Where Does DoD's Tech Money Go?

For our kickoff newsletter, we take a look at how much money the federal defense budget actually allocates to emerging technologies. There’s no shortage of news, media, podcasts and the like talking about strengthening the American technological way of war to deter conflict, so how do words get put into action, at least funding-wise? The President’s FY2024 Budget Request is making its way through the Congressional process - how does it address emerging technologies for the DoD? So we start with a high-level breakdown of the proposal and what it might mean for potential funding opportunities and customer segmentation.

It’s $842B for DoD, but $145B for research, development, test & evaluation (RDT&E)

There are other ways to infuse emerging tech into the DoD (in the $170B procurement or $330B operations & maintenance budgets, for example), but let’s focus on the roughly 17% of the DoD budget called RDT&E. This is the pool of money that’s used to [attempt to] maintain our military’s technological edge through science and technology (S&T) and prototype development. Most of this work, labeled by budget codes 6.1-6.8, is performed by industry, universities, federal laboratories, and others (there’s a great and succinct primer from the Congressional Research Service here). Technology matures as the codes increase in number, so the 6.1-6.3 S&T funds should de-risk further development with 6.4, 6.5, and 6.7 funding (6.6 is management support, sort of like COGS, which for FY24 is supposed to be ~6.3%).

Most of this “emerging tech” money goes to the Air Force by service, or to 6.7 operational systems development (6.7) by budget activity.

The Air Force would get $47B in RDT&E, which combined with Space Force’s $19B, gives the the Department of the Air Force nearly half of DoD’s RDT&E cash. Defense-wide programs account for about a quarter of the budget. These funds go to joint agencies like the Secretary of Defense (SECDEF, $9B), the Missile Defense Agency (MDA, $8.7B), or DARPA ($4.4B).

By budget activity, most of the money is going to 6.7, as well as 6.4 Advanced Component Development & Prototypes or 6.5 System Development & Demonstration. This means that the preponderance of funding is going to more mature technology.

What are examples of what the DoD considers more mature technology?

Well, one way to answer this question is to simply map the 14 critical technology areas that the Office of the Undersecretary of Defense for Research & Engineering (OUSD R&E) (aka the DoD’s CTO) announced last year (here’s a link). These 14 areas are grouped into three categories: “seed areas of emerging opportunity,” “effective adoption areas,” and “defense-specific areas.” Seed areas might be thought of as roughly 6.1-6.3, while the dual-use effective adoption areas are more like 6.4-6.7, and the defense-specific areas span the gamut from 6.1-6.8. That’s not a perfect assignment but it’s a way to think about the 14 areas if your technology is in one of those categories.

Putting it together (for now)

Money is only one lens through which to look at emerging technologies in DoD, and it’s often a cloudy one, but it’s the de facto and de jure way of accountability within The System. Looking at the RDT&E budget, it also gives a sense of the potential opportunity space: more dollars for more mature technology, which makes sense from a value-creation perspective. Depending upon the solution, the commercial strategy could be fighting for relatively fewer (but still many absolute) 6.1-6.3 dollars in one of the seed areas, or servicing/partnering with incumbents later on in the 6.4-6.7 range for dual-use or defense-specific. As examples of 6.4 activities, here are each service’s top two:

• Air Force: Long Range Strike - Bomber ($2.98B), Next-Gen Air Dominance ($2.33B)

• Defense-wide: Improved Homeland Defense Interceptors ($2.13B), “Advanced Innovative Technologies” ($1.09B)

• Space Force: Space Technology Development and Prototyping (sounds tautological) ($2.08B), Evolved Strategic STRATCOM ($633M)

• Navy: LINK PLUMERIA ($2.1B), PILOT FISH ($916M)

• Army: Aviation - Adv Dev ($1.5B), Lower Tier Air Missile Defense (LTAMD) Sensor ($817M)

Where’s the Marine Corps? Buried in the Navy’s budget: USMC Advanced Technology Demonstration ($308M of 6.3 money), Marine Corps Communications Systems ($193M of 6.7 money).

Then again, it usually works out better to find solutions to real problems that your customer (which ironically enough, isn’t always the end user) cares about. We’ll look at ways the DoD spends this RDT&E in the coming weeks.

The Term Sheet

A rollup of defense industry mergers, acquisitions, capital raises and notable contract wins 

• Forefront Aerospace Services acquired Airflight Aerospace, specializing in electromechanical aircraft accessories - April 13, 2023

• Maddox Defense, one of the largest suppliers to the US Strategic National Stockpile, acquired Envirotech Vehicles - April 12, 2023

• Parkway Products, a precision plastics and thermoplastics manufacturer, was acquired by One Equity Partners - April 11, 2023

• Pinnacle Solutions, owned by Mike Durant, former POW, and provider of aviation services is acquired by Akima - April 10, 2023

• Boeing’s ForeFlight acquired CloudAhoy, a flight debriefing software provider, for an undisclosed amount - April 5, 2023

• Virgin Orbit filed for bankruptcy with assets listed near $243MM after failing to reach orbit in January 2023 - April 4, 2023

• BlueHalo (Arlington Capital) bolstered its lead in Counter-UAS with an acquisition of Verus Tech Group - April 3, 2023

• ASRC Federal acquired SAIC’s (NYSE: SAIC) logistics and supply chain management business - March 23, 2023

• REGENT, an electric seaglider manufacturer, announces a strategic investment from Lockheed Martin Ventures - March 22, 2023

• Frontier Aerospace, a leader in nextgen liquid rocket engines, raised a $10MM Series A from AEI HorizonX - March 22, 2023

• Ducommun (NYSE: DCO) acquired BLR Aerospace, a leading provider of aerodynamic and aftermarket services for aircraft - March 21, 2023

• Aviation Ground Equipment, a veteran-owned ground support and equipment manufacturer, is acquired by Nexus Capital Management and HDT Global - March 15, 2023

• Transdigm acquired Calspan Corp, a testing and tech development service provider for the A&D industry - March 14, 2023

• TTM Tech (NASDAQ: TTMI) agrees to sell Shanghai Backplane Assembly to DBG Technology - March 9, 2023

• Neural Propulsion Systems raises a Series B investment with Raytheon Ventures - March 2, 2023

• VaST, a signals intelligence company, is acquired by Altamira Technologies (ClearSky) - March 1, 2023

• H3X Technologies, a designer and manufacturer of advanced electric motors to enable sustainable aviation, completes an investment from Lockheed Martin Ventures - February 28, 2023