When considering the current government programs for leveraging venture capital to develop technologies critical for national security, it’s also crucial to recall that incentive alignment can boost national security priorities with the help of private sector investors.
To ensure the successful commercialization of critical technologies, aligning U.S. national technology priorities with venture capital incentives is essential. By bridging the gap between government-backed R&D and private investment, the U.S. can accelerate the development of hardware and capital-intensive technologies, foster innovation, and strengthen the industrial base.
Prioritize Promising Federal Research For Commercial Development
A first step in aligning national interests with private investment would be to prioritize the research for hardware that combines the biggest technology breakthroughs with the technologies of the highest national interest. However, there is no decision-making authority today within the U.S. government tasked to prioritize technologies for commercial development. The Office of Science and Technology Policy, a Cabinet-level office at the White House would be a potential office for technology prioritization given its purview over research across the federal government.
Once prioritized, a government body with programmatic capability could ensure that the team, market, tech (and if necessary complementary capital) are in place to stimulate venture investment for hardware-based technologies. A candidate for this programmatic responsibility would be the newly-formed Technology and Innovation Partnership Directorate of the National Science Foundation.
Cultivate An Entrepreneurial Founding Team
To create founding teams, TIP could form a network of entrepreneurs with different business-building skills and hire recruiting firms to expand this network. TIP’s budget could include salaries for these founding teams for a limited period, while teams seek venture capital. A promising way to expand the talent pool of researchers and entrepreneurs would be to reform immigration for technically qualified talent. Foreign students and technical entrepreneurs have been a critical engine for U.S. success in science, technology development and forming new ventures. Today, 55% of America’s companies valued at $1 billion or more have first-generation immigrants as founders, including Uber and SpaceX, and each of these companies has created on average 1200 jobs per company.
Create Transparency For The Federal Market
The government could make the federal market more transparent and, if possible, provide visibility through contract awards. The President could set the expectation that government Departments and Agencies could work with TIP to increase the visible market for these prioritized technologies through government contracts or incentivizing government suppliers like defense primes with an R&D tax credit to write contracts for new technology suppliers.
To support orders for new vendors and emerging capabilities, the DoD could consider a special defense working capital fund to facilitate rapid contracts that the Services can repay with follow-on appropriated funds. Such a fund would complement the existing $300 million appropriated for the Accelerating the Production and Fielding of Innovative Technologies program as well as the much smaller $15 million annual appropriation for the National Security and Innovation Capital program.
Demonstrate Technology Maturity
NSIC shows how impactful even limited amounts of government capital can be to demonstrate technology maturity. One example is Anthro Energy which develops batteries based on proprietary polymer technologies. When NSIC made its initial grant to the company in 2022, there were no venture capital investors but with NSIC’s support, the company successfully raised its Series A financing in early 2024. Another example is Maybell which designs a dilution refrigerator—a key enabler for quantum computing—and the only U.S. supplier. After completing technology demonstrations through an NSIC grant, Maybell also successfully raised its Series A financing.
NSIC grants are specifically designed to demonstrate technology maturity—funding an upcoming development milestone that reduces risk for follow-on private investors. In contrast, the SBIR program (which is today 200 times larger) provides grant awards to fund research that may not be correlated with a technology’s maturity. As mentioned previously, experienced investors know that SBIR awards historically have a 1% transition rate to production defense programs and do not demonstrate any commitment from the U.S. government to future purchases of a solution.
Develop A Public Capital Framework
A framework based on capital intensity and product maturity guides where government incentives will be most effective to motivate venture capitalists to invest in hardware or capital-intensive businesses.
Where Government Capital Incentives Will Be Most Effective
Venture capital does not need government incentives to develop even the most complex software including the large language models of generative AI which can cost $100 million. Government-provided capital, however, would be beneficial for hardware development but should be variable in size with larger incentives for higher capital intensity. Capital intensity is correlated both with the technical risk and time required for product development (for software, this can be months; for aircraft, a decade or more). Development costs for large-scale hardware can rapidly go beyond an individual venture firm’s capacity to fund since designing a new chip costs $250 million but designing and building a chip fab costs $20 billion. Developing hypersonic aircraft or demonstrating the technical feasibility of fusion requires tens of billions of dollars.
In addition to capital intensity, government incentives should vary by capital type, depending on product maturity: (1) equity investments for less mature and more expensive to develop technologies, (2) guaranteed loans for initiating pilot production, and (3) contracts and purchase orders—regardless of capital intensity. For hardware products with development costs less than $500 million, venture capitalists do not need direct government incentives but will readily invest if there are government contract awards to substantiate demand. For instance, for space-based technologies for new satellites ($1 million to develop) and new satellite constellations ($300 million to develop), government purchase orders would substantiate market need and speed satellite deployment.
However, where R&D development costs approach $1 billion or more, accompanied by high capital costs and decades-long development time, government assistance can assist in the development itself (beyond simply scaling production). Government investment—whether equity or guaranteed loans—enables repayment and the returned capital reallocated to fund future hardware investments. With an equity investment, there is the possibility the company will pay back the government at a multiple of the investment cost; with a loan, there is the possibility the target company will pay back the loan principal with interest.
For guaranteed loans, the government should defer the interest until there is a liquidity event for the company. To make loans palatable to equity investors, these loans could be forgiven if there is no future liquidity event or the business fails. With this framework, the incentive type corresponds to risk at each stage of development.
The geopolitical, economic, environmental, and public health challenges facing the United States are more acute now than at any time since World War II. U.S. policymakers recognize that dual-purpose technologies are essential to solve these challenges. Venture capital is now the principal engine driving the commercial technology ecosystem, providing the necessary capital and personal networks to translate promising technologies into viable businesses.
However, venture capitalists optimize their investments for outsized returns and are unlikely to invest in technology that requires significant de-risking, has an uncertain or unformed market, or lacks a capable team. To lead in hardware- or capital-intensive technologies, where venture funding is more scarce such as novel energy solutions, quantum information systems, microelectronics, and synthetic biology, U.S. policymakers must prioritize the technologies of highest national interest and assist in forming founding teams, coordinate efforts to create markets and signal demand, and reduce technology risk. Where hardware development costs are expensive—billions of dollars—government capital can speed development and demonstrate technology maturity faster. By applying this approach, the U.S. can activate investor appetite, leverage hundreds of billions of dollars in private capital and better realize future disruptive capabilities. With appropriate incentives, the venture capital industry will finance and support developing the national capabilities needed for economic prosperity and global security.
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