DOD's investment arm details its financial playbook for scaling out tech

The conversations surrounding the technologies of interest to the Defense Department's organization responsible for directing capital in a more commercial-like manner are relatively straight-forward.

Tech is tangible even if it is of the software variety, after all. DOD's Office of Strategic Capital on March 8 gave a first glimpse at its investment strategy and lists a dozen technology priorities as the initial ones.

OSC is referring to the start of its investments as program activity number one for the Small Business Investment Company Critical Technologies Initiative. Page number 10 of the strategy describes those component-level tech areas in greater detail.

But money and the processes for putting it to work is at the center of OSC's primary mission and vision to drive both the technology advancement and scaling out for military application.

When DOD first unveiled the office in December 2022, loans and loan guarantees were called out as potential avenues for OSC to unlock more capital for technology development.

Many civilian agencies use those methods and other types of credit programs to tap into the capital markets, whereas all of that is territory for their defense counterparts.

This key line from the new investment strategy helps explain the void OSC is trying to fill:

"As used by OSC in collaboration with federal partners, these financial tools will enable capital providers to invest in critical technologies that would otherwise be less attractive because the cost of capital is too high, the timelines for repayment or liquidity are too long, or the technical challenges are too risky for a nascent commercial market alone."

The current status quo for DOD has been to lean on grants and contract types that emphasize prototyping, such as the Small Business Innovation Research and Small Business Technology Transfer programs.

Where OSC is looking to come in is at the early stage of component-level technologies, which are vital cogs in the larger systems they go into. Think microelectronics and energy generation, especially battery life, for instance.

Early-stage component tech companies have enough trouble raising capital from investors and that becomes  magnified when the time comes to make advances and scale out the creations.

OSC's plan is to lean on the Small Business Administration's SBIC program and give loan guarantees to investors that are involved in those technologies. The SBIC program is designed to help small businesses connect with venture capital and private equity investors.

Funding for the scaled production of component technologies is a second need OSC identifies in its investment strategy.

Later-stage companies are caught in the quandary of having a promising product but facing reluctance from investors to provide capital until meaningful sales are demonstrated, a move that requires capital in the first place.

OSC views those businesses as needing debt more often than equity. In working with an interagency partner, OSC can support extensions of loans or loan guarantees to companies that are scaling production and have dual-use supply chains.

Working capital, project financing and infrastructure financing are examples of options OSC will consider.

A second portion from the strategy worth reading in full is below:

"OSC may match private sector capital with DOD Research, Development, Test, and Evaluation (RDT&E) funding for larger investments in critical technology when definitively aligned to military service needs, authorities, and transition pathways, to include out-year procurement program funding. The increased level of capital, diligence, and accountability aims to accelerate and scale development, production, and fielding of transformative military capabilities."

The jury on whether OSC's approach is right or not will be out for some time, but the emphasis on dollars and cents in a world of ones and zeroes is the natural and necessary place to start.