The Pentagon’s effort to draw more commercial investment to technology with military uses is thwarted by regulations designed to ensure the viability of small business vendors in the federal contracting base.

This tension is increasingly apparent as more venture capital firms direct cash at government contractors They then come up against Small Business Administration rules at odds with practices standard in startup investment.

Running afoul of regulations around small business certifications can mean losing contract awards or set-aside status, or—in extreme cases—False Claims Act investigations.

Investors say these SBA rules slow the flow of financial support for startups at a …