Time For Congress to Beef Up Funding for DIU’s National Security Innovation Capital Program

At the height of the Cold War, perhaps the most important U.S. national mission was to drive military innovation to ensure that the Soviet Union’s numerical superiority (in terms of soldiers and weapons) would not translate into superiority on the battlefield. The current geopolitical landscape presents a similar challenge in the United States’ rivalry with China, which is investing heavily to surpass the United States in technological capabilities to gain a global economic advantage and at least military parity in the Indo-Pacific region.

In 2015, Congress took a small, but needed, step to stimulate innovation in the U.S. defense system when it authorized and appropriated funding for the Department of Defense’s (DOD) Defense Innovation Unit (DIU). DIU’s mission is to accelerate the adoption of emerging dual-use technologies (technologies with both commercial and military applications) throughout the military. Where it identifies a technological need, DIU finds smaller commercial providers that are unlikely to otherwise be on the DOD’s radar. In addition to widening the pool of potential contractors in these technology areas, DIU can also award contracts much more quickly than is usually the case.

In 2021, Congress took the next step to provide funding for promising early-stage start-ups developing dual-use technologies by establishing the National Security Innovation Capital (NSIC). NSIC funds start-ups developing emerging hardware technologies. These start-ups are less likely to attract the key early-stage equity funding (i.e., funding in exchange for partial ownership of the company) needed to advance their products to later rounds of private venture capital (VC) investment. Such investments play a small, but needed role in driving the development of next-generation technologies and therefore in helping the United States maintain its military advantage. Indeed, without more transformative weapons and other defense innovations, prevailing over China in any potential conflict will be more difficult.

Because few private-sector investors have the risk tolerance and/or investment time horizon necessary for these technologies, these start-ups are often held back by a lack of funding. This funding gap presents two problems: 1) the technologies’ development does not happen as quickly as it would otherwise, and 2) it leaves the door open for investments from our adversaries—most concerningly, China. NSIC’s funding helps prevent these problems. Though it acts like a VC with its focus on start-ups, NSIC differs in two ways. First, it is exclusively focused on early funding—often in the pre-seed or seed rounds—as opposed to larger, later-stage deals that many VCs specialize in. Second, its authorizing legislation prevents it from making equity investments or issuing loans; funding instead comes in the form of prototype development contracts.

Since its founding, NSIC has funded 12 companies, which are developing technologies ranging from advanced batteries to lunar mining equipment. Some of these companies and their technologies:

• Advanced Materials Manufacturing—makes composite metal foam, which is lighter, stronger, and more durable than current alternatives.
• Anthro Energy—manufactures flexible batteries that can bend and be shaped according to the product’s design needs and can be used in equipment such as AR/VR headsets and tactical gear.
• Lunar Resources—makes space manufacturing and resource extraction technologies such as satellite repair and non-binding 3D printing equipment.
• Maybell—designs and manufactures smaller, easier-to-use ultra-cold refrigerators needed for the superconductors on which quantum computers rely.
• New Frontier Aerospace—aims to deliver cargo and passengers anywhere on Earth within two hours using shuttles.

There is a long history of the DOD driving the development of emerging technologies, either in its role as a facilitator of research—e.g., the Defense Advanced Research Projects Agency (DARPA) bankrolled the research that led to the invention of technology like the Internet, global positioning systems, and the graphical user interface—or as a deep-pocketed customer awarding contracts. As Stanford University history professor Leslie Berlin put it, “All of modern high tech has the U.S. Department of Defense to thank at its core, because this is where the money came from to be able to develop a lot of what is driving technology that we’re using today.”

DIU and NSIC, therefore, represent a greater focus on the types of investments and government involvement that helped make the United States a leader in advanced technologies in the first place.

However, at just $15 million in FY2023 (0.002 percent of total defense spending) and $35 million total since its inception, NSIC’s funding is far from adequate. This is especially true compared to many of our allies that have launched similar defense-oriented venture programs, with some of them investing over 9 times more on an absolute basis and 1,600 times more relative to overall defense spending. In future appropriations bills, Congress should fix this, and provide at least the $75 million in annual funding authorized for NSIC when it was founded.

A lack of funding is proving a major impediment, not just for NSIC but for DIU as a whole. In May 2022, former DIU Director Michael Brown gave an interview after announcing his plans to leave the organization in which he expressed his frustration with a lack of funding: “I’m frustrated that we’re not achieving more, we’re not supported more. There’s not the agreement by leadership that this is a priority. And so if that is the case, then you can’t accomplish what you believe should be accomplished. It’s really that simple.”

It is particularly striking that some of America’s major allies not only understand the need for such programs but also provide them with considerably more funding. The programs most similar to NSIC are the North Atlantic Treaty Organization’s (NATO) Innovation Fund and the United Kingdom’s National Security Strategic Investment Fund (NSSIF). NATO’s Innovation Fund, launching this year, will also invest in early-stage start-ups developing dual-use technologies. It will focus on many of the same technology areas as NSIC, and unlike NSIC, it will make equity investments in its companies. 22 NATO-member countries (which does not include the United States) participate and contribute to the fund, and despite NATO having a 2023 budget of only $2.5 billion, the Innovation Fund will invest $77 million per year (3 percent of the 2023 budget).

The UK’s NSSIF, which operates as part of the British Business Bank, also makes equity investments in dual-use technology start-ups. Moreover, these investments are matched by the private sector. NSSIF invested $137 million in 2021, which represented approximately 0.2 percent of the UK’s defense budget.

Fortunately, on a bipartisan basis, members of Congress are recognizing the need for more funding for DIU and NSIC. In a recent letter addressed to leaders of the House and Senate defense appropriation panels, Rep. Mike Gallagher (R-WI) and Sen. Jon Ossoff (D-GA) argued for a $39 million increase in DIU funding for FY2023 over what President Biden had requested. This consisted of an additional $22 million for DIU’s core components and $17 million more for NSIC.

Support for these programs is likely to grow as their investments bear fruit. However, these are longer-term investments by nature, and we should not sit idly by while we wait for what little funding these programs have received to result in major breakthroughs. The longer these programs go underfunded, the more delayed America’s technological progress will be and the greater the opportunity for our adversaries to step in and take advantage.