The Growing Connection Between Big Finance and the Weapons Industry
Ties between big finance and the weapons industry are not new. The first venture capital firm in the U.S. was founded to profit from new technologies developed for use in WWII, and the role of military spending in turning Silicon Valley into a tech hub is well documented. Today’s biggest VC titans are making transformative investments in military technology that pose serious consequences far beyond another hype-driven tech bubble. Weaponizing their financial assets to expand the production of war material will not only divert technological resources away from other critical domestic priorities but also forge novel devices of warfare that will generate demand for battlefield testing grounds both at home and abroad.
The Impact of VC Investments in Military Technology
Before defense tech evangelists can resurrect the age of American global supremacy, they must transform the way the Pentagon does business. This involves seducing Pentagon planners with exotic promises ranging from “attritable autonomous systems” (or swarm) technology to subscription models for weapons systems – not because these fit some strategic framework, but because they align with the VC business model. Venture capital and private equity is about making limited investments in mobile assets (technologies, engineers) to get a startup to the IPO stage (or trim the fat from an existing operator) and cash out. This is at odds with a military-industrial complex that boasts millions of employees and a handful of oligopolistic firms with billions of dollars of permanent infrastructure, huge up-front costs, long time horizons, and extremely complex procurement processes.
Transforming the Pentagon’s Business Model: Challenges and Opportunities
The fingerprints of VC priorities are everywhere: from the Pentagon’s Office of Strategic Capital and the Small Business Investment Company/SBIC initiative to the Defense Innovation Board, a collection of Silicon Valley scions elevated to a permanent department under the Secretary of Defense in October 2023. Typically, the Pentagon acquires technologies or equipment through private contracts with a company or by supplying grants to provide funds for research and development. The new Office of Strategic Capital lets the Pentagon behave less like a public agency and more like a VC investor.
VC’s Influence on Pentagon Procurement and Contracting
In 2022, Silicon Valley investors lobbied the Pentagon to use the OSC to bail out Silicon Valley Bank (where many of them had hundreds of millions deposited) by claiming that the defense tech startups in which they were invested would be damaged if they weren’t rescued. The financial services sector is likewise providing innovative products to facilitate the expansion of VC-backed defense tech in Pentagon contracting. One example is Leonid Bank, which is an invoice factoring company that lends to defense tech startups based on the DOD invoices those startups have for future projects, providing them with more money which is not something that has ever existed for Pentagon contracts.
Much of the VC discourse emphasizes the benefits of reforming the procurement system to acquire more “commercial” off-the-shelf items instead of custom-built ones. However, if the success of the product and the firm that develops it is dependent on the widespread adoption of that technology commercially, this will introduce a new range of militarized technologies into a global system that is already awash with lethal tech, dystopian surveillance products, and an ideology that depicts weapons production as the primary avenue to innovation, economic growth, decent industrial jobs, and infrastructure spending.
The Battle Between VC-Backed Tech Firms and Prime Contractors in the Defense Industry
The stated desire of venture capital is to disrupt an industry they see as monopolistic, inefficient, and too close to government bureaucracy. VC firms identify startups working on civilian technologies and steer them toward developing military applications. Individual engineers working on civilian tech are also being lured away by the promise of better funding and broader impact from defense investors. VC firms like Andreesen Horowitz advocate for changes in Pentagon contracting and procurement in order to facilitate their investments in defense tech. On the other hand, prime contractors are pushing for modifications that would turbocharge technology transfer and joint ventures to help lock-in future exports. The Pentagon, ill-equipped to navigate the competing interests, is caught in the middle, and the outcome of this battle will have significant implications for all.
Analyst comment
The news can be evaluated as negative as it highlights the growing connection between big finance and the weapons industry, which raises concerns about diverting resources from domestic priorities and the development of novel devices of warfare. As an analyst, the market is likely to see increased investments in military technology by VC firms, leading to potential changes in Pentagon contracting and procurement processes. This battle between VC-backed tech firms and prime contractors may result in significant implications for the defense industry and beyond.
