The SBICCT project aims to increase the flow of private capital into technology areas deemed critical to national defense capabilities and U.S. economic success, including component-level technologies and production processes. It’s supported by the Pentagon’s Office of Strategic Capital (OSC) in partnership with SBA’s Office of Investment and Innovation.

The initiative is intended to help tackle a major problem the Pentagon is facing.

“Today, the Department of Defense depends on private capital to develop and commercialize critical technologies for our troops. Unfortunately, private markets don’t always have incentives to invest in these technologies, which often require longer-term investments,” Secretary of Defense Lloyd Austin said at the Reagan National Defense Forum in December 2022 when plans to launch the SBICCT were first announced by him and SBA Administrator Isabella Casillas Guzman. “And so without access to capital, for the time that it takes to develop key new technologies, those innovations could die on the vine, or our competitors could get there first. So we’re looking for new and creative approaches” to address the issue.

The SBICCT effort is designed to leverage SBA funding to offer loans and loan guarantees to investors who want to help bankroll companies working on cutting-edge tech that could aid national security.

The U.S. government began accepting applications for the initiative about a year ago. Since July, four funds have been licensed and nine have been “Green Light Approved” by the Small Business Administration to raise private capital, the DOD and SBA announced Tuesday.

“What the SBA does is we will perform our due diligence on funds, and in partnership with the DOD, they will conduct their vetting and security analysis of those funds as well. And when we are at the point where we have completed our due diligence … we are able to then approve those funds to go raise private capital. And we call that greenlighting. So we’re greenlighting them to go raise their private capital. They may be ready right after green light to hold a first close, in which case … once they close on the capital, then we license them. They may need more time to raise capital, in which case, then we would license them upon the first close,” Bailey DeVries, director of the SBA Office of Innovation and Investment, explained during a call with a small group of reporters.

“The way it works is they will have commitments of capital from private investors and commitment from the SBA to provide them with capital, and then over a period, typically a five-year investment period, they will then call down on that capital to make investments in companies. So this is what we anticipate to see throughout the life of these funds,” DeVries said.

Funds licensed under the initiative can tap into SBA guaranteed loans designed to enhance fund-level investment returns, according to a press release.

“Each fund can access up to $175 million in loans which can be accessed through the new Accrual Debenture, which aligns with the cash flows of longer duration and equity-oriented investment strategies and may also be accessed through the longstanding SBA Standard Debentures that aligns to credit strategies,” per the release.

“These 13 funds [that have been approved so far], taken along with the other investment funds nearing the end of the diligence process, collectively project to invest over $4 billion in nearly 1700 portfolio companies focused on all 14 DoD Critical Technology Areas and component-level technologies and production processes. In addition, these funds plan to invest across asset classes including seed, venture, growth, buyout, direct lending, special situations, and fund-of-funds,” the release noted.

The Pentagon won’t be picking the companies that receive funding from investors under the program, according to officials.

“There’s no guidance or direction from the DOD on what companies. What we’re looking for is we have kind of the 14 critical technology areas, and there’s an agreement that 60% of their portfolio will be invested in these, you know, undercapitalized, more difficult technology areas,” JR Gibbens, chief investment officer in the Pentagon’s Office of Strategic Capital, told DefenseScoop during the call with reporters.

The 14 “critical technology areas” identified by Undersecretary of Defense for Research and Engineering Heidi Shyu as key to national security, which the SBICTT initiative is intended to support, include trusted AI and autonomy; space; integrated sensing and cyber; integrated network systems of systems; renewable energy generation and storage; microelectronics; human-machine interfaces; advanced materials; directed energy; advanced computing and software; hypersonics; biotech; quantum; and future generation wireless tech (FutureG).

“This first group of SBICCT Initiative funds represents a consequential milestone in demonstrating the power of public-private partnerships to build enduring advantage by growing and modernizing our supply chains, strengthening our economic and national security, and benefiting the development and commercialization of critical technologies that are key drivers of our U.S. industrial base,” Shyu said in a statement Tuesday.

The Pentagon is planning to bring more investors into the fold. Additional applications to participate in the initiative will be accepted in “future quarterly filing windows.” The next filing deadline is Nov. 15, according to the press release.

Updated on Oct. 22, 2024, at 7:30 PM: This story has been updated to include comments from Bailey DeVries, director of the SBA Office of Innovation and Investment and JR Gibbens, chief investment officer in the Pentagon’s Office of Strategic Capital, during a call with reporters after Tuesday’s announcement.

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The Office of Strategic Capital announced the notice of funding availability Monday, laying out eligibility criteria and an application process for industrial base companies interested in applying for a piece of the $984 million appropriated for loans. The investments could range from $10 million to $150 million, according to the notice, published in the Federal Register.

Specifically, the program is looking to invest in “the construction, expansion, or modernization of commercial equipment in the United States” that will in some way support the development of 31 critical technologies laid out in the 2024 National Defense Authorization Act. The list of technologies includes autonomous mobile robots, cybersecurity, data fabric, a variety of microelectronics applications, mesh networks, quantum computing and more.

The notice explains that OSC “aims to build on successful examples of administering efficient, cost-effective financial tools to advance national security priorities. By aligning government and private sector incentives around technologies vital to national security and economic interests, DoD aims to use the power of the market and economic competition to attract the capital required for critical technology investment.”

“With this Notice of Funding Availability, OSC establishes itself as a credible lending partner for U.S.-based companies that manufacture and produce critical technology components,” Deputy Secretary of Defense Kathleen Hicks said in a prepared statement. “This demonstrates that DOD is dedicated to using every tool in our toolbox to secure America’s and our military’s enduring technological advantage.”

Summarizing the program’s eligibility and selection criteria, the notice says investment decisions will be based on “compliance with statute, the extent to which an investment supports U.S. national security or economic interests, the impact that direct loans would have on the project or transaction, and the creditworthiness of the investment, among other factors OSC will evaluate in the application process.”

Interested parties — which include individuals, companies, partnerships, trusts, governmental entities and more — are invited to submit the first part of the application for loans by Jan. 2, 2025. The Office of Strategic Capital will then invite select entities that prove eligibility and project or transaction suitability to submit a second application. Funding from the appropriations will remain available through Sept. 26, 2026.

The notice of funding availability marks the first time the Office of Strategic Capital has set out to issue private investments since its establishment in December 2022. Congress, in December 2023, officially enacted the office with the signing of the 2024 NDAA into law. Appropriators then gave OSC its first funding for loans this past March.

While a key function of the office is to support the commercialization and scaling of technologies that could benefit defense and national security, it is also strategically meant to deter innovative American companies from seeking capital that may support the work of the United States’ strategic competitors.

“Through these congressional authorities and appropriations, the DoD now has proven financial tools to enable millions of dollars of investment in national security priorities at limited cost to the Department and the taxpayer,” OSC Director Jason Rathje said Monday. “OSC’s implementation of its congressional mandate will ultimately increase both public and private investment to secure a robust and resilient U.S. industrial base.”

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The agreement, inked at the Reagan National Defense Forum, is the first major move to support the OSC since Austin announced the establishment of the office Thursday.

The letter of intent, obtained by DefenseScoop, noted that the DOD and SBA have had a long history of developing and implementing innovation funding programs to support private sector R&D, such as the Small Business Innovation Research and Small Business Technology Transfer programs.

However, “with the recent launch of the DoD Office of Strategic Capital, we enter a new phase as both agencies aim to expand the relationship to scale private sector innovation. We will work together to increase the flow of private capital into technology areas critical to our Nation’s future economic prosperity and defense capabilities,” it said.

The initiative is intended to help address a major problem the Pentagon is facing.

“Today, the Department of Defense depends on private capital to develop and commercialize critical technologies for our troops. Unfortunately, private markets don’t always have incentives to invest in these technologies, which often require longer-term investments … And so without access to capital, for the time that it takes to develop key new technologies, those innovations could die on the vine, or our competitors could get there first. So we’re looking for new and creative approaches” to tackle the issue, Austin said at the signing ceremony.

The new agreement with the SBA, which will leverage loan guarantees to private capital investors, will help “secure funding for critical areas for national defense and ensure that our warfighters get the capabilities they need before they need them,” he added.

The agencies will be aligning their efforts by leveraging the Small Business Administration’s longstanding Small Business Investment Company (SBIC) program, which was established in the 1950s to help fill “market gaps.”

Guzman said the initiative helped propel major tech companies like Apple, Intel, Tesla and others in their early days.

The Small Business Administration already licenses and funds hundreds of SBIC companies, which currently manage over $37 billion in federal and private capital, according to Guzman.

“The program is the basis for the expansion of our partnership today,” she said at the signing ceremony with Austin. It is “leveraging federal and private capital to crowd investments into early-stage companies so that they can scale and succeed in the marketplace.”

The new partnership with DOD announced on Saturday will focus on the critical technology areas that the Pentagon has identified as essential for long-term national security. The letter of intent did not mention specific technologies, but Undersecretary of Defense for Research and Engineering Heidi Shyu has previously identified 14 critical technology areas that she is focused on.

The letter of intent said: “With this initiative, the DoD and the SBA will work together to increase the availability of scale-up investment capital in our Nation’s critical technology areas, working with private sector investors to leverage their expertise and investment track records to ensure the world’s greatest technologies and companies continue to develop and growth within the United States. These investments will be an important step in the growth and modernization of our national security innovation base, ensuring future national security and continued economic prosperity.”

During a background briefing with reporters at the forum, a senior Defense official told DefenseScoop that the Pentagon and SBA won’t be picking the companies that receive funding from investors under the program.

Unlike many of the other DOD initiatives focused on bolstering commercial enterprises that produce dual-use technologies, the program will leverage SBA funding to offer loans and loan guarantees to investors who want to help bankroll companies working on cutting-edge tech.

“The way the SBIC program works is that the SBA licenses investors, and those investors can then raise their own private capital in the private markets, and that private capital can be matched by leverage through loan guarantees that the SBA provides to those investors in order to build a new fund. And that fund can focus on a wide variety of things,” the official explained.

For the initiative, investors will be applying to the SBIC program through a standard application process run by the Small Business Administration, to be licensed as investors to support technology areas identified by the Pentagon as critical to national defense.

The SBA has the authority to commit $5 billion of loan-guarantee leverage to the SBIC program annually, according to the senior Defense official.

“That is a significant amount of capital that can be supporting companies developing technologies in relation to national security. And when you think about our critical technology areas, there’s a wide variety of opportunities to invest,” the official told reporters. “From a technology advancement perspective, we see these tools providing incredible opportunities for investors to be able to lower the cost of capital to invest in these companies. Tools like debt allow for more patient investments. They provide for longer time horizons, and they also create an opportunity to reduce dilution in the investment itself.”

Another benefit is that taxpayers aren’t expected to ultimately foot the bill, according to the official.

“Loan guarantees are built in a way where we’re expecting those funds to be returned. So instead of like contracts or grants, this provides us an opportunity to align incentives around growth, around scale, around revenue in order to ensure … the taxpayer’s return,” they said.

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The new office is meant to connect companies developing tech in support of national security with organizations that can help fund and sustain their growth long enough to reach wider production.

Often, the innovative technology companies that would be supported by OSC fall into what’s known as the “valley of death” — the phenomenon where the Pentagon’s bureaucratic, often slow-moving acquisition system can stifle successful innovative pilots from moving forward into production because the companies can’t receive funding quickly enough.

“We are in a global competition for leadership in critical technologies, and the Office of Strategic Capital will help us win that competition and build enduring national security advantages,” Austin said in a statement. “By working with the private capital markets and by partnering with our federal colleagues, OSC will address investment gaps and add a new tool to the Department’s investment toolbox.”

The office will be overseen by the secretary of defense and feature an advisory council consisting of the undersecretaries of defense, among others. In specific, OSC will complement the work of the Office of the Undersecretary of Defense for Research and Engineering and its components in the Defense Innovation Unit and the Defense Advanced Research Projects Agency (DARPA) by helping to provide their private sector research partners with longer-term vehicles for private capital.

A key goal of the office will also be to deter innovative American companies from seeking capital that may support the work of the United States’ strategic competitors.

“America’s strategic competitors are working to influence U.S. technological innovation to their advantage,” said Undersecretary of Defense for Research and Engineering Heidi Shyu. “OSC is part of a broader administration-wide effort to ‘crowd-in’ private capital in areas where our efforts can boost our future security and prosperity.”

Shyu said the hope is OSC will “strike its first deals by early next year.”

The Trump administration established a similar office called the Trusted Capital Marketplace, which was created by the 2019 National Defense Authorization Act.

The DOD said in an announcement that this new office differs from existing programs in that it uses “non-acquisition-based tools, such as loans and loan guarantees,” as many other federal agencies do.

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