The U.S. Military’s Investment Ecosystem is Missing in Action


In 2017, Neurala, a Boston-based AI startup, was featured in the New York Times as a technology of great interest to the U.S. military but also to the Chinese government. The article documented Neurala’s dilemma in trying to patriotically support the U.S. Air Force, but also weighing that desire with the near term need for funding. They ultimately accepted a minority investment from a Chinese fund called Haiyin Capital, which is itself supported by the Chinese state-run Everbright Group. Neurala is not the only company that has had to make this choice. Technology companies with direct relevance to military capabilities, such as Quanergy, XCOR Aerospace, and Kateeva, all were pursued and received Chinese investment with purported mandates from Beijing.

These anecdotes highlight the difficulty Washington has had in effectively responding to the erosion of our technological military edge. Despite years of warnings that China and Russia were focusing on offsetting U.S. research and manufacturing advances in military technologies, the only thing we “offset” was our own ability to respond effectively as a national security enterprise.



This is particularly true when it comes to identifying adversarial investment capital in American commercial technologies. Chinese investment in U.S. venture-backed technology deals has more than tripled in recent years. Ominously, a full third of this category of Chinese investment went into early-stage, advanced technology companies, precisely at a time when these companies were most vulnerable and in need of capital. This is part of a concerted push by the Chinese Communist Party, among others, to enable adversarial foreign access into U.S. defense critical technology. The net effect of these activities is to drive American emerging technology suppliers out of business in technology areas that coincide with Chinese strategic investment goals such as photonics, electronics, and artificial intelligence.

To succeed in this new environment, the U.S. government should do more to foster defense innovation and strengthen critical industrial manufacturing capabilities, avoiding actions that push companies to move offshore, to allow themselves to be acquired by foreign competitors, or to exit the defense markets completely. Current laws and regulations governing defense acquisition are already too burdensome. The Pentagon should simultaneously engage commercial companies that do not traditionally supply the government, while minimizing regulation that undermines its ability to acquire critical technology and parts.

The U.S. government is aware of this conundrum. In 2019, it established the Trusted Capital Marketplace, which is meant to introduce trusted sources of capital to innovative small-to-mid-sized businesses that are critical to our national security. The marketplace is a platform designed to help “small, innovative companies that, frankly, don’t either have the resources or the sophistication in terms of the contacts to reach sources of capital,” Pentagon acquisition chief Ellen Lord told journalists in May 2019. The program does this by giving funds to people who are essentially brokers familiar with the Pentagon’s needs. These brokers then connect companies with investors willing to deploy capital in technology solutions to problems the Pentagon is facing.

This initiative is necessary for identifying critical emerging national security science and technologies. Yet, as it stands, the Trusted Capital Marketplace is insufficient to the task of stemming the adversarial capital that is already exploiting U.S. defense-critical technology. The Pentagon must think creatively to address the underlying challenge we face. The success of the program is being deterred by a lack of any meaningful funding as well as a linear focus on finding only the “trusted” sources of capital, as well as identifying commercial technologies that have relevant to defense-critical technologies. The Pentagon also advertised the vetting and securing of this database of companies in partnership with a defense contractor, who would presumably be awarded the marketplace manager contract.

This approach is highly problematic, as the mere establishment of a database of vetted technologies and investors would almost certainly present an easy target for cyber exploitation. Its narrow focus also ignores an opportunity for the Trusted Capital Marketplace to sweep up all sources of capital, thus tagging and tracking not only those patriotic investors so eagerly sought after but also the unpatriotic ones. Failing to do condemns the Pentagon to perpetually lag behind the adversaries who exploit the American system; always having to work harder and spend more chasing its tormentors.

What will success look like? An updated marketplace should emphasize the “marketplace” by not simply protecting and promoting defense-critical commercial technologies. It must integrate horizon scanning, technology discovery, commercial business acceleration, and private capital with non-dilutive government investment funds to sustain technology with national security relevance. This will allow leaders in the Pentagon and in industry to see which American technologies are at risk, and thus which should be protected and promoted, and then surmount the commercial research and development cost curve that has been steadily bending away from American national security. As an investor in dual-use national security technologies, I can attest to the importance of major private investors taking a leadership role with the Pentagon, rather than merely relying on federal procurement to prod the marketplace. This is essential to building a resilient supply chain that protects emerging national security-related technologies from predatory economic tradecraft.

Such a proactive and collaborative ecosystem is essential for the adoption of transformative frameworks and innovative capital investment practices from the private sector. It will be essential to focus the marketplace on commercial technology areas that have clear applications across a broad range of national security capabilities, and then distil them against military supply gaps. For instance, instead of merely looking at “hypersonics” across Silicon Valley and  American-allied partners, the Pentagon should consider gimbal technology that many autonomous systems rely on for stabilization. Otherwise, military leaders are often left with little else to offer other than a sincere but vague commitment that they might fund a project after an investor brings a technology to maturity. Understandably, this is a commitment few investors have accepted.

I am deeply committed to the mission of enabling the heritage defense industrial base via the founding of and building up of numerous related government and commercial organizations. And I channel that commitment into my company, which supports the business strategy of many prospective technology companies seeking, or being sought after, to join the defense innovation base. Does this leave me biased? Sure, but I would posit that the fact that I can speak to the perspective of investors is a reason to keep reading.

How can the Defense Department become more attractive to investors? By shouldering more of the risks in technology incubation, demonstrating a path that companies can follow to achieve large scale success with their new technologies, and ensuring that the defense marketplace can generate profits that compete with alternative investments. In the most recent episode of the War on the Rocks podcast, Rep. Michael Gallagher reported that he was encouraged by the sight of top technology executives at this year’s Reagan National Defense Forum like Brad Smith of Microsoft and Jeff Bezos at Amazon, as well as the presence of companies like Anduril.

Chris Brose, a guest on the same episode, remarked “the only way you’re going to get this different kind of industrial or innovation base is by buying more of what that innovation base is producing now.” This is precisely where an effective Trusted Capital Marketplace can focus the attention of Pentagon acquisition stakeholders and protect them and their important intellectual property from adversarial capital.

Today, defense research grants often come from the Small Business Innovation Research program that provides funding in incremental sums over several years. The problem is that this pool of funding is oriented towards research and development and not the sought-after production contracts that venture-backed startups fervently seek. As Chris Brose went on to describe in the same episode:

It’s never been easier to get a small contract … the challenge is how do you take a $1 million SIBR grant and actually transition it across the valley of death into a $50 million, $100 million, $500 million, $1 billion program … We’ve begun to create avenues for new entrants to come in, that’s really not been our problem … [T]housands of new entrants have sought to come into the defense world, the problem is that, you know, after a decade 80 percent of them are gone.

These new entrants that the Pentagon recruits are too small to instigate the level of innovation that military leaders desire and do not address the issue of how the Pentagon does acquisition. Mission-funded budget accounts and pitch days that result in authentic programs of record are the tools and metrics by which the Pentagon can visualize effective changes. Under an expanded mandate, the Pentagon should leverage the Trusted Capital Marketplace as an umbrella for commercial businesses consortia, providing companies with access to military users and requirements.

Going further, this program can also provide its members with access to shared capital and enterprise tools, reducing the likelihood of redundant and wasted funding. The potential for the Trusted Capital Marketplace to revolutionize the way the Pentagon innovates is evident, and it’s time to take decisive action to bring this revolution to life. Until then, the success of the United States and its industrial base will be held at risk by targeted investment from foreign entities intentionally designed to undermine American military technology advantages.

The United States is operating in a geopolitical landscape where technological capabilities and those that wield them appear to be evolving faster than the Pentagon can respond. To succeed in this new environment, the United States must do more to foster defense innovation and strengthen critical industrial manufacturing capabilities. Simultaneously, it must avoid actions that push these capabilities offshore, set them up to be acquired by foreign competitors, or cause them to exit the defense industrial base completely. Current laws and regulations governing defense acquisition are already too burdensome. An updated Trusted Capital Marketplace program with a new philosophy that leans on broad private sector participation and identifies the untrusted capital providers as much as the trusted ones has the potential to be a powerful antidote.



Stephen Rodriguez is a partner at One Defense, senior advisor at the Atlantic Council, and senior innovation advisor at the Naval Postgraduate School.

Image: U.S. Marine Corps (Photo by Sgt. Mackenzie Carter)