If the United States fails to act swiftly, the next wave of dual-use technological innovation could fall into the hands of its adversaries, widening an irreversible gap. America’s technical edge has historically kept its rivals at bay, but emerging near-peer competition, particularly from China, is reshaping the global balance. Over the past decade, China has transitioned from an ascending power to an imminent great power threat, capitalizing on its prowess in dual-use technology.
China’s Dual-Use Strategy: A Model of State-Backed Innovation
China’s innovation ecosystem has shifted leadership in technological advancement from government entities to commercial markets. In fields like AI, robotics, drones, and energy storage, Chinese venture-backed firms and universities are leading. The crux of China’s success lies in its Government Guidance Funds—over 2,100 state-linked venture capital funds—which provide critical runway for dual-use startups. From 2018 to 2023, Chinese startups secured more than half a trillion dollars, with much of it funneled into companies like EHang (autonomous drones), Zhipu AI (generative AI), and GalaxySpace (micro-satellites).
China’s centralized “military-civil fusion” strategy, spearheaded by President Xi Jinping, has removed barriers between commercial innovation and military applications. This prioritization of indigenous technology underscores Beijing’s vision of dual-use advancements as vital to its geopolitical strategy.
Building a U.S. Playbook: Bridging Defense and Commercial Sectors
To counter China’s progress, the United States must transform its approach to integrating private-sector innovation into defense missions. The Department of Defense (DoD) must modernize funding mechanisms, streamline contracting, and create pathways for startups to overcome bureaucratic obstacles.
1. Multi-Year Funding Funds for innovation units like the Defense Innovation Unit (DIU) should be non-expiring and flexible. Similar to Defense Production Act funding, this approach would allow the DoD to execute funding based on immediate needs, bypassing the cumbersome planning and budgeting cycle. Flexible funding is essential to help startups cross the “valley of death”—the phase where many fail due to resource gaps.
2. Fiscal Flexibility for Proof of Concept Innovation units need more authority to allocate resources for prototype development and initial fielding. Programs like the Air Force’s Tactical Funding Increase should be expanded to support startups developing breakthrough technologies.
3. Outcomes-Based Contracting The DoD should expand the use of outcomes-based contracting, focusing on end results rather than prescribing processes. This approach incentivizes innovation and aligns contractors with mission goals, driving modernization more efficiently.
4. Streamlining Authority to Operate (ATO) The ATO process, required for deploying technology on DoD networks, remains a bottleneck. Platforms like Second Front’s Game Warden—which automate compliance and cybersecurity documentation—offer potential solutions. However, deeper reforms are needed to eliminate redundancies and expedite approvals for startups.
5. Enhancing Collaboration Across DoD Divisions Programs like Competitive Advantage Pathfinders should be expanded to foster collaboration among the requirements, budgeting, and acquisition communities. This will accelerate the transition of innovative technologies into operational use.
Adapting U.S. Venture Capital to Defense Needs The U.S. venture capital sector must adapt to the complexities of defense innovation. This requires a mission-driven approach, with venture firms making strategic hires of individuals experienced in DoD processes to guide startups through the intricate procurement landscape. Investments must also align with long-term defense priorities, requiring patience and an understanding of the unique challenges in defense markets.
Evolving Defense Budgeting and Procurement Defense tech startups must navigate long budgeting cycles and shifting priorities. Venture firms can play a critical role in guiding these companies, ensuring their technologies align with DoD timelines and addressing urgent capability needs. Key milestones, such as securing warfighter approval or prime contractor partnerships, validate a startup’s trajectory and increase its credibility within the defense ecosystem.
Conclusion: Charting a Course for Technological Leadership
America’s ability to maintain its global leadership hinges on its capacity to innovate at the speed of need. By harnessing the creativity of private-sector startups and aligning them with defense priorities, the United States can compete effectively with China’s growing technological prowess. Immediate reforms to funding, contracting, and inter-agency collaboration are essential to ensure that the next generation of dual-use technologies is developed and deployed to strengthen national security. The stakes are high, and the time to act is now.
