It was 12:58 p.m. in Washington D.C when Moscow confirmed the launch of the Sputnik satellite on 4 October 1957. The Soviets had beaten the United States to space. Ripples of concern spread across defense and political communities. This event kickstarted a wave of research and development activities that, at peak, accounted for a full 36 percent of global research and development outlays and culminated in a technological advantage that was enjoyed by the United States well into the 2000s.
The United States is similarly disadvantaged today. Department of Defense (DoD) research and development has shrunk to 4 percent of global R&D expenditures. A year-long study by the Australian Strategic Policy Institute found that China is leading in 37 of 44 areas tracked, with a “potential for a monopoly in areas such as nanoscale materials and synthetic biology.” In this sense, our Sputnik has occurred more than 37 times.
Advancement and Innovation
The U.S. government has taken notice. The 2023 National Defense Science & Technology Strategy specifically states that accelerated technological advancement and innovation are key elements in ensuring national security over the long term. Where the war in Afghanistan fell short of driving military capabilities forward, great power competition is providing an atmosphere for change. In response, the United States must not only invest in innovation units but also develop technical-minded warfighters who understand how to identify talent, recognize gaps, and harness U.S. ingenuity.
Unfortunately, the current state of the government-industrial innovation relationship is not ideal. RAND’s study from 2023 concluded that there is a lack of unified authority for acquisitions in DoD. However, there also are gaps in government funding that prevent start-up companies from properly scaling their products for a military context and a lack of integration between private industry and warfighters that could better inform DoD’s needs.
Bridging the Valley of Death
The “Valley of Death” is a term detailing the fate of ideas that stall in the production cycle—or, in this case, startups that fail to win a government contract. Industry companies such as Shift get around this problem by increasing collaborative efforts through fellowships like the Defense Ventures Program (DVP) cited in the 2023 National Defense Science & Technology Strategy. The authors selected to this program were assigned to the defense-focused venture capital firm Marque Ventures, at which they were able to engage directly with the private sector, establish meaningful connections, and cultivate a more in-depth understanding of business models, dual-use technologies, and solutions to problems challenging DoD.
Shift owes some of its success to a U.S. government Small Business Innovation Research (SBIR) grant. SBIR grants have existed since 1982 and are comparable to seed funding in the venture world. Following seed funding, additional rounds of series A, B, C, and D funds assist promising startup companies to eventually succeed in going public. Venture funding is an avenue for companies without revenue to bridge the gap from idea to profitability. In this way, the government has supported the creation of thousands of high technology prototypes that should benefit DoD.
Unfortunately, SBIR grants have low chances of being transformed to sustained contracts. Even technology innovation hubs like the Rapid Reaction Technology Office Capabilities Prototypes, which has the best adoption rate, sits at 60 percent in successfully reaching the field with contracted prototypes. This rate may seem sufficient, but its reactionary nature blunts its innovative effectiveness. The Defense Innovation Unit has the best proactive technology adoption record with a mere 41 percent success rate.
There is a strategic funding gap between seed and series B funding. The newly formed Office of Strategic Capital (2022) had a budget of $20 million in 2023 and is requesting a budget of $99 million in 2024—or 0.002 percent of the total DoD Budget. Consequently, companies focused on defense must somehow transition from providing $1 million worth of capability to the government to $20 million worth of capability with no additional funding to bridge the gap.
Private equity has proven successful for companies such as Anduril and Palantir. However, venture capital largely finds defense startups too risky and the customer (the government) too difficult. Although these startups have successfully navigated the defense maze from nonrecurring funds to prototype to contract, they remain outliers. There are still hundreds of tech firms offering amazing capabilities that have nonetheless been unable to crack DoD’s code and cross the Valley of Death.
Warfighters are Key
Unfortunately, entrepreneurs and inventors in private industry often lack the relationships and necessary feedback loops required to communicate directly with warfighters. In our experience, most successful inventions have roots in designs developed by people consumed by or adjacent to the problem. Therefore, warfighters must have opportunities to create, iterate, and interact with industry.
However, DoD has few formalized ways to expose its workforce to industry and vice versa. Professional military education programs have military members spending their entire time at traditional professional military education with little to no exposure to industry practitioners. While programs like the Eisenhower School for National Security and Resource Strategy, formerly known as the Industrial College of the Armed Forces, are a good start, the armed forces must do more. Defense industry fellowships, while respected, are limited and not as useful in developing service members who are not contracting or acquisition professionals.
Consequently, there is a cultural ignorance among senior defense officials on how the defense startup industry operates. To address the issue, the 2022 National Defense Strategy stated, “We will increase the availability of fellowships, internships, and rotational assignments—including in the private sector—to grow the skills of our workforce, provide a broad range of experiences, create collaboration opportunities, and carry best practices back to the Department.” Fellowships such as Shift’s DVP (which is funded by AFWERX) attempt to address this line of effort but even these private attempts to solve national security issues run into funding barriers.
The Race Against China
According to ASPI, China has the largest cohort of undergraduate students going into postgraduate education in advanced aircraft engines, leading to the largest proportion of employment in Chinese firms. Similar trends were observed in categories of electronic warfare and autonomous underwater vehicles. While still a strong contender, the United States still comes in second to China in this area.
The Chinese Communist Party’s aggressive “Military-Civil Fusion” strategy has made tremendous strides in breaking down barriers between China’s civilian research and private sectors and integrating them with its defense industrial base. China’s strategy has succeeded in part thanks to its defense-related state-owned enterprises. China’s policies allow for civilian enterprises to conduct classified defense research and development, as well as weapons production, in a more expeditious and focused manner.
While President Joseph Biden’s August 2023 executive order may help blunt some of China’s abilities to use U.S. investments in its dual-use technology companies, it will likely be insufficient in stifling Chinese advancements in the long-run. The U.S. government requires a whole-of-government approach to win the defense tech competition, but the DoD can provide an important piece of the solution.
Winning the Race
The United States can still win this race. To do so, the funding and knowledge gaps must be addressed. One solution will undoubtedly involve venture capital firms. These firms help defense tech startups fill the void between sources of funds for innovation and can bridge the Valley of Death. Their charter is to look over the horizon for high-risk and huge-reward capabilities. Venture capital firms produce team-building capital, support startup growth, customer acquisition, and provide ecosystem expertise.
While there are several generalist venture capital firms probing the defense sector, there are surprisingly few venture capitals, such as Marque Ventures, that truly specialize in backing early-stage companies in the national security space. There are numerous reasons for this, but it boils down to the perception that attempting to scale a private company by doing business with the government presents an existential risk for smaller companies. Macro issues like procurement friction and DoD budget approval delays will take time and election cycles to solve, but the DoD must encourage private capital deployment in support of scaling critical technologies by supporting defensed-focused venture capital firms and their portfolio companies with direct warfighter access while prioritizing organizations such as the Office of Strategic Capital and the Defense Innovation Unit.
Last, and most important, national security is in jeopardy without professionally developed warfighters. Current industry education programs, such as the Air Force’s Education with Industry, only accept roughly 80 service members across 36 career fields per year. Programs such as DVP help break down silos and build bridges but are only able to accommodate roughly 100 service members per year from all the services. The services can and should do more to formalize fellowship opportunities and the Navy must partner with the Air Force and other services to support this effort.
The unique industry perspective provided by fellowships will aid DoD in picking winning innovation and arming warfighters with a more in-depth knowledge of budgeting, requirements, and R&D efforts. This investment in human capital will build on warfighters’ existing business acumen by offering a diverse perspective on leading personnel, projects, and mission sets. The United States can strengthen the military and increase retention while simultaneously strengthening the industrial base partnership. We have had our Sputnik moment. Now, it is time to act.