Why Venture Capital Is Indispensable for U.S. Industrial Strategy: Activating Investors to Realize Disruptive National Capabilities
Michael Brown and Pavneet Singh
SUMMARY
The United States is in what the National Security Strategy calls “the decisive decade” of intensifying transnational challenges, supply chain vulnerabilities, and geostrategic competition with China. Technology leadership will largely determine the United States’ ability to prevail and prosper in the face of these challenges since the companies, products, and economic growth derived from advanced technology strengthen the economy, introduce innovative solutions to environmental and public health challenges, and provide sources of military deterrence and advantage. Over the past few decades, the U.S. innovation ecosystem has shifted. Instead of aligning with the strategic priorities of the U.S. government, companies are now more responsive to the demands of global consumers and businesses, often backed by venture capital. Consequently, the private sector has become less inclined to invest in hardware-based or capital-intensive projects, as these investments typically offer lower potential returns compared to the more lucrative software-focused ventures.
The critical technologies important for national security include many hardware-based or capital-intensive technologies such as advanced computing, advanced manufacturing and materials, biotechnology, communications and networking technologies, energy technologies, human-machine interfaces, quantum information science, semiconductors, and space technologies. In fact, while many of these technologies would include software as part of a system, the only exclusively software technologies are artificial intelligence and the suite of tools that define cybersecurity. As much as 90 percent of venture capital investment today is in software, meaning that industries like AI and cybersecurity will be well funded. However, to ensure adequate funding for the hardware-based, capital-intensive technologies such as advanced manufacturing and materials, semiconductors, energy technologies, quantum computing and space technologies, the U.S. government must be more proactive in attracting the required capital for commercialization. All of these technologies are also dual-use—used by commercial companies and the military. Without adequate funding, the technology advantage of the U.S. military erodes.
Among the available investment vehicles, venture capital stands out as the principal engine for commercializing promising new technologies. This paper aims to illuminate the pivotal role of venture capital in shaping U.S. industrial strategy, offering insights for policy makers and practitioners. Combining a longer time horizon and a higher risk appetite than other asset classes, venture capital rewards bold ideas, experimentation, and the assimilation of global talent. Because the U.S. government is unlikely to directly invest hundreds of billions of dollars to commercialize hardware-based technologies, it should instead shape incentives to attract private investors, especially the venture industry, which can be an indispensable partner in commercializing dual-use technology. To do so, however, it must understand the incentives that drive venture investment decisions to make hardware technologies of national interest more attractive. As a result of the failure to create a coherent commercialization strategy, much of federally-funded R&D remains in labs—or worse, is bought, stolen, or copied by adversaries who are more focused on the strategic advantages of developing these technologies than on achieving a high return on investment. To avoid these failures, buttress American competitiveness, and effectively utilize the unique strengths of the venture capital ecosystem, the paper concludes by making five recommendations for aligning U.S. national technology priorities with venture capital incentives:
- Prioritize Promising Federal Research for Commercial Development
- Cultivate Entrepreneurial Founding Teams
- Create Transparency for the Federal Total Addressable Market (TAM)
- Demonstrate Technology Maturity, and
- Develop a Public Capital Framework.
With the right incentives to attract venture capital, the United States can ignite investor interest, mobilize hundreds of billions in private capital, and build the critical technologies essential for national security, economic prosperity, and global leadership.
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