DoD’s budget priorities – why research funding for small businesses & startups remains secure
The Department of Defense (DoD) is bracing for budget cuts, with plans to reduce spending by 8% annually over the next five years. This move has sparked concerns about the future of DoD-funded innovation programs, particularly for small businesses and startups that depend on research grants like SBIR (Small Business Innovation Research) and STTR (Small Business Technology Transfer).
However, despite broader budget tightening, startups and small businesses should feel confident that research funding for industry will continue.
What the DoD plans to cut
According to Acting Deputy Defense Secretary Robert Salesses, one of the primary targets for reductions is “excessive bureaucracy.” While specifics are still being determined, this category could include:
- Cuts to the civilian workforce
- A reduction in the number of generals
- Sweeping changes to personnel structures
Additionally, Secretary Hegseth’s memo explicitly calls for reductions to:
- Climate change initiatives
- Diversity, equity, and inclusion (DEI) programs
What the DoD plans to protect: The 17 exemptions
Hegseth’s memo lists 17 specific exemptions from cuts, signaling the areas where the Pentagon intends to preserve or even increase funding. These protected programs and priorities include:
- Collaborative Combat Aircraft (next-generation autonomous aircraft designed to operate alongside crewed fighters)
- Virginia-class submarines
- Loitering munitions and other autonomous weapons systems
- Nuclear modernization programs
- Homeland missile defense
- Counter-small unmanned aerial systems (C-sUAS)
- Munitions procurement and production
- Certain cybersecurity programs
- Executable funding for surface ships
- Operations impacting Southwest border security
- Support for key regional commands:
- Indo-Pacific Command
- Northern Command
- Space Command
- Strategic Command
- Cyber Command
- Transportation Command
These exemptions highlight that technology modernization, strategic deterrence, and critical operational capabilities will remain safeguarded, even as other areas face budget reductions. In fact, these priority sectors are likely to benefit from the funds reallocated due to cuts in other parts of the budget.
Why DoD research funding for small businesses is safe in 2026
Even as the Pentagon adjusts spending, several factors protect small business research funding from major cuts:
1) SBIR and STTR programs are mandated by Congress
These programs are required by law and receive dedicated funding across federal agencies, including the DoD. Even during past budget cuts, they’ve remained consistently funded because they deliver high-impact innovation at a relatively low cost.
2) Technology innovation is a national security priority
The DoD has made it clear that maintaining a technological edge over global competitors is essential. Cutting funding for breakthrough research would weaken U.S. military readiness, making these investments a top priority.
3) Historical budget trends show innovation funding is resilient
During previous budget reductions, like the 2013 sequestration, funding for advanced R&D and small business innovation was largely protected. Similar trends are expected in 2026, with cuts targeting outdated programs rather than next-gen research.
4) Public-private partnerships help the DoD innovate faster
The DoD increasingly relies on startups and small businesses to deliver agile, cutting-edge solutions. Programs like SBIR, STTR, and the Defense Innovation Unit (DIU) are designed to accelerate early-stage technology commercialization, making them indispensable to the DoD’s innovation strategy.
Conclusion – small business innovation will remain a DoD priority in 2026
Despite proposed defense budget cuts, DoD research funding for small businesses and startups is not going away. Innovation remains at the core of national defense strategy, and small businesses will continue to receive support through SBIR, STTR, and related programs.
For startups developing technologies with defense applications, now is an excellent time to pursue DoD grants and contracts.