The Ronald Reagan Presidential Foundation & Institute recently released its first National Security Innovation Base (NSIB) Report Card, awarding “Innovation Capital” a B- grade. But the failure of Silicon Valley Bank (SVB) just a week before marked a drastic change to the state of innovation. As a result, this B- grade is worth re-examining.
The Report Card rightly considers the amount of capital available to entities seeking to innovate in the national security sector (no small feat) as an indicator of NSIB health. Private investment and a shift away from the long-held bureaucratic processes of government contracting towards new funding mechanisms have paved the way for faster, cutting-edge innovation to break into a space that desperately needs fast, state-of-the-art production and fielding.
SVB earned its following in the start-up community because of its ability to access venture debt to fund the transition from prototype to production. But flexibility and efficiency require trade-offs. SVB’s collapse is a warning sign, and a glaring consequence, of the unstable financial landscape that our national security innovation base has come to rely on, perhaps too heavily, without proper redundancies. It also raises the question of how the DoD will protect vital production lines within the innovation base in the event of a tumultuous swing in Silicon Valley – especially given that the DoD will have just a matter of days, if they’re lucky, to react with purpose.
Private investment could also reduce the influence of crucial institutional expertise in the government decision-making process. By outsourcing the decisions about what is researched and what gets produced, the United States national security apparatus must trust that venture capitalists’ priorities will match the needs of the warfighter today, and in the conflicts of tomorrow. It might be a worthy tradeoff given the maneuverability that comes with private investment, but it’s a risk nonetheless.
In recent years, the Pentagon has moved to mitigate both risks through a corps of agencies designed to fund innovation. While these innovation hubs diversify the sources of early funding and play a part in aligning requirements to resources, they don’t solve for the central problem—speed. Meaningful funding rounds can come together in months; SVB imploded in less than a week. Even with DOD innovation hubs, it takes years for innovators to win meaningful contracts from the Pentagon. That doesn’t reassure innovators looking for lower-risk funding options, nor does it signal to the market or our adversaries that the Department could move swiftly enough to be relevant if the Valley experiences another financial crisis.
Knowing that the capital we depend on to sustain innovation in national security is more unstable than once thought, coupled with private investors’ potentially immature product prioritization, Innovation Capital’s B- grade is more optimistic than recent events demonstrate.
The innovation sector just failed an important test, one that drops their grade to a C. To recover, we should buttress the defense innovation ecosystem with additional funding mechanisms– mechanisms with fewer vulnerabilities and more safeguards that still steer the industry towards innovation and government interaction, allowing government agencies to leverage creative solutions to our nation’s problems. Guaranteed debt and the Office of Strategic Capital could provide stable but flexible funding mechanisms that assume the risk of funding an entire path to production and take that risk away from the American taxpayer.
Hear more from Ursa Major founder and CEO Joe Laurienti at the National Security Innovation Base Summit last month.