Cover: Venture Capital and Strategic Investment for Developing Government Mission Capabilities

Venture Capital and Strategic Investment for Developing Government Mission Capabilities

Published Mar 24, 2014

by Timothy Webb, Christopher Guo, Jennifer Lamping Lewis, Daniel Egel


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Research Questions

  1. What were the experiences of previous U.S. government-sponsored venture capital initiatives?
  2. How did these past initiatives develop mission-oriented capabilities?

A wide range of military capability improvement efforts have benefited from development and procurement methods that accommodate urgent operational needs. Changes in the threat environment suggest a need for a fresh examination of the adequacy and suitability of acquisition methods for the coming decade. This report examines one class of acquisition method, known as government venture capital (GVC), or government strategic investment (GSI). The research extracts general observations from previous cases and from a partial economic model of the GSI type of initiative. Taken together, these analyses will help government acquisition managers to judge more thoroughly the suitability of strategic investment methods for motivating future government mission–oriented innovation by private firms.

The report does not explicitly compare GSIs and alternatives for their efficacy in advancing government mission objectives. If it had, it is likely that the main advantage of GSI would be improved access to information about alternative approaches available in the commercial market, resulting from the close relationships the GSI structure engenders between government and business.

Key Findings

Qualitative analysis of cases led to the following observations.

  • In the three government strategic investment (GSI) cases examined, mission-oriented innovation was of equal or greater importance than generating financial return.
  • GSI participation in venture capital investments has provided government with additional information about technology-focused market sectors and companies.
  • GSI initiatives rely on the operational flexibility afforded by Other Transaction authority.
  • GSI initiatives rely in a significant way on a government-to-private sector "interface" function.
  • The GSI's responsibility to government customers adds significant difficulty to the task of investment management.
  • GSI initiatives need staff with private market capabilities to serve investment management functions.

Economic modeling analysis led to the following observations.

  • It is possible to systematically assess selected incentives to which private firms will respond.
  • The desired balance of GSI financial support between equity investment and contractual support depends on likelihood of sale in government and commercial markets.
  • The GSI initiatives in the case studies illustrate a range in the balance between equity investment and contractual support.

The research described in this report was prepared for the Office of the Secretary of Defense (OSD). The research was conducted within the RAND National Defense Research Institute, a federally funded research and development center sponsored by OSD, the Joint Staff, the Unified Combatant Commands, the Navy, the Marine Corps, the defense agencies, and the defense Intelligence Community.

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