Senior defense officials are pushing for new increases in private capital investment, which key analysts say has the potential to expand the defense industrial base and drive greater innovation into U.S. weapon systems.
One of the most obvious opportunities for this is helping new entrants bridge the “valley of death,” according to Cynthia Cook, a defense analyst at the Center for Strategic and International Studies.
From the government perspective, she said, any time the military receives 10 bids for one capability and buys a single solution from one company, the Defense Department can call that a success.
For the other nine companies, Cook said, they’ve hit the “valley of death” and might not ever win production contracts. But, if those solutions are still potentially useful to some entity within DOD, injections of private capital can keep those companies alive until they find another customer within the department.
Sam Moyer, a research fellow at the National Defense Industrial Association’s Emerging Technology Institute, told Inside Defense the idea makes even more sense when looking at increases in defense spending from other countries.
“Other countries -- especially U.S. adversaries -- invest a larger proportion of their [gross domestic product] every year,” he said. “And so, the U.S. overall investment rate, if we are to compete in great power competition, probably needs to go up.”
The Chinese defense budget has grown 6% annually between 2013 and 2023 after adjusting for inflation, according to the DOD’s annual assessment of Chinese military capabilities.
U.S. investment in military capabilities can increase with the help of government or private capital, but Moyer said the latter makes more sense at this time.
“Because the government budget is looking fairly strained right now, it seems logical that the private investment world could be a resource to fill that gap if you want to do that,” he said.
Using private capital to unlock innovation
Cook of CSIS also told Inside Defense that “private capital has the potential to broaden the innovation ecosystem” in the defense industrial base.
The investments could bolster firms producing dual-use products that could fit DOD needs even if the companies don’t view the department as a potential customer yet, according to Cook.
“They may not want to work for the Department of Defense because of what they’ve heard about the bureaucracy involved,” she said.
The Pentagon has been working for years to combat the private sector’s perception of it as an undesirable customer.
Ryan Tseng, ShieldAI president and co-founder, said it was a narrative he had to push back on when he started his company.
“We go back 10 years ago and we were going up and down Silicon Valley, we got told to pound sand by basically everybody,” he said during a panel discussion at the annual McAleese and Associates defense conference last month. “We were crazy, why would you do that? Silicon Valley had turned its back on the defense sector.”
Retired Air Force Lt. Gen. John Caine, nominee to chair the Joint Chiefs of Staff, told lawmakers the department “must quickly become a better buyer” in his answers to advance policy questions earlier this month.
“The DOD is frankly a poor buyer and must devote energy to this effort,” said Caine, who has most recently worked with venture capital firms.
Caine also noted that he “may be the only officer ever nominated for this position with experience in the venture capital world, an experience I will draw on as the DOD looks to modernize its business systems and revitalize America’s Defense Industrial Base.”
Cook of CSIS said private capital investments could also be used to speed up the fielding and deployment of innovative solutions, introducing new competitors providing capabilities at more efficient, rapid and less expensive rates compared to existing defense contractors.
Emil Michael, President Trump’s pick for under secretary of defense for research and engineering, spoke about the potential for private capital to support the defense industrial base in his APQs.
“Venture capital and private equity investment in defense technologies could play an even bigger role in the revitalization of the defense industrial base,” wrote Michael, who most recently served as chief executive officer for special interest acquisition company DPCM Capital.
He said the investments would be particularly beneficial for “small businesses seeking to gain entry and provide innovative solutions to meet evolving warfighter demands, delivering breakthrough, war-winning capabilities.”
An old idea with new focus
It’s important to keep in mind that the department and the defense industrial base at large have experience with “successfully leveraging private capital,” Moyer of NDIA-ETI told Inside Defense.
“One of the things I’ve noticed is there’s an awful lot of private capital that already invests in the defense industrial base,” he said. “There’s an awful lot of venture capital, there’s a lot of private equity funds, a lot of commercial banks play in this space.”
DOD also has existing vehicles to engage with private capital sources to expand the defense sector, such as the Office of Strategic Capital -- the OSD-level office intended to catalyze private investment in technology industries deemed critical to national security.
Those efforts are enabled by OSC’s two major programs -- the Small Business Investment Company Critical Technology (SBICCT) initiative and the OSC Credit Program.
SBICCT is the result of a partnership between OSC and the Small Business Administration’s Office of Investment and Innovation -- aimed at pairing sources of private capital with federally guaranteed loans meant to boost investment in technology areas deemed high-priority for the Pentagon.
The OSC Credit Program is DOD’s department-wide loan and loan guarantee authority, currently in its inaugural iteration targeting domestic manufacturing capabilities.
Analysts also noted that nominees for top positions at DOD have private capital experience and have highlighted their backgrounds as an asset.
“What is different about the Trump administration is that they have identified a number of leaders with this Wall Street-type background,” Cook of CSIS said.
Stephen Feinberg, co-founder, co-CEO and chief investment officer for global investment and private equity firm Cerberus Capital Management, was confirmed as deputy defense secretary in mid-March.
Having senior Pentagon leaders with financial backgrounds could create a new type of synergy between DOD and the private sector, according to Moyer of NDIA-ETI.
“I think what that can mean is that it might be easier for DOD -- if it wants to increase engagement with private capital -- to use the tools it already has, and to harmonize the use of those tools,” he said.
Feinberg told lawmakers in his APQs that is what he hopes to do in his role as chief operating officer for the department.
“Based on my experience in the private sector, I believe that private equity and venture capital can bring significant resources to bear in support of U.S. national security priorities and can offer insight into market dynamics, opportunities, and risks that affect DOD’s mission,” he said. “If confirmed, I would engage representatives from venture capital and private equity alongside other stakeholders.”