Back in December 2022, the Department of Defense (DoD) established the Office of Strategic Capital (OSC) in response to a long-standing problem flagged by defense companies in the private sector – the “valley of death.” This term is commonly referred to in the industry as the often-long-term gap between development and actual production for new technologies. Historically, the technology companies have had a difficult time securing long term “patient” capital which results in an inability to bring critical technology to scale for military use. Furthermore, many of the technologies that are vital in developing future military capabilities are not directly procured by the DoD. Thus, this clearly indicates the lack of capital support from existing procurement programs to meet the needs of those companies.
Due to DoD’s legal limitations, the OSC plays a key role in bridging the gap by linking companies that have essential defense capabilities with sources of private capital. By working with private sector partners outside the Pentagon, the OSC is able to help further DoD’s investment priorities. It is particularly important when it comes to hardware such as semiconductors since there has been a trend away from investing in deep or critical technologies in favor of software which has lower risk and higher returns. In efforts to encourage investment in advanced materials and cutting-edge technology, the OSC plans to first partner with the Small Business Administration’s Small Business Investment Company (SBIC) program.
Unlike the DoD, SBA can leverage the full faith and credit of the U.S government to increase the pool of investment capital available to innovative companies. Through the SBIC program, the SBA provides loans and loan guarantees to private investors aiming to boost their confidence in making investments in more critical technologies vital to national security. Compared to several other countries such as China where there may be heavy government intervention in the private sector, the U.S. takes on a partnership approach through empowering investors to make their own choice. Looking to its continued development, the OSC plans to partner with other agencies in the future to support the extension of loans in scaling innovative and advanced technologies.
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