Recent Market Volatility Shows Value of Government Funding, DOD Official Says

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Despite economic uncertainty, the head of the Pentagon’s office that connects promising tech companies with private capital said they will “continue to advance these technologies and support DOD operations.”

Government partnerships with early-stage companies can strengthen the production of innovative technologies vital to national security, even in times of economic uncertainty, according to the head of the Pentagon’s Office of Strategic Capital, or OSC.

During an event hosted by the Center for Strategic and International Studies on Friday, Jason Rathje—whose office is tasked with connecting firms developing critical products and devices with private capital—said that market volatility caused by the collapses of Silicon Valley Bank and New York-based Signature Bank last week demonstrated “the value of government partnerships and the value of government-guaranteed financing when it comes to the things that are vital to national security.”

OSC, which was established by the Pentagon in December, partners with private capital providers to help tech companies navigate the so-called “Valley of Death,” where firms struggle to financially navigate “the gap between the laboratory and full-scale production.” Rathje said that the office’s mission fits within an all-of-government approach “to help the United States compete in today's global competition over critical technology areas”—regardless of external market forces.

“The important part of this—from a DOD perspective and certainly from a national security overarching perspective—is that there are things that are vitally important to national security,” Rathje said, noting that the ability to “support and guarantee financing in innovative new ways that allow us to advance these critical technology areas” remains a federal priority. 

He added that, while these efforts are “not completely carved off from market volatility,” they position OSC “to continue to advance these technologies and support DOD operations, even in tougher economic times.” 

Rathje said the first program OSC has launched—a partnership with the Small Business Administration to provide startups with long-term funding, known as the Small Business Investment Company Critical Technologies Initiative—demonstrates the value of these types of “patient capital” investments, where investors are prepared to wait a longer period of time to see results, in the development of critical technologies.

“That approach that we're taking with the [Small Business Investment Company] program is one where we're trying to increase the investment to crowd-in private capital, to create patient capital investment funds,” he said, adding that they are prioritizing investments in technologies “that have large applications—like semiconductors—but aren't necessarily going directly to the things that we buy.”

Rathje drew a parallel between the new joint OSC-SBA initiative and SBIC funding that supercomputer manufacturer Cray—which he noted “helped the Department of Energy compete during the Cold War”—received during a difficult economic period in the 1970s.

“It, as a company, required investment from patient capital sources,” Rathje said. “It struggled to raise money on the private markets. And, fortunately for Cray, there were three SBICs that invested into Cray to build the world's first supercomputer.” 

He noted that this kind of funding could have similar benefits for other early-stage companies today.

“For us, looking back through our history—understanding that market volatility comes and goes, but finding ways that programs have worked in different times in our history and have supported companies that we all use today, products we use today—just really helps us to better understand what are the things that we think we can use in the future to help us better compete,” he added.

Pentagon officials, however, have continued to monitor the potential national security implications resulting from uncertainty in the banking sector. Rathje also sent an email to OSC’s engagements listserv on March 12 saying that his office was “heads-down in assessing impacts to national security” resulting from the collapse of Silicon Valley Bank, and was “actively collaborating with our DOD and other government colleagues to advocate for our national security community and provide insight into ongoing mitigation efforts.” 

OSC’s work is poised to expand, however, regardless of market volatility. DOD’s fiscal year 2024 budget request proposes allocating $115 million to OSC to, in part, enable the office to incentivize investments “through loan and loan guarantee programs that lower the cost to private capital investors and increase the flow of investments.” 

Rathje said that DOD “does not have the authority today to do federal credit programs,” but added that it is “an ongoing conversation.” 

“I think the vital part of the budget request today is that we believe that we can build an effective organization through our SBIC partnerships and increase our participation in the market if granted the authority and the appropriations to do so,” he said.