‘Very concerning’: SVB’s collapse rattled Pentagon tech hub, prods closer collaboration

WASHINGTON — Nearly two weeks after Silicon Valley Bank (SVB) was shut down by regulators, the acting director of the Pentagon’s innovation hub said today that after racing to help as the news was breaking, now he’s looking at ways to protect the organization’s vendors should anything like it happen again.

“It was very concerning,” Mike Madsen, acting director of the Defense Innovation Unit (DIU), said at the Potomac Officer’s Club annual Research and Development Summit. “And when it happened, we were very busy over that weekend reaching out to a lot of our vendors, and they had very short notice in terms of hours. So it was pretty critical for those folks.”

Silicon Valley Bank, a lender for technology startups and venture capital firms, was shut down on March 10 after concerns about the institution’s health prompted customers to withdraw their holdings, essentially creating a run on the bank. Ultimately, customers were protected when the Treasury Department stepped in a few days later. 

Madsen said the biggest concern for DIU, which works with scores of smaller tech firms like those who banked with SVP, immediately following the bank’s closing was that vendors who contracted with the hub would have to stop some of the work they were doing, either due to direct payroll issues or more indirect issues stemming from primary vendors in the supply chain, for example.

“Some of our contracted actions, the money was being routed to accounts in Silicon Valley Bank,” he said. “So we wanted to make sure that we’re able to refactor those… The next concern we had was any financial distress that companies might feel and any type of response they might have that would put IP at risk… And then the next thing was considering further uncertainty in the industry. You know, are there going to be more and more of these banks…[like] Silicon Valley Bank?”

After initially assessing the risks to its vendors, Madsen said DIU started looking at its existing authorities to see what it could do to help, in the immediate aftermath and in the future, including potentially “accelerat[ing] milestones,” presumably meaning being able to provide funding earlier to vendors, or working with “commercial capital providers” with which DIU already has relationships. A spokesperson for DIU didn’t immediately return Breaking Defense’s request for more details.

But Madsen also saw the SVB situation as an opportunity to strengthen the “connective tissue” between the Pentagon and the commercial sector, and “build a partnership.”

“So I think it’s taking that tact, and then for us, it’s stepping back strategically and starting to build and understand those kinds of things so that if it does happen [again], we’re ready to respond,” he said. “And I think the response was relatively quick in this instance, but to continue to build that connective tissue, have those conversations and be ready to act with what tools we can use.”

DIU was established in 2015 in an effort to accelerate adoption of commercial and dual-use technologies for the Defense Department. The hub has several offices around the US, including in Silicon Valley and the Pentagon. 

In fiscal 2022, DIU transitioned its largest number of technologies in a single year since its inception: 17 technologies worth up to $1.3 billion in contract award ceilings, more than twice the amount it transitioned the previous year. The hub also awarded $203 million in prototype contracts across 165 vendors, started 52 new projects and saw a 47 percent increase in the total number of companies competing for a contract in FY22.