DoD establishes Office of Strategic Capital
On December 1, Secretary of Defense Lloyd Austin III established the Office of Strategic Capital (OSC), a Department of Defense organization that will help build an enduring technological advantage by partnering with private capital providers.
OSC will connect companies developing critical technologies vital to national security with capital. Critical technologies such as advanced materials, next-generation biotechnology, and quantum science often require long-term financing to bridge the gap between the laboratory and full-scale production, often referred to as the “Valley of Death” in industry.
“We are in a global competition for leadership in critical technologies, and the Office of Strategic Capital will help us win that competition and build enduring national security advantages,” said Secretary Austin. “By working with the private capital markets and by partnering with our federal colleagues, OSC will address investment gaps and add a new tool to the Department’s investment toolbox.”
These technology companies also suffer from a limited supply of longtime-horizon “patient capital,” which results in an inability to transition technology into military capabilities – even for technologies developed with the help of federal research grants or contracts. Moreover, many of these technologies are essential for future defense capabilities but are not purchased directly by the DoD, meaning existing procurement programs are unable to support the relevant companies’ immediate capital needs.
“America’s strategic competitors are working to influence U.S. technological innovation to their advantage,” said Under Secretary of Defense for Research and Engineering Heidi Shyu. “OSC is part of a broader administration-wide effort to ‘crowd-in’ private capital in areas where our efforts can boost our future security and prosperity. Our hope is that OSC will be able to strike its first deals by early next year.”
As an office overseen by the Secretary of Defense, the OSC will have an advisory council that includes the Under Secretaries of Defense. The OSC will work across policy, acquisition, and research efforts to increase the amount of capital available to critical technology companies. OSC will also help counter non-market actions by strategic competitors that use U.S. capital markets to advance their own technology goals.
In support of the Under Secretary Defense for Research and Engineering, OSC will complement the innovation organizations already executing programs to support critical technology developers. OSC aims to scale investments between science and technology-focused organizations, such as the Defense Advanced Research Projects Agency, and commercially oriented organizations, such as the Defense Innovation Unit, by increasing the capital available to critical technology companies to help them reach scaled production.
While existing offices rely on grants and contracts to deploy capital, OSC is investigating the use of non-acquisition-based tools, such as loans and loan guarantees. Many other federal agencies use credit programs to participate in capital markets through loans, loan guarantees, development funds, and other tools.
These types of federal investments have been vital in helping companies such as Apple, Cray Research, and Sun Microsystems early in their development. The OSC is unique within DoD by seeking to use proven credit programs, making strategic public-private investments in supply chains, and supporting critical technology companies from early-stage to full production.
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