The “Why and How” of the DoD Office of Strategic Capital (OSC)

We are sensitive to the time management constraints of our members and readers, but if your organization has a stake in the evolving national security investment and American competitiveness ecosystem, this archived video provides an up-to-the-minute update from a major player organization and its leader. It is worth the time – as there are plenty of vital takeaways here.

Dr. Cynthia Cook, Director of the CSIS Defense-Industrial Initiatives Group, sat down this month for a discussion with Dr. Jason Rathje, Director of the DoD’s Office of Strategic Capital (OSC). They discussed the mission of the OSC, the role of the DoD in supporting innovation, and long-term investments to safeguard America’s supply chains. Or, as Dr. Rathje put it in the interview, “the why and the how” of the OSC after over a year of work behind the scenes at the DoD putting the office together before its launch in December 2022.

Rathje is a leader to watch in the national security investment community, one of a few individuals who have emerged from the founding team of AFWERK that is branching out with other organizations and startups in the national security innovation space.  This community participated in an MITx Dual-Use Ventures Event in January.

OODA Loop was in attendance at the event and many AFWERK alums offered valuable insights and resources that we will be incorporating into our research throughout the year.  Stay tuned.

Rathje’s bio:

Dr. Jason Rathje currently serves as the Director of the Office of Strategic Capital in the U.S. Department of Defense. OSC’s mission is to attract and scale private capital in support of national security. OSC’s current focus is on the development and implementation of new financial tools to increase public-private investment in our Nation’s enabling and frontier technologies.  From 2019 to 2022, Dr. Rathje served as Director and Co-founder of AFVentures, the Department of the Air Force’s Commercial Investment Arm under AFWERX. In that role, he managed $1.8B of combined government funding and private capital for scaling early to mid-stage technology ventures to support Air Force operations.

Dr. Rathje holds a Doctor of Philosophy in Strategy and Policy from Stanford University, as well as a Bachelors of Science and a Masters of Science in Aerospace Engineering from MIT.

Pentagon Mobilized to Support Tech Startups After Bank Failure

https://oodaloop.com/archive/2023/03/14/dods-office-of-strategic-capital-assesses-impacts-to-national-security-of-the-collapse-of-silicon-valley-bank/

The failure of Silicon Valley Bank presents the Defense Department with warnings—and opportunities

At the link above, you will our initial coverage of the OSC response to the failure of Silicon Valley Bank earlier this month. Once the FDIC stepped in to stabilize the crisis, DoD and OSC decision-makers turned to the lessons which need to be gleaned from the SVB failure, the long-term impacts on the structures and incentives for national security investment – and what further steps need to be taken outside of the FTC stepping in short term.

Marcus Weisgerber and Patrick Tucker at Defense One captured these activities in the last few weeks, including the perspective of DoD leadership that will play a crucial role in any structural decisions and changes ahead:

In the hours after Silicon Valley Bank collapsed on March 10, Pentagon officials who work directly with startups that develop national-security technologies grew increasingly concerned.  Would startups that had money in the bank need to stop work? If that happened, would there be supply-chain disruptions? Would a company under financial stress put its intellectual property at risk?

Officials prepared different courses of action to get cash to companies, if needed.

“It was a busy weekend, for sure,” Michael Madsen, acting director of the organization that acts as conduit between startups and the military, said Tuesday at a Reagan Institute event in Washington. No immediate action was needed. The Treasury Department stepped in on Sunday and said depositors with funds at Silicon Valley Bank would have access to their money.

“You know, I don’t think it’s a big concern of ours yet,” Pentagon Comptroller Mike McCord told reporters Wednesday on the sidelines of the McAleese and Associations Defense Programs conference.

Had the Biden administration not acted quickly to back up account holder funds at SVB, the United States—and the national-security community in particular—would have faced a major challenge in supporting and growing innovative new technologies, Michael Brown, a venture partner at Shield Capital and former head of the Defense Department’s Defense Innovation Unit, told Defense One.

Had SVB collapsed, Brown said, it would have hit some of the companies that he works with very hard. “You’re, you’re a small company, you raise money from your venture backers; you don’t maybe have revenue coming in yet and you can’t make payroll if you can’t access your cash balance? Yeah, it really would have been a horrific situation.”

Brown, who previously ran the Defense Department’s outreach to Silicon Valley, said the national-security implications of SVB depositors’ funds vanishing would have gone well beyond the lost money. Many of the young startups that had funds in SVB were working on projects with clear defense and national-security applications.

“You certainly would have seen the national-security implications for autonomy for AI, for cyberspace, a lot of the sectors which are so vibrant right now and could be used to better effect by the Defense Department,” he said. “It would be like cutting the [research and development] for all of those different companies. And you can imagine what happens, right? That means you’re just living on your current product. And as soon as they run out, nothing’s coming.”

The Defense Department is requesting $17.8 billion in 2024 funding for research into emerging technology areas like artificial intelligence, autonomy, cybersecurity, and others. But much of that money is for developing capabilities that will only be available later in the decade, Brown said. The Pentagon has a real gap in fielding innovative technologies quickly, he said.

“If you want to change the capability of the force near-term, you’ve got to be looking at buying lots of small things, which are what the commercial sector provides. We’re seeing that put to great use in Ukraine right now. That’s going to come out of the…sector that the venture capitalists are backing,” Brown said. (1)

What Next?

• “The relationship between those entities and a very small handful of key institutions like SVB is a big national-security concern, he said. “If you want to kind of knock out the seed corn for the next decade or two of innovative tech, much of which we need for the competition with China, [collapsing SVB] would have been a very effective blow. [Chinese President Xi Jinping and Russian President Vladimir Putin] would have been cheering to see so many companies fail.”
• The SVB debacle is not just an alarm bell for the fragility of the U.S. startup community, it also presents an opportunity for the Defense Department. Laurienti said SVB occupied a very particular role in the start-up ecosystem, one that could be filled by the federal government or even the Defense Department.
• The bank [SVB] provided “a mechanism where you don’t need to go find investors, you can work with an institution like Silicon Valley Bank to finance that transition from prototyping to production. I think this is a huge opportunity for DOD and the federal government to find new forms, new mechanisms for financing that bridge,” he said.
• A growing number of startups were forgoing early-stage funding from China even before the Treasury Department made such funding harder, Brown said. “Given the awareness of China and how that’s changed in the last six or seven years, many more small companies are aware that they shouldn’t be taking any money from China, if they want to be selling to allied governments, us or other governments.” (1)