National Defense Magazine Op-Ed: A Roadmap to Leverage Private Investment to Support Defense
Effectively tapping into private markets and expertise to meet current and future defense needs will require bold new strategies to de-risk growth and scaling for emerging companies in hardware industries and to promote attractive investment options in hardware innovation.
As outlined in the inaugural National Defense Industrial Strategy, a modernized defense industrial ecosystem must include a resilient and flexible industrial base, encompassing manufacturing, supply chains and logistical systems.
Addressing these priorities and delivering a wide variety of capabilities to the nation’s warfighters at speed and scale will require a collaborative mix of government funding and substantial private investment.
Private markets represent an under-utilized capital base that can be deployed in a multitude of ways and faster than traditional government funding. The ability to tap into this community is vital for startups and innovation-focused companies that grow and thrive by rapidly developing and deploying emerging technologies to meet market needs.
Innovators and startups in the technology hardware sector — defined as companies focused on tangible products rather than software — frequently encounter challenges in obtaining funding to scale successfully.
A 2017 study by CB Insights found that 97 percent of hardware startups closed their doors within the first five years of operations, often after failing to secure a second round of funding. This is no surprise when considering that hardware startups are one of the least funded sectors by far, only receiving 8.9 percent of all venture capital invested in 2023, a six-year high.
Hardware companies targeting defense procurement requirements — such as munitions manufacturers and space technology startups — may have access to government funds initially through Small Business Innovative Research and Small Business Technology Transfer grants, but often struggle to attract the private investment necessary for the next phase of growth.
These companies face several challenges in attracting private investors, including: unpredictable returns stemming from a limited number of authorized buyers and uncertain buying schedules and demand; lack of clarity and transparency in technology specifications and validated requirements, complicating the evaluation of a startup’s potential and suitability; highly specialized requirements for independent verification and validation analysis, leading to high capital costs for scaling; and elevated risk profiles for environmental health and safety associated with materials and manufacturing methods; lengthy sales and procurement cycles, resulting in extended revenue delays and heightened uncertainty for startups; and limited investor familiarity with specialized fields aimed at government, hardware and defense markets.
Given these risk factors, it’s easy to understand why the investment community has been hesitant to deploy capital to startups in these sectors and why real estate companies often forgo taking a chance on emerging hardware companies that need physical space to accommodate their growing needs.
Those in the national security and hardware sectors recognize that solving the challenges faced by hardware manufacturers in critical technology areas is essential for continued national security and prosperity but also acknowledge that the government alone cannot solve this problem.
Empowering both new and established groups in critical industries to build onshore manufacturing and scale-up production capacity to meet national security needs must be prioritized. Methods such as the industry campus model, which incorporate a wide range of industry, academic and government stakeholders around a particular sector, show promise by lowering capital expenses for scale-up, nurturing collaboration between industry players, and providing support and space for emerging companies to expand.
Several industry campuses are already in development, including the Munitions Campus in Indiana, and NASA’s Johnson Space Center Exploration Park in Texas.
The industry campus model is designed to bring the best of the government demand signal together with commercial creativity to attract private investment and enable a force multiplier approach for government dollars.
While industry campuses often align with government priorities, they are primarily funded through private investment, stimulating innovation for emerging hardware technologies that will benefit the federal and commercial sectors.
To enhance the appeal of hardware technology companies as investments, it is imperative to minimize the high failure rate of hardware startups and mitigate uncertainties for investors.
This entails: introducing innovative real-estate development models that lower startup capital requirements and offer flexibility to companies during the scaling process; providing additional support beyond the “incubator” and “accelerator” phases, such as access to technical experts, potential partners, and service providers; and providing greater clarity in government demand forecasts and validated requirements helps companies shape their product development roadmaps and production plans, while offering investors a clearer picture of market potential.
While the industry campus model is designed to address the first two requirements, government agencies must also put strategies in place to improve conditions for both hardware startups and investors. An important concept to consider is enhancing visibility for validated requirements to offer investors better insights. Additional opportunities might involve breaking down silos across agencies and departments to consolidate demand, enhancing understanding of the broader market potential, and prioritizing a focus on dual-use technologies with potential in both government and commercial domains.
Private investment is essential to fulfill the Defense Department’s priorities outlined in the National Defense Strategy. With the right conditions, emerging hardware technology companies hold the promise of delivering substantial returns on investment — potentially evolving into the next generation of government primes and industry leaders.
Strengthening communication and connections between government procurement and the investment community will foster a robust ecosystem where hardware technology companies can thrive.