The missing middle: America’s overlooked weakness in defense innovation

The U.S. is investing heavily in critical industries, including semiconductors, artificial intelligence, quantum, and critical minerals, through initiatives such as The Office of Strategic Capital, the Defense Industrial Base Fund, and the new EXIM Make More in America (MMIM) program for critical technologies. However, most of this money still flows to two extremes: universities and labs for early-stage research, as well as prime contractors for large-scale deployment.

Mid-scale companies, which have proven prototypes and are ready to scale, often struggle to find the resources needed to expand. In fiscal 2024, federal R&D requests increased by $5.9 billion (6.2%), while funding for facilities and equipment decreased by 7.5%.

The fiscal 2025 budget also saw a 9% increase in facilities and equipment, representing a broader mismatch between research investment and scale-up capacity.

The Defense Department’s 2025 Acquisition Transformation Strategy and Warfighting Acquisition System both acknowledge this gap, outlining how modernized contracting and risk-tolerant financing can accelerate production readiness for non-traditional suppliers.

This imbalance is more than an economic inefficiency — it’s a strategic vulnerability. Without a strong path for these companies, taxpayer-funded breakthroughs often stall before reaching production, leaving the U.S. dependent on foreign suppliers for critical technologies like chips, batteries, and minerals.

DOD’s Warfighting Acquisition System directly targets this weakness, calling for a shift to a wartime footing in acquisition — one that prioritizes speed, accountability, and flexibility — to bring these technologies into production faster and reduce reliance on competitors like China. Yet, even as the acquisition reforms aim to accelerate production, many of the companies that can deliver that speed struggle to survive the transition from prototype to production.

This is the gap that’s known as the missing middle.

Why Mid-Scale Innovators Are Falling Through the Cracks

Building on this challenge, capital-heavy, mid-scale companies with validated prototypes face steep hurdles in financing first-of-a-kind production lines, supplier qualifications, and working capital — costs that private capital markets have increasingly retreated from.

With this pullback from private investments, federal funding has stepped in, but it has remained more focused on early-stage research. The 2025 federal budget directed the majority of research funds to academia, rather than to private companies that can commercialize new technologies. And even as total development funding grows, it remains concentrated among the largest primes.

Additionally, according to the State of Venture Capital 2024 report, the top 30 funds captured 75% of all new venture capital, concentrating investment in faster-revenue software models and starving hard-tech companies of growth funding.

This leaves mid-tier manufacturers — often the companies best positioned to convert research into production — facing a financing “missing middle.”

Recognizing these gaps, the DOD’s Acquisition Transformation Strategy and broader reform agenda both seek to expand competition, stabilize demand signals, and lower barriers to entry and mid-scale companies. The strategy identifies this imbalance as a structural risk to innovation and competition, noting that after World War II, there were 51 primary defense primes — and now there are just five. These strategies, along with the push for internal reform, mark the beginning of a much more challenging initiative: reducing the U.S. reliance on foreign suppliers.

Bringing Missing Middle into the Fold  

The U.S. still heavily relies on foreign suppliers, particularly China, for critical minerals, batteries, and microelectronics — components that are crucial for building modern weapons systems and communications gear.

However, dependence on foreign aid leaves U.S. defense programs vulnerable to supply chain disruptions and geopolitical risks.

China’s industrial strategy offers a sharp contrast to the U.S. approach. Its government couples R&D spending with direct subsidies, preferential tax and land treatment, and subsidized credit, supporting roughly 4% of GDP each year. That coordination has enabled Chinese companies to dominate global markets in solar, batteries, and critical minerals, even driving many U.S. solar manufacturers out of business in the 2010s.

The U.S. is just now reasserting industrial leadership through reforms like the Acquisition Transformation Strategy, which couples R&D with fielding agility, multi-year procurements, and demand-signal clarity to unlock private capital and sustain domestic production.

Additionally, the new Warfighting Acquisition System explicitly aims to shed the slow, bureaucratic, and risk-averse culture that has long hampered defense innovation. By empowering accountable program leaders and enabling capability trade councils to balance cost, schedule, and performance, the reforms aim to streamline decision-making.

They also accelerate milestone approvals to compress delivery cycles from decades to years. This is a critical shift because when top commercial companies can succeed without defense funding, they often opt out entirely, leaving the department to work with those willing to navigate red tape rather than those best equipped to deliver innovation.

In recent years, the department has utilized flexible tools, such as Other Transaction Authorities to enhance access for non-traditional suppliers. However, the Acquisition Transformation Strategy moves beyond such limited workarounds. It calls for stripping out burdensome clauses from federal contracting, aligning cost accounting standards with Generally Accepted Accounting Principles, and expanding “TINA-Lite” provisions to streamline negotiation thresholds — effectively cutting cycle time and enabling more companies to compete for production-scale programs, not just prototypes.

Closing the Gap as a National Security Imperative

With funding and policy momentum growing, the U.S. must ensure that new investments also reach the innovators most capable of scaling technology. The most effective ways to do that include:

• Scale-up capacity: The U.S needs to expand federal grants, loan guarantees, and public-private partnerships to help mid-scale companies move from prototype to production. Beyond Defense Production Act tools, agencies like the Office of Strategic Capital are a great example of how an organization can finance advanced manufacturing.
• Reward performance through milestone-based programs: Instead of paying contractors regardless of results, there are options where milestone funding ties to payment for specific outcomes, which reduces government risk. NASA’s Commercial Orbital Transportation Services program used this model, paying companies like SpaceX only when milestones were met. Using a similar approach within defense contracting would de-risk spending while attracting high-quality technologies.
• Invest regionally with purpose, not permanence: Use mission-driven regional consortia — such as DOD-aligned microelectronics programs — to coordinate grants and technical support for lab-to-fab transitions, rather than building permanent physical facilities. These consortia can channel funding where it’s most needed and adapt as missions evolve.

America still leads the world in R&D spending, accounting for roughly 30% of global investment; however, it has continued to lose ground in production of the very technologies it invents.

The current administration’s reshoring and supply chain security initiatives are an essential step, but without sustained support for mid-scale companies, the cycle of underdevelopment will repeat.

These companies form the bridge between research and deployment — and should be treated as strategic assets. If the U.S. can successfully harness its capabilities through DOD’s new acquisition frameworks, taxpayer-funded research can lead to fielded defense systems, resilient supply chains, and the technological edge needed to secure America’s future.