Emerging Defense Technologies Need Funding to Cross ‘The Valley of Death’

February 15, 2020
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It has become abundantly clear that the United States faces a robust economic and military competitor in China. In at least one respect, this is a more daunting challenge than America faced in the Cold War because while the former Soviet Union had a strong military, it struggled with a weak economy. In those days, the United States also could rely on specialized defense contractors to provide most of the technologies that the Defense Department needed to maintain military superiority, but that's no longer true. Now, many of the capabilities the country needs for its defense reside in the private sector. It is, therefore, critical to establish better links between the commercial sector and the military.

Enter the Defense Innovation Unit (DIU), a Defense Department entity that was launched in 2015 to work more closely with the private sector. DIU conducts a number of initiatives to work more closely with new and established U.S. companies and help them provide the kinds of technological capabilities our warfighters need. But one notable DIU initiative—a proposed program to invest in start-ups that can provide DoD promising new technologies—has been stalled while it waits for funding.

Section 1711 of the National Defense Authorization Act for Fiscal Year 2018 (NDAA) directed the Secretary of Defense to create a pilot program focused on “increasing the capability of the defense industrial base to support … manufacturing and production of emerging defense and commercial technologies.” It authorized multiple methods of doing this, including grants, loans, contracts, and even awards to third parties to support investments, including debt and equity investments. The bill identified a critical funding gap as a key factor explaining why the United States has lost advanced manufacturing capabilities that can play an important role in supporting DoD missions.

Section 230 of the Fiscal Year 2019 NDAA doubled down on the concept, directing the Undersecretary of Defense for Research and Engineering (USD(R&E)) to establish activities to “develop interaction between the Department of Defense and commercial technology industry and academia with regard to emerging hardware products and technologies with national security implications,” including funding “research and technology development in hardware-intensive capabilities that private industry has not sufficiently supported to meet rapidly emerging defense and national security needs.”

The bill authorized $75 million toward the concept, and USD(R&E) created a program called the National Security Investment Capital to pursue the objectives. The program is designed to be run by DIU and to take equity positions that, if successful, will generate revenues for the U.S. Treasury. Yet despite being authorized, and fully supported by DoD, Congress two years later has yet to appropriate the funds to get the program off the ground.

Given the fact that diminished domestic technological production capacity degrades U.S. national security, it is past time for Congress to fully fund the National Security Investment Capital program to provide needed early stage funding for the types of companies and technologies DoD needs.

This program is especially important because while the U.S. economy is flush with venture capital, much of it goes into areas with clear commercial potential, like e-commerce, not into riskier areas that are critical to national defense, like novel materials, batteries, new electronic circuitry or electro-mechanical systems. Batteries, which underpin increasingly large swaths of consumer, industrial and defense sectors, depend on highly complex materials science and chemistry. The same goes for the electric motors those batteries support. Small robots, which clean your house or remotely defuse IEDs, are marvels of engineering involving motors, batteries, sensors, electronics, and software. The same is true for small drones, which deliver spectacular aerial photography and provide soldiers in the field with invaluable reconnaissance support. The list goes on and on.

But to realize their full potential, start-ups that produce these types of technologies must cross the so-called “valley of death”—that precarious stage when their innovations are not yet perfected, investors are still skittish, and customers are scarce. That requires funding, yet it is often limited for companies developing “hard tech”—novel materials and hardware that DoD increasingly needs—because they face even more daunting challenges than software start-ups. A recent MIT study looking at 150 small manufacturers born out of universities found that, while the companies were able to get initial rounds of funding, most were unable to get the additional capital to grow their manufacturing domestically, so they went overseas to manufacture instead, typically to Asia. The reason, according to analysis by Sridhar Kota and Thomas C. Mahoney, is that pilot production facilities are "typically too risky and expensive for venture capital investors," and "large multinational manufacturers tend to show interest only after higher [technological and manufacturing readiness levels] are achieved."

The statistics bear this out. Venture capital firms focus on higher and faster returns than hardware provides. Kota and Mahoney, for example, found that, since 2002, “both the number of deals and the amount invested by venture capital funds in manufacturing have averaged just 0.4 percent.” As MIT professor Hiram Samel succinctly puts it: “VC’s want things that scale at zero marginal cost, which describes software, not manufacturing.”

That’s why the proposed National Security Investment Capital could potentially play such a critical role in solving this problem. Having authorized the money, Congress now should at least let the program try to deliver on its promise by funding it for a minimum of 5 years and then having the General Accountability Office evaluate its effectiveness. Failure to do so risks losing defense capabilities that China will have no such hesitance to develop.

Robert D. Atkinson (@RobAtkinsonITIF) is president of the Information Technology and Innovation Foundation (ITIF), the leading think tank for science and technology policy.

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