Pentagon’s ‘strategic capital’ office focusing on ‘deep tech’ startups through SBIC initiative

WASHINGTON — Two months into its establishment, the Pentagon’s Office of Strategic Capital (OSC) is looking at ways to increase capital flows and market participation in deep technology areas — things like artificial intelligence, biotech and quantum computing — and is developing its first investment strategy, the office’s director said today. 

“How do we give these technology entrepreneurs the opportunity to take their [science and technology] into products and services that not only support the national security mission but also larger economic prosperity?” said Jason Rathje, who was a guest speaker at a meeting today of the Defense Innovation Board. “Well, the Office of Strategic Capital is investigating two new strategies to help align and scale private investment to support national security.”

Those two strategies are syndication, in which the government “simply partners with private capital providers to co-invest in new technology efforts to help scale the business as we help scale the technology,” Rathje said, and a “more novel strategy” for DoD: leverage.

“Leverage works to change the economics on investments in deep technology areas,” Rathje said. “Fundamentally what leverage does is it lowers the cost of capital, private investors to make the patient capital investments that are required at the sizes that they’re required to invest in deep technology companies.”

The Pentagon established the OSC last December in an effort to help bridge the “valley of death,” where innovative technologies fail to shift into actual programs of record, by developing and implementing “proven partnered strategies to shape and scale investment in critical technologies,” DoD said in a memo. While the OSC and Defense Innovation Board are two separate entities, they share a similar focus on leveraging private industry for advancing innovation within the department.

“OSC was fundamentally established to give the Department of Defense a new tool in our current competition because today the United States…is in a global competition to be a world leader in emerging and critical technologies,” Rathje said. “Technology areas such as semiconductors, advanced materials and biotech are just as critical as those defense technologies that we consider — such as hypersonics and directed energy — these are technology areas are ones that we spend billions of dollars of [science and technology] funding… winning this race is truly vital to national security and economic prosperity.”

In December the office launched its first program activity, the Small Business Investment Company (SBIC) critical technologies initiative through the office’s partnership with the Small Business Administration. The SBIC program has already helped create new investment opportunities in early stage deep technology companies, Rathje said. 

“Now the way this program works is it leverages what is called the Federal Credit Program… where other departments and agencies utilize government loans and loan guarantees to increase leveraging technology areas and societal sectors that we think are important to increase investment in,” he said. 

The OSC will start taking applications for the SBIC initiative by this summer and wants to “license our first funds” for the program this year, Rathje added. The office also plans to publish its first investment strategy, which will assess critical technology areas for “capital availability as well as liquidity opportunities.”

“So what this does is it really helps us to tip and cue these tools to invest in the areas of these technology sectors that most require this source of capital,” he said.