Financial Services: –
The U.S. finance industry is robust and well-resourced, offering a range of commercial and consumer banking, lending, and investment services to individuals and institutions across the country and the globe. Innovation within the finance industry is usually financed by risk capital firms seeking innovation with the potential for commercial success and high returns on investment. Financing innovation is considered a high-risk endeavor due to high startup failure rates, unproven technology, and the challenges of scaling to market production. Finding and applying innovation funding for potential defense market products is even more difficult, given the single buyer in the form of the DoD, the consolidated nature of the private defense industry, and the draw of higher, faster returns in the commercial sector. These factors limit private investment in national security-oriented start-ups. They also resulted in a divergence between the high technology capabilities in the commercial marketplace and the outmoded technology often found within the DoD and the broader U.S. Government (USG). To correct this imbalance, the DoD must take the following actions: increase and expand the investment tools within the innovation ecosystem, scale innovation ecosystem products to operations, and support America’s continued innovation advantage to be more relevant, complementary, and agile.
The Industry Study suggests that for the U.S. to prevail over China in a race for the primacy of national defense systems, the DoD must adopt processes that broadly leverage the strength of the many U.S. innovation ecosystems, better scale DoD acquisitions while optimizing inclusion of the private finance industry to rapidly bring forward disruptive technologies, and expand both the quality of human capital and the ubiquity of financial technology advancements that are foundational across the finance industry, the commercial marketplace, and the DoD. To better leverage disruptive innovation and financial structures, the DoD should: 1. Recalibrate the DoD Innovation Network, 2. Bridge the Procurement Valley of Death, and 3. Maintain Innovation Advantage Through Financing and Human Talent. The DoD culture that evolves from these changes will be better postured to incorporate financing focused on transforming ideas into capabilities relevant in future warfare, complementary to the private industry’s technological trends, and agile in converting loosened requirements into capabilities increasingly consumable as technology advances. As the DoD’s innovation ecosystem is at an inflection point in history, its ability to finance innovation is too. This paper will present the Industry Study’s findings on the strategic environment for financing innovation related to national security, identify the key stakeholders and interests, review the range of financing sources known in the industry as the capital stack (see Appendix B for Glossary), identify challenges specific to defense innovation, and conclude with policy recommendations to make innovation financing more relevant, complementary, and agile to support national security objectives.
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