Change Phase II Small Business Programs from Grants to US Investments: It’s Needed to Get Innovations to Market

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August 25, 2025

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by Dr. Gordian* (Special to Advanced Biofuels USA) The recent action by the US government to take a $10 billion equity position in the chip manufacturer, Intel, offers an exciting way to push US Small Business to the forefront of commercializing their hard won technological advances. These advances would help take US energy, security, medical, and agriculture industries to new worldwide innovative leadership positions.

Most current Phase II SBIR (Small Business Innovation Research) and STTR (Small Business Technology Transfer) projects are primarily focused on commercialization rather than straight R&D. This is especially true in Department of Defense and Department of Energy Phase II projects. They largely involve prototype testing/verification and commercial plan implementation. In other words, the very stages usually associated with venture and other forms of capital investment.

But, do current Phase II funding polices do an adequate job of advancing science and technology in a commercial direction on their limited budgets? A convincing case can be made that they do not. Specifically, a relatively small percentage of Phase II projects are currently funded based on non-transparent evaluations of separate reviews of technical and commercial portions of the Phase II proposal. Or, in other words, an academic type process.

Also, remember that SBIR/STTR projects are known as big bang for the buck investments. And, they are limited in their funding. For example, In 2024 the Department. of Energy spent only $52 million to issue 229 Phase I awards.

So, instead of using this academic review approach, Phase II SBIR/STTR offices should be converted into Equity Funding Locations. And, instead of being tied to only Yes/No funding decisions because of limited funding, flexibility should be provided on funding amounts.

The Phase II Equity Funding Program

Here’s how it could work: in 4 steps.

All Phase I projects that met their stated Phase I work goals with results that showed they could work in commercial environments, would be awarded the first tranche of the maximum Phase II amount. Using the $1 million value of most Phase II awards, the first tranche would be about $250,000 USD. It would be paid to companies that have acceptable US business structures; LLC, C Corps, etc.

In exchange for the 1^st tranche, the US government would receive in exchange equity positions in the companies based on a minimum value of the companies of $2 million USD. (Higher values would be used based on prior investment histories.)
At pre-set mileposts, up to three additional tranches of $250,000 USD could be awarded in exchange for higher equity positions based on company performance.
After completion of the Phase II equity projects, the US government would retain their equity positions and would be expected to assist the companies in implementing their innovations and growing their values.

As you can see, there are two immediate benefits for the US government over the current Phase II approach.

First. The same limited budgets, used in a flexible, performance based manner would not only test more innovations, but would spread out available financial support, and stop funding before it was wasted.

Second. The US government would be in a position to obtain continuous funding through their equity positions. This would ultimately free the program from taxpayer dollars.

As for US Small Businesses, there would be three very important benefits.

First. They would have the certainty that work could begin if they were successful in Phase I.

Second. With the US government in equity positions, risk would be reduced for private investors. This could bring in private investors earlier and in combination with the US government positions, crossing the “Valley of Death” could become much, much easier for US Small Businesses.

Third. Putting Phase II in an equity funding format would help Small Businesses learn how to operate in that environment without the crushing stress caused by many early-stage VC deals.

Time to Change Is Now

With US agencies now reviewing SBIR/STTR changes (which have delayed some funding notices) this is the time to make meaningful changes that would lead to the boosts in US innovations that all Americans would agree are needed.

One last note. This idea of government “boot-strap” equity investments is not new. Many successful pharmaceutical and technology entities in California, Maryland, New York, and other states made the jump to the top with this kind of help.

*Dr. Gordian specializes in solving “seemingly intractable problems with simple solutions.” The Doctor also points out that crucial documents such as those behind the US Constitution, the Federalist Papers, were written by similar esteemed personages. For the Federalist Papers it was “Publius.”