The Defense Department's new Office of Strategic Capital is looking to launch several initiatives this year to attract "patient investment" to areas of emerging technology deemed critical for national security, with an eye toward loan guarantees and potentially co-funding the development of new capabilities.
OSC Director Jason Rathje, speaking today at the Center for Strategic and International Studies, highlighted a recently inked deal with the Small Business Association that will allow OSC to leverage loan guarantees through the Small Business Investment Company Critical Technologies Initiative.
“The SBIC program is a very different type of DOD program,” he said. “Through this program we provide loan guarantees to investors to raise debt to match with private capital where that total investment fund -- the government-backed debt -- and the private capital invests in critical technology companies.”
The point, he said, is to “crowd-in” private capital funds related to “deep technology” areas, specifically hardware-related products that investors have begun shunning in recent years.
For instance, Rathje said hardware accounted for 45% of private capital investment in 2006, while software made up 55%. But in 2017 hardware accounted for only 8%, while hardware was 92%.
“Hardware, deep tech, is expensive,” he said. “Much more expensive than software. These investments in these technology companies, they require patient capital.”
Private investment in technology areas like e-commerce, Rathje said, is about nearly 150 times higher than it is in quantum computing, which DOD considers critical for national security.
Another example Rathje used was cubic boron arsenide, an emerging material that has 10 times the thermal conductivity of silicon, which is the staple of the semiconductor industry and, for now, more cheaply produced.
DOD, he said, needs to do something to “increase the likelihood that we will have a startup that makes cubic boron arsenide” so it can eventually have a massive impact on U.S. military power consumption.
Additionally, Rathje said, the SBIC program is good for “patient investment” because it allows for Accrual Debenture, where the government can collect interest on the loan but won’t require repayment for 10 years.
Along with loan guarantee programs, OSC intends to launch the Transition Acceleration Program Activity this year, eyeing “out-year” DOD research, development, test and evaluation funds to possibly team with private capital investors to co-develop critical technologies. Rathje likened it to a cost-sharing program.
Additionally, OSC seeks to launch the Global Critical Technology Scout program in which it might contract with nonprofit organizations to scout and scale critical technologies developed by emerging international companies.
“We're thinking deeply about what are the opportunities we see in the out-year budgets,” he said.
The Pentagon is requesting $115 million for OSC in fiscal year 2024.
Defense Secretary Lloyd Austin established the OSC in December to help provide funding for critical technology areas “that the private sector has not sufficiently supported.”
Rathje said OSC will begin taking applications for the SBIC program in the coming months with the other initiatives to follow.
“We plan to start going through the licensing process sometime early summer,” he said.