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The conversation surrounding technologies of interest to the Department of Defense organization charged with directing capital in more commercial ways is a relatively straightforward one.
After all, technology is tangible, even if it’s a type of software. On March 8, the Defense Department’s Strategic Capital Office revealed its investment strategy for the first time, listing 12 technology priorities as its initial priorities.
OSC calls the investment launch the first round of programmatic activities for its small business investment firm Critical Technology Initiatives. Page number 10 of the strategy details these component-level technical areas.
But funding and the process to make it happen are at the heart of OSC’s core mission and vision to drive both technological advancement and scale-out to military applications.
When the Department of Defense first announced the office in December 2022, loans and loan guarantees were called for as potential means for the OSC to secure more funding for technology development.
Many civilian institutions use these methods and other types of credit programs to enter capital markets, but all of them are the domain of defense agencies.
The following key sentence of the new investment strategy helps explain the void that OSC seeks to fill.
“By leveraging these financial tools, as the OSC is using in conjunction with our federal partners, capital providers can use these financial tools to ensure that their cost of capital is too high, their repayment or liquidity schedules are too long, or that they are unable to raise funds.” “It allows us to invest in critical technologies that are otherwise unattractive for reasons such as long timelines. The technical challenges are too risky for early commercial markets alone.”
The Department of Defense currently relies on grant and contract types that focus on prototyping, such as the Small Business Innovation Study and the Small Business Technology Transfer Program.
OSC is entering the early stages of component-level technology, making it a critical cog in the larger systems in which it is embedded. For example, consider microelectronics and energy generation, especially battery life.
Early-stage component technology companies have enough difficulty raising capital from investors, and the difficulty becomes even greater when it’s time to make progress and scale out the product.
OSC’s plan is to rely on the Small Business Administration’s SBIC program to provide loan guarantees to investors involved in these technologies. The SBIC program is designed to help small businesses connect with venture capital and private equity investors.
The second need identified by OSC in its investment strategy is financing for large-scale production of component technologies.
Late-stage companies often have promising products, but investors are reluctant to provide capital until meaningful sales can be demonstrated, which requires capital first. Become.
The OSC believes that these companies often require more debt than equity. OSC can work with interagency partners to support loans and loan guarantee extensions to companies with expanded production and dual-use supply chains.
Examples of options considered by the OSC include working capital, project finance, and infrastructure finance.
Here is the second part of the strategy, which is worth reading in full.
“The OSC supports the use of private sector capital and the Department of Defense for larger investments in critical technologies, including off-year acquisition program funds, when clearly aligned with military needs, authorities, and transition pathways. Potential for matching research, development, test, and evaluation (RDT&E) funds. Increased levels of capital, diligence, and accountability will accelerate and expand the development, production, and deployment of innovative military capabilities. is aimed at.”
The verdict on whether the OSC’s approach is the right one will be out for some time, but the emphasis on dollars and cents in a world of ones and zeros is a natural and necessary starting point.
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