14 critical technology areas, including microelectronics, space technology and advanced computing. and reliable software, AI, and autonomy.

Each approved fund participating in the initiative can borrow up to $175 million through the SBA – the new loan structure allows the fund to defer loan payments until it begins generating returns.

Defense Secretary Lloyd Austin and SBA Administrator Isabel Casillas Guzman introduced the initiative in 2022, and the DoD Office of Strategic Capitalin collaboration with the SBA’s Office of Investment and Innovation, which supports this effort, began accepting SBIC applications in fall 2023.

The SBIC program is far from new, however. Launched in 1958 during the Eisenhower administration, the SBIC program aimed to catalyze the growth of venture capital to support technological innovation, with early investments in emerging companies such as Fairchild Semiconductor.

At one point, nearly two-thirds of U.S. venture capital was government-backed through this program – these funds helped launch several major companies, including Apple, Intel, and Cray Research.

The long-running program provides loans to private investors rather than directly to businesses, incentivizing investors to move into more expensive sectors by reducing their financial risk. In turn, this approach supports companies that struggle to secure later-stage financing and helps them overcome the valley of death, where companies fail to scale their products from the lab to the field.

“For example, for a series of semiconductors, a startup costs between $20 and $40 million for an investor. A crypto or (financial technology) company costs between $5 million and $8 million for an investor. It’s simply not a financially sound investment decision to invest in one semiconductor company versus four to eight fintech or crypto companies,” OSC Director Jason said last week Rathje.

“It changes the calculations. By providing a loan to partner with private capital, we reduce the cost of capital. So a $20 million loan might look like a $10 million loan to a stock investor. So they’re going to invest as part of the deal with us – they’re agreeing to make investments in areas that they’re not investing in today. And at the end of the opportunity, we get our money back as the taxpayer, but the investor keeps the profits. »

And the program complements small business innovation research programs: While SBIR loans target early-stage innovations, SBIC loans target later-stage growth.

“Fun fact, at no cost to the taxpayer, because all of these loans are repaid, and the SBIC program has had a record over the last 28 years of repaying all of the loans that taxpayers lent to these investors with the agreement according to which they are we are going to invest in small and medium-sized companies that are growing in this area,” Rathje said.

Companies do not need to be venture capital funded to receive investment through SBIC. In addition to venture capital, debt financing is also available, which increases the flexibility of businesses to receive financing.

The first 13 funds, plus ongoing additional investments, are expected to invest more than $4 billion across 1,700 portfolio companies. So far, more than 100 funds have expressed interest in this initiative.

New applications are accepted quarterly – the next submission deadline is November 15.

To date, the SBIC program has deployed more than $130 billion in capital, made nearly 200,000 small business investments and authorized nearly 2,400 funds, according to SBA data.

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