Building the Base Episode 30: Jason Rathje

Building The Base Website Graphic Episode 30 V1

In this podcast, Jason Rathje, the new director of the DoD Office of Strategic Capital, discusses the importance of public-private partnerships in the context of national security. He shares his background and pivotal moments that motivated his work in the Department of Defense. The Office of Strategic Capital aims to maintain the Department of Defense’s technological advantage by leveraging private investment capital and improving collaboration with startups and entrepreneurs. They focus on critical technology areas and diversifying the supply chain. The office plans to launch various programs, including debt financing initiatives, and engage with stakeholders such as venture capitalists, private equity firms, and tech companies.
Lauren, Hondo and Jason discuss:

  1. National security
  2. Public/private partnerships
  3. Department of Defense (DOD)
  4. Strategic Capital
  5. Venture capital
  6. Technology innovation
  7. Supply chain diversification


Jason Rathje is the current director of the Office of Strategic Capital (OSC). He has spent time in both the private and public sectors. After graduating from the Massachusetts Institute of Technology (MIT), Jason spent three years researching the intersection of entrepreneurship, innovation, and national security in Stanford’s Management Science & Engineering Department, specializing in technology entrepreneurship strategies. Specifically, he studied the effect of government partnerships, both as an investor and customer, on basic research through commercialization. This research heavily influenced his involvement in AFVentures, as well as sparked new research projects on how to more intelligently expand the dual-use economy.

Podcast Transcript

Lauren Bedula:

Welcome back to Building the Base. I’m Lauren Bedula, and I’m here with Hondo Geurts and Jason Rathje, the new director of the DoD Office of Strategic Capital. Our listeners are curious about what’s happening in the office, so we’re excited to have you, Jason. You’ve been making significant changes at DOD, and we’re eager to hear your thoughts today. Thanks for joining us.

Jason Rathje:

Thank you for having me.

Hondo Geurts:

Jason, great to have you here. I won’t dwell too much on our past experiences together. As we grow older, it’s gratifying to see those we’ve mentored excel and take things to the next level. It’s fantastic to have you here with us. I know your background from our previous work together, but could you share with our audience how an Air Force officer with a geeky side and a PhD ended up running the new Capital office for the DOD?

Jason Rathje:

DOD? Well, I appreciate that, though, for my career, there have been a few key moments that have made me want to continue to work inside of the Department of Defense and work for in sport, national security. And probably the most pivotal moment was during the ghost program as a first lieutenant, which I’m sure you’ve heard plenty of time from my colleagues and peers who’ve gone through the program. I started off my career as an engineer inside of the Air Force, I worked for a couple years, wasn’t too thrilled with the first job that I had and was seeking a way to get more involved in where we were in what we were doing in 2012-2013 timeframe. And there’s this great program called the ghost program where young acquisition officers young engineers and program managers can head over to SOCOM for a little OTJ and how to do acquisitions and support current operations and people like Hondo Geurts. He’s the service acquisition executive at the time and mentor myself as well as number NGOs, who are now all in leadership positions across the air force, both in uniform and in civilian positions. Kinda wrote my recommendation letter when I had opportunity to go back to do a PhD and rethink my career as an engineer and learn that as probably an okay engineer, there’s other life choices that I could be making. What, when I was headed back to school, I was really interested in this concept of innovation. And more importantly, at the time, I had no idea what innovation meant. It was a buzzword, and this was 2014-2015. Grain is still very much in that category. But I was fortunate to come across a line of business literature, and then into some of the more esoteric, econ publications, they all went back to the 1930s around this concept of innovation as a wedge to corporate strategy. And I felt, and so headed back to school to get a degree in strategy and public policy was out in the west coast in Silicon Valley for about five years. Working with founders working with investors and asking the question doesn’t make sense for an entrepreneur, to work with the government. From the standpoint of an entrepreneur, it doesn’t make rational sense. And in the answers I got back through years of research was it depends. But they weren’t really great for the Department of Defense. And there were a lot of really good reasons for that. One, the DoD wrote down rights contracts, having very demanding technical requirements for companies to meet. And when you’re young entrepreneur, there are very high switching costs and a very high opportunity cost for choosing the wrong path and being stuck in that path. But there’s also this choice that companies felt that they had to make an investor’s thought, that they had to make where they’re either pursued defense, or they pursued commercial. And let’s face it, the returns are always going to be higher in the nonprofit sector. What we found though, is if we changed the way that we thought about writing contracts about working with new companies, with startups with entrepreneurs, that gave them an opportunity to test the Air Force market, which is where it was at a time now the DoD market with new technologies to make it less of a you are working for the Department of Defense, and hey, let’s see if we can partner on something that’s interesting for both of us, and then find opportunities to rapidly scale and integrate those technologies into capabilities that the department needed to read incrementally rigorous process, we can increase the amount of companies that were working for the Department because it made more rational sense. As you can generate market, you can generate revenue, you can build your base in ways that that was hard to do in the commercial sector. Because you know, once you’re inside of the DOD, you’re inside the DOD and you’ve got a steady stream, you got a steady market, and you know who your customer is, you know where your money is coming from. It is really a stabilizing dependency for early stage companies, which can be beneficial if done the right way. Through that program, you know, that, for example, running the Air Force SBIR program, from 2008 to 2080, all DoD SBIR companies combined had about a $2 billion of venture capital invested. Now, since 2018, and 2022, which is the last time that I checked, it was about $12 billion worth of capital. So you’ve seen a significant amount of shift and investment into companies that are supporting the Department of Defense. And there’s lots of reasons for that are due. And all of the innovation organizations afterwards, there was a I was that was modeled after saltworks. Right. That’s why you see all these works organizations out in the ecosystem today. And so, you know, building on certainly the shoulders of giants that have come before us, but there’s been an incredible group of individuals. Kind of to your point of folks who were doing rapid acquisitions that were deploying capability to the field during the war on terror and have continued to work in this with this mindset. Now, we’re working with this whole new bed of contractors that are supporting the department, and I’m very confident and very excited about the future.

Lauren Bedula:

Tell us about your new office. What’s the mission, and what are your priorities? Our listeners are eager to hear more.

Jason Rathje:

The Office of Strategic Capital aims to provide the Department of Defense with new tools to compete effectively in today’s techno-economic competition. Critical technology areas span semiconductors, biotech, advanced materials, hypersonics, directed energy, and more. Private investment capital dominates today, while government funding has decreased in comparison. However, the United States possesses the most liquid and largest capital markets globally, which provides us with a strategic advantage. Our goal is to ensure that the Department of Defense maintains a technological advantage for national and economic security. We need to be better buyers and work more nimbly with venture-backed companies. However, relying solely on buying is not enough. We must also focus on securing and diversifying our supply chain, both in existing industries and those of the future.

Hondo Geurts

So, Jason, one of the things we often talk about is just because you don’t know about it doesn’t mean it doesn’t exist. And for a large part, the DOD has not played much into this debt financing and these kinds of programs, but I think a lot of other federal agencies have used them for decades very successfully. When you talk about bringing some of these programs to the DOD, can you help the listeners understand what already exists in the federal government and why you think we can build on those as a great new tool to put in our toolset as we try to leverage this high-tech opportunity?

Jason Rathje

It’s a great question because the Office of Strategic Capital’s primary tool for mobilizing private capital for national security is an extremely low cost of capital to invest in domestic infrastructure, manufacturing, and commercialization. Most federal departments and agencies, except for the Department of Defense, Department of Labor, and Department of Justice, have federal credit programs. For example, the VA Home Loan Program provides a loan guarantee to banks to provide mortgages to servicemembers and veterans. These programs have been used in the past to increase capitalization in critical industries. For instance, the Small Business Investment Company program catalyzed the venture capital asset class, and companies like Intel, Sun Microsystems, Cray Research, and Apple Computer received investments from it. Federal credit programs have a low cost to the taxpayer, around 1.2% on average, and provide a return on investment. Comparatively, grants and spending cost more to the taxpayer. The DOD has used federal credit programs in the past, such as providing a loan to Tesla, which led to their IPO and repayment to the taxpayers within three years. These programs are efficient and effective for critical industries and provide an alternative to spending money directly.

Lauren Bedula

How will you interact with venture capitalists, private equity firms, and tech companies? Can you give our listeners an overview of the stakeholders you’ll be engaging with and how they can help you?

Jason Rathje

We are launching several programs this year. The first program in operation is the revitalization of the SBI C program, which provides government-backed loans to match with private capital. We can provide leveraged debt financing at a two-to-one ratio for every dollar of private capital in a limited partnership. Another program we plan to launch is the loan program initiative in partnership with another vendor agency. This program will expand domestic infrastructure and manufacturing investments. We are also exploring programs in the R&D and TV spaces. Additionally, we are launching the Critical Technology Scouting program to expand exposure to international technology companies and seek co-investment opportunities with allies and partners.

Hondo Geurts

There’s a lot of activity going on. For those familiar with the DOD, starting a new office can be challenging, involving finding office space, talent, and support. How has the process been for you so far? Are you satisfied with the level of talent you’ve been able to attract, considering that expertise in these areas may not currently exist within the DOD?

Jason Rathje : We just closed our first round of applications for the first-ever capital markets position inside the Department of Defense. The outpouring of interest was phenomenal. We had people from top banks, top consulting companies, and a wide variety of folks in the capital market space apply for the position. We’ve had a lot of support from the department to start bringing people on board. This is a key area for growth, and we’re looking for individuals with talent in federal credit programs, private equity, venture capital, and credit financing. We want to prove that our model works and catalyze investment in these areas. If you’re interested, we will be hiring more and growing the team. It’s a great opportunity to build something from the ground up, whether you’re inside or outside the building.

Hondo Geurts : Can you give us a sense of scale for this program? What’s the order of magnitude we’re talking about in terms of funding?

Jason Rathje : When you look at other federal credit programs like the title 17 loan innovative technology loan guarantee program that the Department of Energy ran, there were $45 billion of available debt financing. The SBA program we’re partnering with has $5 billion to commit annually to the SPI C program. These are investment dollars allocated differently in the President’s budget. It’s not about getting a few billion dollars in the defense budget. It’s about what budget authority Congress believes we can operate with effectively and efficiently, with a low enough risk profile to return the capital to the Treasury Department and the taxpayer. If we’re successful and build the right mechanisms, we’re talking about orders of magnitude where a few hundred million dollars of appropriation can provide risk financing for billions of dollars of available debt financing dedicated to partnerships with the private sector. We ran a small experiment with ABAP works, crowding in $1.50 of private capital for every government dollar. With hundreds of millions of dollars, we can talk about billions of blended finance and public-private capital to support these industries.

Hondo Geurts Would these programs offer a better way to finance large capital infrastructure instead of using appropriated funds?

Jason Rathje: Yes, when the infrastructure or production lines can be used for multiple markets and customers beyond the DOD, there are ways to finance them without using appropriated dollars. By being the marginal dollar to increase capital flows, we can attract private investors and balance the funding strategies for the department. Private capital can play a significant role in infrastructure programs and domestic manufacturing.

Lauren Bedula How does OSC work with innovation hubs? How does it fit together?

Jason Rathje : No. Absolutely.  I appreciate making that delineation. OSC focuses on core finance and capital markets. We consider ourselves a capital markets organization. As part of the executive branch, we deeply consider how the market performance impacts our national security. We think about the economic instrument of national power. In the past, the Department of Defense hasn’t focused much on the economy, particularly in technology, infrastructure, and manufacturing. However, at OSC, we realized the opportunities in these areas during COVID. We recognized that we were well-equipped to tackle this issue, even though it was outside our purview. Our organization focuses on real innovation work, driving efficiencies for warfighters and meeting operational needs. But we don’t concentrate on infrastructure, domestic manufacturing, or capital flows to undercapitalized areas. It’s inherently different. The secretary is establishing a strategic capital Advisory Council, similar to an internal board of directors for OSC. It’s co-chaired by the undersecretary of Research and Engineering and the undersecretary for acquisition and sustainment. They used to be one organization, but now they’re two, and it’s important to work with both our ans colleagues and our r&d colleagues to ensure investments align with the department’s priorities. The council also includes the undersecretary for policy, Cape, Comptroller, the services, and the joint staff. We want to tie our investments into budgeting decisions and help balance tough choices. Private capital should be a core funding strategy for the Department of Defense.

Hondo Geurts : Let’s get more practical. We recently had a guest involved in dual-use stat aircraft and regional aircraft production, which could potentially support the DOD. How would a company like that interact with your office? How should they consider it as a potential option with their investors?

Jason Rathje : As we establish these programs, we want the community to understand the available financing options, similar to financial products offered by banks like mortgages, car loans, and savings accounts. Loan programs have eligibility criteria, just like getting a mortgage. We want to make it clear to companies and investors which programs exist and what the eligibility criteria are. Our goal is to be transparent and help companies determine if they are eligible or not. We aim to limit wasted time and effort by avoiding situations where they won’t be eligible. But if they are eligible, we will assess the associated risks. It all comes down to a fundamental calculation. The more Congress and the department are willing to take risks in certain areas, the more appropriated dollars we will allocate. On average, these programs carry a risk profile of 2% to 10%, meaning there’s a 10% chance of default. For higher-risk early-stage companies, we will engage in fewer deals annually. For less risky areas, we can do more deals. We want to ensure companies are aware of their eligibility, available options, and the types of financing they can pursue.

Lauren Bedula : Jason, thank you for joining us. Many finance professionals have shown interest in collaborating with the DoD to support national security. Your office sends a clear signal about the importance of collaboration. Thank you for clarifying your priorities, explaining what the office will do, and how the private sector can contribute.

Jason Rathje : Thank you again for having me on. I really appreciate it.

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