-As shared by Katie Bilek
At the recent R&D Capital Summit during TechConnect World, I had the pleasure of hosting a discussion with Jared Evans, Director of the Transition Acceleration Program (TAP) at DoD’s Office of Strategic Capital (OSC). As a cofounder and former partner at AFVentures, Jared brings an incredible perspective of scaling technology ventures to support the federal mission.
Most important to our conversation was the “why” behind the Office of Strategic Capital. The office was established in December 2022 with the mission “to develop, integrate, and implement proven partnered capital strategies to shape and scale investment in critical technologies.” The growing dichotomy between the Defense and commercial R&D markets over the last few decades comes as no surprise – and part of OSC’s driving force is to foster private capital investment like we saw in the era just succeeding WWII.
OSC is taking a methodical approach to sourcing and funding these mission-critical technologies.
First, they work internally with the various military services, combatant commands, stakeholders, program offices and end-users to identify critical technologies in need of investment. 14 critical technology areas have been designated via OUSD R&D under Heidi Shyu’s directive in verticals including advanced materials, microelectronics, directed energy, hypersonics, quantum science, integrated sensing and more. You can read more about the critical technology areas here.
Next, they fund. The primary vehicle they will leverage is the SBIC model – one currently in place at SBA, being replicated and modified for DoD’s deployment in the SBIC Critical Technologies (SBICCT) Initiative. (At the time of this discussion, we’re still awaiting expansion of the existing SBIC program with new proposed SBA regulations. Until that happens, existing SBIC funds may be deployed for these initiatives that qualify in support of national security).
Launched at SXSW in Austin earlier this year, SBICCT Initiative will utilize a new financial product, the Accrual Debenture. Designed to span a longer duration, interest will accumulate and come due once the loan reaches its term. This will address the “patient capital” gaps seen in sectors that require significant up-front investment.
One of the great case studies for SBICs dates back to 1975 in Cray Research – an organization that received private sector funding to develop a technology – the first supercomputer – that the Department of Defense utilized during the Cold War. On the verge of bankruptcy, Cray’s SBIC investment served as the bridge across the Valley of Death to sustain their development of a mission-critical technology.
As OSC prepares to deploy capital, I applaud their willingness to embrace debt as a source of liquidity. So often in the innovation ecosystem, when we talk about capital, the term “equity” is thrown around loosely as a seemingly all-encompassing solution to financial problems. While equity capital is an option, it’s not the only one. Equity can be expensive, dilutive and often introduces a new ownership dynamic to a business that can exhaust the human element. Debt, with the right financial partner, can be more affordable, non-dilutive and patient.
The coupling of private investment with federal funding is needed to fully realize a robust R&D development pipeline that is vital to our nation’s security. The Office of Strategic Capital is building out the financial toolset that so many innovators need – I’m looking forward to the continued collaboration between the federal and financial communities, and the ultimate success of the program.