If the United States doesn’t act fast, the next generation of dual-use technological innovation will belong to its adversaries — creating an irreversible gap. America’s technical advantage has kept adversaries in check for decades, but new near-peer competition in dual-use technologies threatens that balance. Over the past decade, China has rapidly evolved from an emerging economic and geopolitical force to an imminent great power threat.
China and the West have seen their commercial markets supplant the government in innovation leadership, including in the defense space. In everything from AI to drones, batteries, and robotics, China’s venture capital–backed companies and university networks are leading the way in technological development.
This is important because to compete with the pacing threat of China’s burgeoning commercial dual-use ecosystem, the Department of Defense needs to deliver at the speed of need in inventing and assimilating new technologies. This will require the United States to redefine its tech investment playbook to develop better entrance pathways for the private industry and startups working on promising dual-use technologies. This is also important to me personally. My bias is rooted in seeing first-hand the current and possible state of innovation for our country as a venture capitalist (as the managing partner of Booz Allen Ventures and our Foreign Tech Intelligence Team), a technologist, and an American citizen, concerned that we are on the precipice of ceding our tenured advantage on the global scale. The United States needs a new roadmap — a new playbook for victory — and needs it now.
What’s Driving the Pacing Threat
China follows a similar dual-use scaling approach to the United States, leveraging a mix of public and private capital, with one major difference being China’s dedicated venture capital investment funds. For example, with roughly 2,100 government-linked funds called Government Guidance Funds, China offers more flexibility to deploy capital and has long time horizons for success. This provides Chinese dual-use startups with a vital runway that most startups desperately need to succeed. From 2018 to 2023, Chinese startups raised well over half a trillion dollars, with much of this capital flowing into inherently dual-use companies such as EHang (autonomous cargo and passenger drones), Zhipu AI (generative AI), and GalaxySpace (micro-satellites).
Moreover, Chinese leader Xi Jinping has centralized China’s “military-civil fusion” strategy to reduce acquisition barriers and make it easier for Chinese innovators to do business with the People’s Liberation Army. Xi’s decision centralizes military-civil fusion, a longstanding but wavering program in China, underscores that the Chinese Communist Party considers indigenous, dual-use technology development as paramount to China’s future.
Playbook to Drive Defense Department–Commercial Collaboration in the United States
The United States should improve the environment for collaboration between the Department of Defense and the private sector to meet the technological challenge of China. That means streamlining the Department of Defense’s authorities and operations and improving the investment environment to speed the integration of advanced tech into current missions and develop the right tech for the future. Funding and authorities need to be modernized, including when and where funds can be spent and the contracting process itself.
Multi-Year Funding
Similarly to Defense Production Act funding, money appropriated for the Defense Innovation Unit and other innovation cells dedicated to bringing dual-use advanced tech to the Department of Defense should be non-expiring and valid until expended. Determining technology shortfalls and being able to execute funds as needed — not through the Department of Defense planning, programming, budgeting, and execution process — can be a key contributor to overcoming the “valley of death” for promising startups.
Fiscal Flexibility
Department of Defense innovation units should have more flexibility to support startups through proof of concept. A good example is the flexibility Congress provided the Defense Innovation Unit to use its budget both for company prototype development and for initial fielding of new technologies. Likewise, the under secretary of defense for research and engineering programs — such as Accelerate the Procurement and Fielding of Innovative Technologies — are extremely useful in addressing the valley of death but need more funding support from Congress, as well as continued support to existing Air Force work projects such as the Tactical Funding Increase and Strategic Funding Increase programs.
Outcomes-Based Contracting
The Department of Defense needs to be empowered to adopt outcomes-based contracting to unlock the commercial-level thinking and innovation needed to drive modernization forward. Such contracting allows the government to pay for services and products based on achievement of specific outcomes. In other words, tell the contractor “where you want to go” instead of “how to get there.” It would also align incentives between primes and systems integrators and non-traditionals in a way that treats these platforms that are built and integrated together as one firm fixed-price unit as opposed to being treated as ammunition or bolts and screws. The Department of Defense has been an early adopter of outcomes-based contracting, especially in the push toward prototyping, but it should apply the approach more broadly.
Enforce the 1994 Federal Acquisition Streamlining Act
The Senate Armed Services Committee’s Fiscal Year 25 National Defense Authorization Act pushed to help ensure fidelity to the Federal Acquisition Streamlining Act, which is a good thing for adoption of emerging dual-use technologies. The Federal Acquisition Streamlining Act requires the federal government to use commercial products, when available, instead of trying to build their own. Department of Defense processes and policy need streamlining too, opening up internal collaboration opportunities, making processes survivable for cutting edge startups, and sharpening focus on America’s main defense technology competitor.
Codify Intra-Department of Defense Collaboration
Department of Defense leaders should take advantage of new programs such as Competitive Advantage Pathfinders, which empowers requirements, budgeting, and acquisition communities across the services to collaborate on technology development and acquisition. The importance of collaboration between service branches and flexible spending authorizations has been echoed by Under Secretary of Defense for Research and Engineering Heidi Shyu, whose research, development, test, and evaluation units have the procurement flexibility to rapidly field technologies, in conjunction with service branches, to seamlessly transition to the appropriate service branch sub-units.
Streamline the Authority to Operate Process
Even the best tech for the Department of Defense’s needs will sit on the shelf if it doesn’t make it through the ponderous authority to operate processes required to be allowed on the department’s networks. These are long-established information technology risk-management processes required by the decade-old Federal Information Security Modernization Act of 2014. Much of the authority to operate process is done manually, particularly the intensive reporting and documentation requirements for implementing security controls. However, today few startups have the runway to wait for full authority to operate approvals under the best of circumstances. A Department of Defense–accredited platform, like Second Front’s Game Warden, can be part of the solution (Booz Allen Ventures invested in Second Front in January 2024). Game Warden provides a secure environment that streamlines and automates authority to operate compliance processes, enabling the rapid delivery of commercial software to government end-users. However, fundamentally, the authority to operate procedures themselves need streamlining to make them survivable for promising startups. The Department of Defense is moving in this direction, looking at cutting out redundant accreditation with reciprocity for authority to operate across Department of Defense networks, ensuring digital availability and sharing of key documentation with stakeholders on issues like cybersecurity, accreditation, and performance.
Focus on China
Legacy intelligence practices of analyzing Chinese policy and end-to-end People’s Liberation Army military systems are vital, but they do not give the U.S. government a full picture of Chinese technological development. The Department of Defense and intelligence community leaders need a deeper understanding of China’s private sector, from which the People’s Liberation Army and China’s state security services increasingly procure dual-use technologies. For example, Chinese Original Equipment Manufacturing and systems integrators are increasingly incentivized to supplement their services with dual-use products from Chinese startups. The Department of Defense should similarly look for creative ways to incentivize the acquisition and delivery of dual-use products.
Evolving the U.S. Venture Capital Market to Meet Mission Demands
U.S. venture capitalists also have a vital role to play as startup investments become increasingly pivotal in geopolitical tech competition. The nation’s competitive advantage will depend on startups’ ability to overcome the valley of death phenomenon, where roughly seven in ten startups fail in the first two to three years. The odds are even more daunting for defense tech startups due to limited funding for research contracts and inadequate support to navigate Department of Defense processes.
While significant private capital has flowed into early-stage dual-use technology startups over the past three years, it is insufficient. Sustained investment is needed as these companies scale to ensure they achieve product-market fit within robust Department of Defense programs. Furthermore, success will hinge on venture capitalists understanding the changing state of the defense market, mission problems, the budgeting and procurement cycle, and which technologies will solve real issues for national security.
Mission First
Venture capital investing in dual-use tech isn’t new, but its value proposition varies. Most venture capital firms claiming defense tech expertise only provide financial backing, while just a select few truly drive strategic value for both startups and the Department of Defense. To bring dual-use technology to the warfighter, the United States needs more venture capital firms committed to a mission-driven approach that requires deep knowledge of the Department of Defense’s complexities and requirements and include long return cycles, often 7 to 12 years.
As former Deputy Secretary of Defense Robert Work noted at the National Defense Industrial Association conference, “The Department is an economy.” It is vast, with its own culture, language, and intricate processes. Investment success here demands not just funding but hands-on expert navigation, which most emerging dual-use startups cannot manage alone. Mission-focused guidance is critical to deploying technology that matters.
To bridge this gap, venture firms ought to make both strategic hires and hyper-focused military specification hires to add value to their portfolio. These hires are individuals with deep Department of Defense experience who understand mission needs, know the acquisition process, have the connections to champion the technology and ultimately have served on the ground downrange and have encountered first-hand the problems to address — also known as “Operators.” Venture capital firms should also cultivate mission-aligned partnerships to guide product development, ensuring the technology is truly dual-use from the start. Take the challenge of mitigating adversarial autonomous drone swarms — it’s a high-priority area where contractors like Booz Allen are partnering through investing in startups to turn potential into operational capability on large systems integration–led contracts. If systems are not built to handle austere conditions from first principles, they will not hold up in theater. This deep knowledge and expertise will move emerging technology through the valley of death and into impactful defense solutions.
Government Budgeting Realities
Venture capitalists should understand that while Department of Defense budgeting and procurement processes are slow, they are always in motion. Successful defense technology investors need a deep understanding of the department’s multi-year budget planning and shifting priorities, and they should help guide their portfolio to align development timelines with these cycles. Patience and strategic flexibility are essential, as these startups should be prepared for extended runways while remaining agile to capitalize on changing requirements, urgent capability needs, and unexpected funding and leadership shifts.
Winning in the Long-Tail
Venture capitalists also need to recognize that the defense sector is inherently a long-tail market that demands sustained commitment. While returns may not be immediate, the potential for significant impact and financial gain is real. It’s critical to identify and highlight key milestones, such as securing warfighter approval, winning a tactical funding increase, or landing a prime contractor partnership. These markers validate a startup’s trajectory and end-customer understanding, as well as increasing its credibility within the department. It’s also incumbent on the Department of Defense and the intelligence community to break through the bureaucracy to get funding out the door and into the hands of the dual-use companies faster and more efficiently, as noted above, or risk a mass exodus of private funding over the next five to ten years, a problem that China does not have.
Parting Thoughts
By harnessing the creativity and adaptability of commercial, private, and startup organizations, the United States can compete effectively and establish a new era of economic and national security, underpinned by peace and stability.
Without immediate and substantial investment in the activation and scaling of dual-use technologies, the United States risks falling behind in the global power race. That requires streamlining Department of Defense authorities and operations and improving the investment environment to help promising dual-use startups survive and bring the best possible tech to defense missions at the speed of need, and for the future.
Brian MacCarthy is a Booz Allen senior vice president and managing partner for Booz Allen’s $100 million venture capital fund, Booz Allen Ventures, in addition to Booz Allen’s Tech Scouting team including its Foreign Technology Intelligence Practice. He leads a team of venture investors, technologists, and business developers who scout, partner, and invest in cutting-edge dual-use technologies that can transform the markets and missions of clients. He has over 20 years of experience in the federal and commercial sectors, spanning software, hardware, cloud, AI, cyber security, and health operations.
Image: Kisha Johnson
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