New S&T Strategy, New Opportunities

May 23, 2023

Hello, Arsenal readers. Have you ever spent a weekend reading longform defense strategy documents and sharing cool facts from Pentagon press releases in friend group chats? Well, we did that for you, so you could enjoy the upcoming Memorial Day Weekend.

Let’s get to it:

  • 🔬 Science and Technology Strategy Release Breakdown

  • 💸 DoD’s New Office of Strategic Capital

  • 🚩 Red Team Update

  • 💰 The Term Sheet

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Reader Poll:

The S&T Strategy Release

The DoD CTO’s “National Defense Science and Technology Strategy 2023” dropped earlier this month, and we’re here to give you:

  • a few hot takes

  • the tl;dr summary (it’s only 12 pages though!)

  • a potential unique opportunity in defense tech

Why does another vision document matter? 

  • We’ve looked at it for potential redirects or underexplored areas which may confer first (or early) mover advantages

Some quick takeaways

→ Only the People’s Republic of China is listed as a by-name competitor

  • This reflects geopolitical realities, but it also means that your solution is likely to have a better product-market fit if it has a use case in countering PRC.

→ It’s generally light on specifics, but does highlight general ways to increase commercial partnership

→ By nature, most strategies are broad - this one focuses on status quo, international enablers, and commercial partnerships

→ By word count:

  • “usual suspects”: technology (70), defense (63), science (41), research (36), innovation (34), technologies (34), capabilities (31)

  • international enablers: partners (30), joint (26), allies (26), partnerships (7)

  • commercial: industry (15), private (8), partnerships (7), industrial (6), commercial (6)

  • honorable (or absent) mentions: accelerate (6), change (5), rapid (5), warfighter(s) (2), end-users (1)

→ Research & Engineering wants to ‘Benjamin Button’ the defense innovation ecosystem back to a time when it wasn’t dominated by a few large primes.

Quoting the National Defense Strategy, S&T should leverage

“our diversity and pluralistic system of ideas and technology generation that drive unparalleled creativity, innovation, and adaptation.”

This maybe applies to American economic dynamism, but more work to be done for defense dynamism, which the strategy addresses:

“make the changes necessary to foster a more vibrant ecosystem that brings in new partners to grow our research and collaboration base.”

This aims to undo decades of consolidation. From Anduril:

The tl;dr summary

Intro

  • Importance of dual-use technology

  • Need open systems

  • Will change process, engage tech innovation base, change industrial posture

  • 3 ways to sharpen competitive edge: joint mission, speed & scale, R&D foundations

  • Four principles

    • Purpose of defense S&T is to enhance national security and influence

    • Joint mission is a collaborative mission

    • International allies and industry partners are integral to American R&D

    • Effective technology protection is tailored to support military innovation

  • Focus on Joint Mission

    • Rehash the 14 critical tech areas grouped into 3 areas (we covered this before here)

    • Rigorous analysis (modeling & simulation) to support choices

    • Joint experimentation

  • Create and Field Capabilities at Speed & Scale

    • Bridge proverbial Valley of Death (as seen by S&T):

From the DoD S&T Strategy 2023.

  • Foster a more vibrant ecosystem

    • How? By “increasing partnerships”

  • Strengthening collaboration with int’l allies & partners

  • Non-traditional partnerships

    • DIU, AFWERX, et al. + new investment pathways

  • Innovation in industrial processes (more on that below)

    • Nine Manufacturing Innovation Institutes (MIIs)

  • Continuously transitioning capabilities

  • Communicating clearly

  • Protecting critical tech

  • Ensuring the foundations for R&D

    • Enhancing laboratory and test infrastructure

    • Upgrading digital infrastructure

    • Cultivate the current workforce

    • Investments in the workforce of tomorrow

A potential unique opportunity

Based off our read, one immediate area that is often overlooked in defense tech may be expanding manufacturing readiness and innovation. Another positive indicator is that it should be supported by tailwinds from novel investment mechanisms like DIU or the newly-formed Office of Strategic Capital (OSC).

Manufacturing readiness has been a hot topic as support to Ukraine has reduced key technology stockpiles, and it’s explicitly called out in the strategy as the 9 Manufacturing Innovation Institutes (MIIs).

What are they?

“Each institute is a public-private partnership designed to overcome the challenges faced by American manufacturing innovators in a variety of technology areas.” Some examples:

What is their goal?

“The DoD MIIs seek to revitalize the U.S.’s domestic manufacturing capability through domestic public-private partnerships that enhance America’s strategic competitiveness while enabling the military of tomorrow.”

What have they done so far?

“With a combined $1.6+ billion in initial and follow-on Federal investment and $2.1+ billion in matching funds from industry, academia, and state governments, the institutes have convened a network of over 1,700 organizations across defense industry, commercial manufacturers of all sizes, start-ups, universities, community colleges, and state/local economic developers in active partnership with the U.S. Federal Government.”

Our take

Manufacturing innovation and readiness is a big deal in defense tech, but a lot of focus is usually on building the next flux capacitor. Building manufacturing capacity is capital intensive, but improving, inventing, or iterating on associated processes does not have to be.

The war in Ukraine has highlighted the production base issues (sole suppliers or dreaded inverted V supply chains), and things like these MIIs indicate that there’s another part of the value chain that is arguably underserved because it’s not as sexy as exquisite widgets.

We’ll cover some of the firms in the space looking at this problem in a future issue…

Speaking of Non-Traditional Partnerships…A Quick Breakdown: Office of Strategic Capital

The Office of Strategic Capital is setting up an investing syndicate and offering leverage to investors by providing loans with tax payer money - what could go wrong?! 😓

Eventually, the office will provide federal credit or loan guarantees to defense tech startups that are working on the critical technology areas

Office of Strategic Capital

  • eCommerce receives 2x - 3x more funding than the critical technologies needed for national security

  • Since critical technologies are insufficiently capitalized, private capital will need to be incentivized by DoD to shift investing into other technology areas

What stage company does OSC help to provide capital for?

Office of Strategic Capital

Why is this office necessary? If these technologies are THAT important, why doesn’t the government just go the acquisition route?

  • DoD needs to accept part of the risk in order to spur innovation and development in critical technology areas

  • The OSC will help get technologies from R&D to procurement

  • The office can help transition available technologies into DoD operations

  • Many of the technologies that DoD requires, DoD cannot buy or do not exist currently in the required form

The OSC’s Capital Strategies

Office of Strategic Capital

Office of Strategic Capital

What could wrong?

  • The companies could go bankrupt and will not be able to pay back the entire loan or parts of the loan

The office is still standing up and it will be interesting to see how OSC will start to pool capital - stay tuned…

Red Team Update

  • A satellite image (thanks, Planet Labs) obtained by Defense News shows what appears to be a WZ-8 supersonic reconnaissance drone parked outside one of two newly built hangars at China’s Lu’an Airbase

  • China is continuing to revamp a bomber base that was identified in recently leaked U.S documents as hosting a new supersonic reconnaissance drone; Read the top secret documents on discord

  • The base is home to the 29th Air Regiment of the People’s Liberation Army Air Force’s 10th Bomber Division, which currently operates the Xi’an H-6K and H-6M bombers that carry the WZ-8 supersonic drone

     

  • (Shout out to a loyal reader for pointing this story out) - China launched the 4 SAR satellites and have attempted an interesting orbit formation

  • Conventional SAR satellites use a single moving payload to create an aperture, China is trying to get less than 0.5 meters resolution over a large footprint by having 3 receiving satellites orbit a single transmitting satellite

  • Russia’s MoD is completing the formation of tactical and technical requirements for a new sea-based intercontinental missile

  • It is expected the new missile will become the main armament of the nuclear powered strategic missile submarines of the future generation of the Russian Navy

The Term Sheet

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

Notable M&A or Investments

  • Point Blank acquires Safe Incorporated, a provider of energy-absorbing, crashworthy seating hardware and systems (5/19)

  • GracoRoberts acquires Pacific Coast Composites to expand aerospace composite offerings (5/18)

  • eMagin, maker of organic light-emitting diodes (OLEDs) used in military aviation and target sights, is acquired by Samsung Electronics for $218M (5/17)

  • Precision Concepts Group, component and sub-assembly supplier for various pieces of military equipment, is acquired by Biomerics through Wasatch Equity Partners for an undisclosed amount (5/17)

  • B&A acquires iDoxSolutions, which will create a platform offering more advanced IT capes across DoD and other federal agencies (5/16)

Notable Contract Wins

  • Klur Technology Group wins a contract for battery packs for mobile command centers for an undisclosed amount (5/22)

  • BAE Systems awarded $72.5M Army Precision Guided Munitions Research Contract (5/18)

  • QinetiQ awarded an Army contract for providing a low-cost aerial target, Banshee Jet 80+, for an undisclosed amount (5/17)

  • L3Harris awarded $750M Marine Corps contract for radios (5/17)

  • Astra Space awarded a contract add-on from DoD facilitated by the DIU; the contract is for Rocket 4’s first test flight (5/16)

Notable Capital Raises

  • Varda Space Industries, an in-space manufacturer of semiconductors and pharmaceuticals, raises $25M at a $500M valuation post-money (5/18)

About Us

Our team has 30+ years of combined experience as military officers using the end products. We’ve worked in both government and industry. From MIT to Wharton, Wall Street to biotech, and DARPA to the flightline, we will offer you a unique perspective on how to navigate America’s defense tech industry.

The opinions expressed in this newsletter are solely those of the authors and do not necessarily reflect the views of DoD, our employers or any affiliated organization. This newsletter is for informational purposes only and is not intended to provide legal, financial or professional advice.