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

The first 13 licensed funds approved under the SBICCT initiative are now eligible to receive government-backed loans from the SBA, which they can use to make investments in companies that focus on technologies across 14 critical technology areas, including microelectronics, space technology, advanced computing and software and trusted AI and autonomy.

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

Secretary of Defense Lloyd Austin and SBA Administrator Isabel Casillas Guzman introduced the initiative back in 2022, and the DoD’s Office of Strategic Capital, along with SBA’s Office of Investment and Innovation, which support the effort, started accepting SBIC applications in fall 2023.

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

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

The long-standing program provides loans to private investors rather than directly to businesses, which incentivizes investors to pursue higher-cost industries by reducing their financial risk. The approach, in return, supports companies that struggle with later-stage funding and helps them overcome the valley of death, which is where companies fail to scale products from the lab to the field.

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

“What this does is it changes the math. By providing a loan to partner with private capital, we lower the cost of capital. So a $20 million loan might look like a $10 million loan to an equity investor. So they’re going to make an investment through the agreement with us — they agree to make investments in the areas they’re not investing in today. And at the end of the opportunity, we get our money back as a taxpayer, but the investor keeps the profits.”

And the program complements the 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 these loans get repaid, and the SBIC program has had a record of the last 28 years of repaying all of the loans the taxpayers lent to these investors with the agreement that they’re going to make investments in small to medium-sized companies who are growing in this space,” said Rathje.

Companies don’t have to be venture-backed to receive investments through SBIC. In addition to venture capital, debt financing is also available, which increases flexibility for companies to receive financing.

The first 13 funds, along with additional investments in the pipeline, are projected to invest more than $4 billion in 1700 portfolio companies. So far, more than 100 funds have expressed interest in the initiative.

New applications are accepted quarterly — the next submission deadline is Nov. 15.

To date, the SBIC program has deployed over $130 billion of capital, made close to 200,000 investments in small businesses and licensed close to 2,400 funds, according to the SBA data.

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