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The US’s global leadership in private-sector innovation may not be enough to keep us competitive and secure on a global scale.
Many of our closest competitors, such as China, are “command economies,” meaning that most of their major industries are publicly owned. Every major company is a dual-use company by default, serving both commercial and governmental purposes. Any and all innovation in those countries can be exploited for the national interest, giving those nations a competitive edge in terms of national security.
In the US, businesses and their investors must make a deliberate choice to enter into the defense and aerospace markets. That money, and the innovation that flows from it, is driven by the need to make a profit. If the promise of high returns isn’t apparent, companies will have difficulty raising funds.
This is particularly true for startups in the aerospace and defense sectors, which produce many of the revolutionary new capabilities that government agencies like the Defense Department want. Economic fluctuations and the unique challenges for space and defense investors are causing them to retreat to more historically profitable sectors, creating a critical challenge for our nation’s strategic competitiveness and national security.
Industries that are essential to our nation’s competitiveness are underfunded. The US national security sector misses out on the ability to integrate game-changing innovation from these startups.
If the US wishes to meet the security challenges of the 21st century, it needs to change its approach to strategic investment in critical sectors.
This isn’t just a “DOD issue.” This is an all-of-government issue.
Our nation needs to find a way to inspire investors to engage with national security-related companies, funds, and startups. We need to incentivize investment in areas that historically don’t get significant capital to seed a sustainable pipeline of businesses that can bring new solutions to our national defense system.
Coordinated investment and acquisition opportunities, particularly to develop the space economy, are especially important in periods of downturn. This is how we can innovate faster than our competitors who have strategic control of their investor bases.
Unfortunately, the US has a mixed track record of playing investor itself. It needs to pursue ways to align itself with the private investor, to take the strings off of government contract mechanisms, and to direct private investor decisions in ways that create demand for continuing capital into specific industries. It needs to guide individual investor decisions toward sectors that are doing good for the country.
If US companies aren’t won over by the economic viability of national security investing, there’s no way to compete with the command economies of our strategic competitors.
There are ways to nudge private-sector investors toward national security and aerospace interests. For example, Small Business Investment Companies (SBIC) provide financing options that are more forgiving and on better terms than traditional lenders.
We’re encouraged to see this model being emulated for the defense sector through a provision in this year’s National Defense Authorization Act called the “Investing in American Defense Technologies Act.”
The original legislation, sponsored by Sens. Marsha Blackburn (R-Tenn.) and Jacky Rosen (D-Nev.) and Reps. Chrissy Houlahan (D-Pa.) and Pat Fallon (R-Texas), called for a new DOD private-public partnership program to fuel investment in innovative small businesses that develop advanced defense technologies critical to our national security. Much like SBIC, it proposes providing investors with low-risk matching funds, incentivizing them to bring needed and sustainable capital into the defense market.
Equally encouraging, the DOD recently stood up a new “Office of Strategic Capital,” which will aim to connect defense technology developers with sources of sustainable private capital to help bridge the gap—the notorious “Valley of Death”—between R&D and full-scale production.
Reporting directly to the secretary of defense, the office will help the national security community prioritize critical technology areas while deepening investment in the private companies that are in the early stages of developing them.
Executed right, the office can ensure that promising commercial capabilities and emerging technologies are available to US national security agencies in the long term, even if today’s procurement programs aren’t able to support the relevant companies’ immediate capital needs.
The US needs to buttress investor activities in critical sectors and provide the private sector with tools, security, and “patient” capital that isn’t looking for short-term gains if we’re going to remain secure and competitive on the geopolitical stage.
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Jordan Noone is the Co-Founder and General Partner of Embedded Ventures, a next generation venture capital firm investing in national security space startups, and Co-Founder of Relativity Space.
Mandy Vaughn is Operating Partner of Embedded Ventures and CEO and Founder of GXO, Inc, which partners with new tech startups, investors, and government entities in the space industry.
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