Creating a US Innovation Accelerator Modeled On In-Q-Tel
The U.S. should create a new non-governmental Innovation Accelerator modeled after the successful In-Q-Tel program to invest in small and mid-cap companies creating technologies that address critical needs of the United States. Doing so would directly address the bottleneck in our innovation pipeline that limits innovative companies from bringing their products to market.
Challenge and Opportunity
While the federal government funds basic, early-stage R&D, it leaves product development and commercialization to the private sector. This paradigm has created a so-called innovation Valley of Death: a lack of capital support for the transition to early commercialization, and one that stalls economic growth for many innovation-driven sectors. The U.S. currently leads the world in the formation of companies, but the limitations on capital sources artificially restrict growth. For example, the U.S. currently leads the world in biotechnology and biomedical innovation. The U.S. market alone is worth $600B, and is projected to exceed $1.5 trillion. However, international rivals are catching up: China is projected to close the biotechnology innovation gap in 2028. The U.S. must act quickly to protect its lead.
Typically, early and mid-stage innovations are too immature for private capital investors because they present an outsized risk. In addition, private capital tends to be more conservative in rough economic times, which further dries up the innovation pipeline. Investment “fads” tend to starve other fields of capital investment for potentially years at a time So, though the U.S. government provides significant early-stage discovery funding for innovation through its various agencies, the grant lifecycle is such that after the creation and initial development of new technologies, there are few mechanisms for continued support to drive products to market.
It is this period – after R&D but before commercial demonstration – that creates a substantial bottleneck for entrepreneurs where their work is too advanced for the usual government research and development grant funding but not developed enough to draw private investment. Existing SBIR and STTR grant programs that the government provides for this purpose are typically too small to significantly advance such innovations, while the application process is too cumbersome and slow to draw the interests of many companies. As a result, small businesses created around these technologies often fail because of funding challenges, rather than any faults of the innovations they are developing.
The federal government, therefore, has an opportunity to make the path from lab to market smoother by establishing a mechanism for supporting smaller companies developing innovative products that will substantially improve the lives of Americans. A new U.S. Innovation Accelerator will provide R&D funding to promising companies to accelerate innovations critical to the U.S. by de-risking them as they move toward private sector funding and commercialization.
Creating the U.S. Innovation Accelerator
We propose creating a new federally guided entity modeled on In-Q-Tel, the government funded not-for-profit venture capital firm that invests in companies that are developing technologies that can be used by intelligence agencies. Similar to In-Q-Tel, the U.S. Innovation Accelerator would operate independently of the government, but leverage federal investments in research and development to ensure that promising new technologies make it to market.
By having the organization live outside of the government, it will be able to pay staff a wage that is commensurate with their experience and draw top talent interested in driving innovation across the R&D spectrum. The organization would invest in the development of technology companies, and would partner with private capital sources to help develop critical technologies that are too risky for private capital entities to fund on their own. Such capital would allow innovation to flourish. In exchange, the organization could establish requirements for keeping such companies, and their manufacturing operations, in the U.S. for some period after receiving public funding (10 years, for example) to prevent the offshoring of technologies that are developed with public dollars. The agency would use a variety of funding vehicles to support companies to best match their needs and increase their chances of success.
Scope
The new U.S. Innovation Accelerator could be established as a sector-specific entity, (for example as biotechnology and healthcare-focused fund), or it could include a series of portfolios that invest in companies across the innovation spectrum. Both approaches have merits worth exploring: a narrower biomedical fund would have the benefit of quickly deploying capital to accelerate key areas of strategic U.S. interest while proving the concept and setting the stage to expand to other sectors of the economy; alternatively, if a larger pool of funding is available initially, a broader investment portfolio would allow for targeted investments across sectors ranging from biotechnology and agriculture to advanced materials and energy.
Sources of Capital
The U.S. Innovation Accelerator can be funded in several ways to create a robust investment vehicle for advancing biotechnology and healthcare innovation. Two potential models include a publicly-funded revolving fund, similar to In-Q-Tel, while the other would draw capital from retirement and pension funds providing a return on investment to voluntary investors.
Appropriations driven revolving fund. Like In-Q-Tel, Congress could kick start the Innovation Accelerator though direct appropriations. This annual investment could be curtailed and repaid to the treasury once the fund starts to realize returns on the investments it makes.
Thrift Savings Plan allocations. The federal employee retirement savings plan, the Thrift Savings Plan, holds approximately $700 billion in assets across various investment funds. By allowing for voluntary investment allocation in the Innovation Fund by federal employees, even a small percentage of TSP assets could provide billions in initial capital. This allocation would be structured as part of the TSP’s broader investment strategy, through the creation of a new specialized SBF fund option for participants.
U.S. State & Public Pension Plans. State and local government pension plans hold assets totaling roughly $6.25 trillion. The Innovation Fund could work with state pension administrators to create investment vehicles that align with their risk-return profiles and support both financial and social impact goals. These would be made available to plan participants in a similar manner to the TSP or through more traditional allocation.
Reforming the SBIR/STTR Programs. The SBIR and STTR programs represent 3.2% of the total Federal R&D budget for 11 agencies, but struggle to attract suitable applicants. This is not because there is a lack of need in early-stage innovation. Typically, these grants are judged and awarded by program managers that have little or no private sector experience, take too long from application to award, and provide insufficient funds for many companies to consider them. Those dollars could instead be allocated to the Innovation Accelerator program, and invested in more promising small businesses through a streamlined program that creates a revolving fund through returns on initial investment that can be then reinvested in additional promising companies. The program now uses ceilings for different phases of SBIR grants. These phases are artificial, and do not reflect the reality of the needs of different types of companies and thus should be eliminated and replaced with needs-based funding. USG agencies can issue technology priority guidance to the U.S. Innovation Accelerator and completely off-load the burden of having to run multiple SBIR programs.
Part of the proposed US Sovereign Wealth Fund. In February of this year, President Trump issued an Executive Order directing the Secretaries of Commerce and Treasury to develop plans for the creation of a sovereign wealth fund. The plan will include recommendations for funding mechanisms, investment strategies, fund structure, and a governance model. Such funds exist across many countries as a mechanism for amplifying the financial return on the nation’s assets and to leverage those returns for strategic benefit and economic growth. We propose that the U.S. Innovation Accelerator falls squarely in the remit of a sovereign fund and that the fund could serve as a sustainable source of capital to fund the development of innovative companies and products that address critical national challenges and directly benefit Americans in tangible ways.
Structure and operations
The Innovation Accelerator program will be structured similar to a lean private venture capital entity, with oversight from the U.S. government to inform strategic deployment of capital towards innovative companies that address unmet national needs. As an independent, non-profit organization or public benefit corporation (PBC), overhead can be kept low, and it can be guided by a small entrepreneurial Board of Directors representing innovative industries and investment professionals to ensure that the organization stays on mission. Further, the organization should collaborate with federal agencies to identify areas of national need and ensure that promising companies that originate from other federal research and development programs will have the capital necessary to bring their innovations to market, thus ensuring a stable innovation pipeline and addressing a longstanding bottleneck that has driven American companies to seek foreign capital or to offshore their operations.
The professional investment team would include expertise in a broad set of domains and with a proven track record of commercial success. The organization would have a high degree of autonomy but maintain alignment with national technology priorities and competitive strategy. Transparency and accountability will be paramount and include constant full public accounting of all investments and strategy.
The primary objective of the Innovation Accelerator will be to deliver game changing innovations that generate exceptional returns on investment while supporting the development of strategically important technologies. The U.S. Innovation Accelerator will also insulate domestic innovation from the delays and inefficiency caused by the private sector funding cycle.
Conclusion
The U.S. Innovation Accelerator would address a critical gap in the current U.S. innovation pipeline that was created as an artifact of the way we fund research. Most public dollars are dedicated to early-stage research but development and commercialization are normally left to the private sector, which is vulnerable to macroeconomic trends that can stall innovation for years. The U.S. Innovation Accelerator would open up that bottleneck by driving innovation and economic growth while addressing critical national needs. Because the U.S. Innovation Accelerator would exist outside of the federal government, it can be created without an act of Congress. The President could direct his administration through an executive action to develop plans and create the U.S. Innovation Accelerator as either part of the sovereign fund he has proposed or independent of that action. However, to get it initially funded and backed by the U.S. government, (see funding mechanisms above), Congress would have to appropriate dollars through an existing federal agency. Part of the charter for establishing the U.S. Innovation Accelerator could be repayment of the initial investments back to the U.S. Treasury from fund returns.
In-Q-Tel’s mission is to support a specific need of the U.S. government, to invest in companies that build information technologies that are of use to the intelligence community. Without such a model, intelligence agencies would have to rely on in-house expertise to develop such technologies. In the case of the U.S. Innovation Accelerator, the organization would invest in companies that are addressing critical technology gaps facing the entire nation. This would both de-risk such investments for private capital and drive forward innovations that might be out of favor with private capital investors that lack long-term strategic vision. It would also create a continuum from advanced research projects agencies through to the marketplace. This has been a particularly vexing issue for these agencies who generally invest in the research and development of new innovations, but not their advanced development and commercialization.
While there is indeed a significant amount of private capital available, private investors often exhibit risk aversion, particularly when it comes to groundbreaking innovations. Even in times of economic prosperity, private capital tends to gravitate toward trending sectors, driven by groupthink and the desire for near term exits. This lack of strategic patience completely neglects certain technology areas that are critical to solving national challenges. For instance, while private funding is readily available for AI/ML healthcare startups, companies developing new antibiotics often struggle to secure investment. This is a prime example of misalignment between private capital incentives and national health priorities. The proposed U.S. Innovation Accelerator would play a vital role in bridging this gap. It would act as a catalyst for pioneering innovations that tackle critical challenges, are truly novel, and have strong potential for success—areas where private capital might hesitate to invest due to a lack of strategic vision.
While In-Q-Tel still receives annual funding from the U.S. government, we propose a model where the accelerator draws dollars from a variety of sources and repays those sources over time as the businesses they fund succeed. The objective would be for the accelerator to repay those funds within the first 10 years and then remain completely independent financially.
In-Q-Tel decides on its investment theses based on its government agency partners’ perceived strategic needs. These are sometimes highly focused needs with small market potential. This can limit the potential for large exits because those companies would be unable to raise additional investment to make products or modifications to products with such a small market opportunity. The U.S. Innovation Accelerator would prioritize investments in innovative companies making products that have a clearly defined public market and dual-use benefit.
The Federation of American Scientists supports the National Security Commission on Emerging Biotechnology’s Final Report and the Recommendations contained within it.
The U.S. should create a new non-governmental Innovation Accelerator modeled after the successful In-Q-Tel program to invest in small and mid-cap companies creating technologies that address critical needs of the United States.
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