INNOVATE Act Overhauls Federal Tech Grants: New $40K Entry Phase, Strict Foreign Security Checks, and Removal of Diversity Preferences

The INNOVATE Act, officially the Investing in National Next-Generation Opportunities for Venture Acceleration and Technological Excellence Act, is a major overhaul of the government’s primary small business R&D funding programs: the Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR) programs. If you're a small business owner, a tech worker, or just someone concerned about where your tax dollars go, this bill matters. It’s changing who gets the money, how they get it, and what strings are attached, focusing heavily on national security and commercial success while shifting away from demographic considerations.

The New Entry Point: Phase 1A for the Newbies

One of the most interesting additions is the creation of a brand-new "Phase 1A" entry program (Sec. 201). This is specifically designed to bring in new companies that have never won an SBIR or STTR award before. Agencies must set aside at least 2.5 percent of their total SBIR budget for this. The application is short—no more than two pages—and the award is capped at $40,000. Think of this as a quick-start grant to help true newcomers develop their idea and prepare a proposal for a larger Phase II grant later. This is great news for first-time entrepreneurs who need a small financial boost to get their foot in the door without wading through the complex paperwork of a full Phase I proposal.

Bye-Bye Diversity, Hello Geography: The Preference Shift

Here’s where the policy gets tricky. The bill explicitly removes language that gave special consideration to businesses owned by women or socially and economically disadvantaged individuals (Sec. 202). Instead, the focus shifts to geography. Agencies must now prioritize businesses located in "emerging States" or "rural areas." This means if you’re a woman or minority business owner who relied on those previous demographic preferences, you’ll lose that specific edge. However, if you run a small tech company out of a rural county or a state that historically hasn’t received many SBIR awards, this bill could significantly increase your chances of securing federal R&D money.

National Security Tightens the Screws on Foreign Risk

Title IV introduces sweeping new national security requirements that will affect every single applicant. Agencies must now vet all applicants against eight specific government watchlists—covering everything from the Department of Homeland Security’s lists to the Treasury’s Non-SDN Chinese Military-Industrial Complex Companies List (Sec. 402). The definition of “foreign risk” is incredibly broad, covering almost any financial, research, or licensing connection the company or its key personnel have had with a “foreign country of concern” in the last ten years (Sec. 401).

If an agency denies your award based on a foreign risk finding, they are explicitly prohibited from telling you the specific reason until the official decision is made. This lack of transparency is a major concern. If you’re a small tech firm with legitimate international investors or partners, you could be shut out without knowing why, making it impossible to address the concern or appeal the decision. Furthermore, the government can now indefinitely extend the time it has to recover funds if your intellectual property (developed with SBIR/STTR money) is sold or shared with a "foreign country of concern," giving them a long leash over your company’s assets (Sec. 404).

Stricter Expectations for the Big Winners

If your company has already won a lot of federal R&D money, the rules are about to get a lot tougher (Sec. 501). Companies that have received more than 25 Phase II awards now face two major hurdles to keep participating: First, they must prove their total annual revenue from non-SBIR/STTR sources is at least equal to the total dollar amount they’ve received from all their SBIR/STTR awards combined. Second, they must show that 65% of their combined annual earnings and investments over the last three years came from outside the SBIR/STTR programs. If they fail these tests, they are locked out of applying for new awards until they meet the commercialization standard. This is a clear move to stop companies from becoming perpetually dependent on government grants, forcing them to prove they can actually commercialize their technology in the private market.

Defense Gets a Strategic Fund and Fixed Prices

For the Department of Defense (DoD), the bill creates a new “Phase II strategic breakthrough funding” stream, replacing the old Commercialization Readiness Program (Sec. 102). This dedicated fund is for high-potential defense technologies, offering awards up to $30 million over 48 months, but only if the small business can secure 100% matching funds from non-SBIR/STTR sources. This is designed to rapidly transition critical technologies into actual military systems. On the contracting side, the bill makes “firm-fixed-price contracts” the default for all SBIR and STTR awards (Sec. 104). This means the price is set upfront, which is great for the government’s budget predictability, but it shifts the risk of cost overruns entirely onto the small business contractor. Finally, the bill extends the authorization for both the SBIR and STTR programs for an additional three years, ensuring these funding opportunities remain available through 2028 (Sec. 505).