Attract and Scale Private Capital to Support Biotechnology

Congress must establish and fund an Independence Investment Fund, led by a non-governmental manager, that would invest in technology startups that strengthen U.S. national and economic security.

Private capital alone will not carry biotechnologies that are critical to U.S. national security along the path from the laboratory to the market; the technical and business risks are simply too high. While government funding should not singlehandedly propel a company through that stage, it can act as a powerful signal to private investors about the importance and viability of a company or technology.

Several U.S. government efforts have attempted to solve the problem of seeding and attracting capital toward technologies critical to U.S. national security.

Existing financing mechanisms include:

• a partnership among the Department of Health and Human Service’s (HHS) Biomedical Advanced Research and Development Authority (BARDA) and the Global Health Investment Corporation (GHIC), a non-profit venture capital entity (GHIC deploys government money to make venture capital style investments in medical countermeasures for health security);¹⁴⁹
• In-Q-Tel (IQT), a non-profit strategic investor that invests on behalf of the U.S. national security community across a range of technology sectors including space, microelectronics, and biotechnology;¹⁵⁰ and
• the Office of Strategic Capital at the Department of Defense (DOD), which has partnered with the Small Business Administration (SBA) to create the Small Business Investment Company Critical Technology (SBICCT) Initiative.¹⁵¹ Through the SBICCT, fund managers deploy low-cost, government-guaranteed capital in alignment with DOD’s critical technology areas (CTAs), including biotechnology.¹⁵²

Each of these investment vehicles serve to commercialize technologies in the United States, but they all serve different purposes and gaps remain. For example, none of these investment vehicles has in its mandate the responsibility to support and commercialize the type of technologies that would create a competitor to WuXi Apptec. Without an additional investment approach, emerging technologies that are important for U.S. national security will fail.

Congress must establish the Independence Investment Fund at the Department of Commerce (DOC) to support high-priority areas of national security technology that are left unaddressed by current initiatives. These technology areas encompass a broad range of national security concerns, expanding beyond strictly defense and intelligence applications. By making initial investments in high-potential areas, the fund could signal market opportunities and incentivize private investors to follow suit. The investments would lead to a “crowding-in” effect, unlocking private capital to scale up national security technology products. Roughly 30 percent of the fund’s capital should be set aside specifically for emerging biotechnology investments.

Government-Backed, Private-Run

The DOC would set overarching strategic priorities for the fund. The fund would be operated by a nongovernmental investment partner, with experienced fund managers making investment decisions without day-to-day government oversight. The DOC could suggest technology startups for consideration by the fund managers, but the fund would have the final say on those specific investment decisions. The fund would be established with the support of a strategic advisory board, including venture capital investors, large equity investors, and a designated representative from the National Biotechnology Coordination Office (NBCO) (see recommendation 1.1a).

Strategic funding would allow for longer time horizons and accommodate the uncertainty inherent in scaling innovative technologies, particularly in sectors such as biotechnology that face extended commercialization timelines and entrenched market competition.

Maximizing Impact

The goal of the fund would be to earn returns through continuous access to private market investments that enable self-sustainment after initial appropriations from Congress. There is a possibility that a second, smaller allocation will be necessary roughly 10 years after establishment of the fund, depending on investment returns and how long the fund needs to become self-sustaining.

The fund’s operational model is designed to maximize efficiency and impact. By delegating investment decisions to an experienced investment partner and establishing a strategic advisory board, the fund ensures a balance between government oversight and private sector agility. Additionally, its structure would drive toward long-term self-sustainment, reducing its dependence on continuous government appropriations while attracting significant private capital. These features would make the fund adaptable and scalable, so that it is best positioned to support a wide array of national security technology investments, particularly in high-risk areas such as biotechnology where existing models fall short​.

Partners

The fund would be directed to invest in American companies but could possess the authority to make limited investments in companies in allied countries where appropriate, and over time, seek to partner with allied funds, such as the NATO Innovation Fund and the UK National Security Strategic Investment Fund.

Congress should direct the Department of Energy (DOE) and the Department of Health and Human Services (HHS) to use existing authorities to smooth out unpredictable and inconsistent demand for biotechnology products through advance market commitments (AMCs) and offtake agreements and provide new authorities where necessary.

Biotechnology products that meet existing U.S. government needs struggle to attract private sector investment and scale up. These difficulties arise in part because the government is not clearly signaling consistent demand for biotechnology.

Biotechnology can satisfy the technical needs of various agencies. Consider the DOE’s efforts to develop nontoxic lubricants for hydropower equipment, some of which could be manufactured with cost-competitive and scalable biomanufacturing.¹⁵³ The problem, however, is that biotechnology companies do not always know what is needed, when, and by which part of the government. Furthermore, current government procurement mechanisms generate inconsistent demand. The challenges are familiar to anyone contracting with the government: single year appropriations, abrupt policy shifts, and crises can all drive volatility in demand. Companies producing antibody drugs, for example, encountered a spike and sudden drop in government demand during the COVID-19 pandemic.¹⁵⁴ It is critical to clearly define and smooth out demand for biotechnology products that can fulfill government needs. Companies and investors, especially those in private equity, look for steady market demand as evidence that they should pursue scale-up.

To signal consistent demand, governments can use advance market commitments (AMCs) and offtake agreements. AMCs are a promise to purchase a product that does not yet exist, if a developer can make it at scale. They help companies de-risk the costs of new product development by positioning the U.S. government as the first, but not only, buyer. Offtake agreements are promises to purchase an existing product in multiple orders over a given period. They help companies demonstrate to private investors that there is steady demand within government markets for their products.¹⁵⁵ Government AMCs and offtake agreements intend not to create artificial demand but rather to formalize a commitment to purchase products that fulfill existing needs and standards.¹⁵⁶

Congress should direct the DOE and the HHS to leverage other transaction authorities (OTAs)—a flexible procurement mechanism authorized by Congress—to establish AMCs for biotechnology products that meet existing technical needs, signaling demand to pull these products through development. The DOE should also establish offtake agreements, signaling demand to pull developed biotechnologies through scale-up.

The DOE and the HHS should each define which of their existing technical needs can be met with biotechnology. The DOE, for example, might need biobased lubricants for hydropower equipment, while HHS might want new vaccine platforms for U.S. public health. Once those needs are defined, the DOE and the HHS should determine which biotechnologies would most benefit from AMCs (such as those that have not yet scaled up) and which would benefit from offtake agreements.

AMCs and offtake agreements should be meticulously designed in consultation with technical and market experts from both inside and outside the government. Each AMC or offtake agreement should detail agreed-on prices, specifications, delivery timelines, and frameworks for evaluation. Finally, for Congressional oversight purposes, the DOE and the HHS should report annually to Congress on their AMCs and offtake agreements. This oversight mechanism would ensure that the agreements are meeting their objectives and timelines so that the government is not locked into expensive or unneeded pledges.

Congress should restore full and immediate expensing of research and development (R&D) expenditures.

Recent changes to the Internal Revenue Code have reduced the amount of R&D costs that businesses can deduct annually. Previously, a company could fully deduct its domestic R&D expenditures in the year in which those expenditures were incurred, but companies must now spread those deductions across five years.

For biotechnology startups, the amortization of R&D expensing can make it harder to stay afloat. R&D accounts for about a quarter of the overall spending by biotechnology companies.¹⁵⁷

Congress should restore full and immediate expensing of domestic R&D expenditures under Section 174 of the Internal Revenue Code. A return to this prior treatment of R&D expensing would provide some financial cushion for small businesses as they develop their technologies.¹⁵⁸

Congress should improve the effectiveness and reach of the Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR) programs to support early-stage innovation.

The Small Business Administration’s (SBA) Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR) programs are mechanisms for the U.S. government to strategically invest in early-stage technologies, including biotechnologies. Powered by a network of federal agencies, “America’s seed fund” is intended to provide non-dilutive funding—that is, investment that does not require owners to give up equity—to help emerging technologies move toward commercialization.¹⁵⁹ Eleven federal agencies participate in the programs, and each agency with a R&D budget of over $100 million sets aside 3.2 percent of its budget for its own SBIR/STRR programs, with early research award amounts limited to $306,000 and pre-commercialization award amounts limited to $1.5 million.¹⁶⁰

The SBIR/STTR programs comprise one of the largest hard tech seed funds in the world. Yet there is no overarching, coherent strategy for deploying its over $3 billion of annual funding. Each federal agency allocates grants in accordance with its respective mission without any broader considerations. For biotechnology in particular, funding is fragmented across the DOD, the NSF, the EPA, the DOC, the USDA, and the Department of Homeland Security (DHS). SBIR/STTR grant applications can be cumbersome. Some early-stage companies find the size of early research grants (which range from $100,000 to $306,000, depending on the agency) not worth the effort to apply.

An SBIR Success Story

As “America’s Seed Fund,” the Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR) programs aim to stimulate technological innovation, foster small businesses in meeting federal research and development (R&D) needs, encourage participation from socially and economically disadvantaged individuals in technology innovation, and increase private sector commercialization of federal R&D through early-stage, high-risk funding.ˣˣⁱ

Geno, a San Diego-based biotechnology company that has received SBIR/STTR grants, provides an illuminating example of how such funding in early-stage research can translate into technological innovation and economic growth in an emerging industry. Founded in 1998, Geno was awarded multiple SBIR/STTR grants in support of various research efforts between 2000 and 2007.ˣˣⁱⁱ Since then, Geno has commercialized GENO Bio-BDO, a process technology that harnesses plant sugars to produce the widely used industrial chemical 1,4-butanediol. Geno has grown the company’s portfolio to include plant-based nylon production and has secured partnerships with brands including Lululemon and L’Oreal.ˣˣⁱⁱⁱ In August 2024, Geno received $1.51 million from the Department of Defense’s (DOD) Distributed Bioindustrial Manufacturing Program (DBIMP) to plan a multiproduct biorefinery for polymer precursors that have applications in the aviation and automobile markets.ˣˣⁱᵛ

The programs would be better if they more easily reached companies whose technology have high potential for commercialization. Federal SBIR/STTR program administrators may have no experience investing in the industry, and even though federal agencies have the legal authority to grant SBIR/STTR funds to businesses owned by hedge funds or private equity firms, they are inappropriately excluding these businesses from participating in their SBIR programs.¹⁶¹ Critics have accused the SBIR/STTR programs of fostering “SBIR mills,” whereby firms obtain multiple early-stage SBIR grants for short-term revenue without ever commercializing a product.¹⁶²

Lastly, even if SBIR/STTR grants reach high-potential companies, they remain vulnerable to China’s brute force economic tactics. A 2021 DOD report found that Chinese state-sponsored firms target SBIR-funded companies for intellectual property acquisition and theft.¹⁶³ In 2023, the SBA issued due diligence guidelines to manage the risk of intellectual property theft from foreign governments, but they applied only to current recipients and new applicants.¹⁶⁴

Given the large annual budget, it is critical that policymakers ensure that the SBIR/STTR programs have the direction needed to catalyze emerging biotechnology startups.

Congress should ensure that funding reaches biotechnology companies that have high commercialization potential and are critical to U.S. national security interests. To ensure that grants are strategically allocated, Congress should provide direction, resources, and guardrails. It should convey the importance of funding in critical technology areas alongside an overall increase of the set-aside percentage for the SBIR/STTR programs. The programs should be reformed to better incorporate industry expertise and commercialization potential when reviewing grants. Congress should also consider ways of solving the problem of companies that repeatedly consume SBIR/STTR resources without ever reaching commercialization. The SBIR/STTR programs should also be streamlined so that they allocate grants more quickly and efficiently. Lastly, Congress should expand the recent measures that mitigate risks of foreign intellectual property theft and require the reporting of foreign acquisitions of past grant recipients.