The US is investing heavily in microelectronics. (Photo by Rudolfs Klintsons via Pexels)
WASHINGTON – The Department of Defense and the Small Business Administration (SBA) announced Tuesday the first set of licenses and investment funds approved for small businesses under the Small Business Investment Company’s (SBICCT) Critical Technology Initiative ).
Together, the government plans to invest over $2.8 billion in more than 1,000 companies in the defense supply chain to help them strengthen their private capital so they can more easily move from prototypes to products.
The SBICCT initiative was established in 2022 and began accepting applications in the fall of 2023 with the goal of attracting and scaling private investment in 14 DoD Critical Technology Areas that are vital to economic and national security, Jason Rathje, director of the Office of Strategic Capital, said during a media roundtable Tuesday. Specifically, he said this program aims to expand access to capital for manufacturing and production.
He explained that nearly two decades ago, venture capital was investing heavily in hardware, but that changed drastically about ten years later. Because of this, the DoD started this program to help fill the gap. Investing in hardware is extremely important when you’re creating technology like semiconductors, Rathje said.
“Now [these companies] have access to capital that they otherwise would not have access to, because as these dollars are diverted from investment in capital-intensive industries, the availability of capital for companies developing these technologies is also reduced. With this program, we are now swinging the pendulum in the other direction,” said Rathje.
“This now provides us with an opportunity to bring capital back to invest in these technology-intensive and critical areas and allows us, the department, to see the value in terms of products and component technologies that are vital to national security,” he added.
In early July, SBA awarded the first SBICCT Initiative license. (The SBICCT initiative aims to use SBA funds to provide loans and loan guarantees to investors interested in financing companies developing advanced technologies that support national security.)
About three months later, there are now four funds that have been licensed and nine that have been “green-lighted”. The latter means that a business is invited to submit a final license application after sufficient capital has been raised and they are “vetted” to raise private capital and do a “first close” (when a fund is launched after initial investor commitments have been made), it is explained Bailey DeVries, associate administrator and director of the SBA Office of Innovation and Investment, during the round table.
“What the SBA is doing is we’re going to do our due diligence on the funds and in partnership with the DOJ, they’re going to do their due diligence and security analysis of this fund as well. And when we’re at the point where we’ve done our due diligence and have the legal sufficiency, we’re able to then approve those funds to raise private capital,” she said.
The 13 funds, which the department declined to say who they belonged to, are expected to “collectively design” to invest more than $4 billion in “nearly” 1,700 portfolio companies, according to a DoD press release.
The $4 billion figure brings together $2.8 million, which combines $1.8 billion in private capital raised by 13 licensed and approved funds, with SBA leverage. These funds combined with funds nearing the end of the due diligence process, which are derived from the SBA’s debt programs—a way for small businesses to access long-term, fixed-rate capital—come to a total of over $4 billion, an American official. clarified behind the table. (According to the press release, each fund can receive up to $175 million in loans through the same system.)
The SBA, unlike the Pentagon, can legally use “full trust and credit” of the federal government to guarantee loans to innovative firms. The same would not be true of an OSC effort, but since that Pentagon office is working with the SBA, it is able to use the same legal safeguards.
Rathje said such a partnership between the SBA and the Pentagon allows the US to prioritize its “sustainable advantage” over adversaries by combining innovation with investment.
“Making investments that not only drive the growth of these technologies, but also drive more interest in developing these technologies, as there is capital available now, is an ecosystem opportunity that we see really increasing the long-term advantage of the U.S.- of,” he said.
This story has been updated to reflect a clarification sent by the DOJ after the roundtable on the total amount of private capital expected to be raised.