Growth Credit for the Defense Industrial Base: Unlocking Private Capital for Small Business Scaling

A Practitioner Perspective on Mobilizing Private Capital Frank Finelli, Senior Advisor, The Carlyle Group; Tanveer Kathawalla, Managing Partner, Pioneer 1890; Michael Bruno, Managing Partner, Elrose Capital

BENS brings practitioner perspectives from the business community to the nation’s most pressing security challenges. Through our Mobilizing Private Capital (MPC) campaign, we’re translating that understanding into action.

The below perspectives and recommendations emerge from BENS’ inaugural MPC Panel Series discussion on Financing the Arsenal of Democracy, featuring three practitioners who operate at the intersection of national security and private finance. BENS will continue to feature experienced members discussing ways in which private sector can innovate and mobilize in support of U.S. national security.

Introduction

As China’s industrial base continues to outpace America’s in scale, speed, and civil-military integration, senior U.S. national security leaders should focus on mobilizing the depth and sophistication of American capital markets—one of the United States’ most underutilized strategic advantages. To counter China’s unified control of its defense industries, government and private sector leadership should focus on injecting capital to where it matters most: the small and mid-sized American businesses that form the backbone of the defense industrial base.

The Practitioner Perspectives in Brief

The United States must expand the range of financial instruments available to early-stage and small defense businesses by pairing venture capital with growth credit, specifically through scaled use of the Small Business Investment Company Critical Technology (SBICCT) program, a public-private lending mechanism that deploys government leverage alongside private capital to deliver senior secured debt to small manufacturers at rates that would be otherwise unavailable.

Unlike venture capital, which demands 20–30% returns to compensate for the high failure rate of early-stage risks, growth credit can deliver capital to revenue-generating, trajectory-positive companies at 10–15% net returns to investors, lowering the effective cost of capital while preserving founder and early investor equity. For small businesses that make the widgets, machine parts, and subcomponents the Department of Defense can’t source at scale, this instrument represents a critical and largely untapped bridge between prototype and production.

The Strategic Context

The United States has the world’s largest economy and the world’s deepest capital markets, with over $100 trillion in debt and equity combined. Yet in the domains that matter most for national security, America is falling behind.

China’s defense industrial base is not merely a peer competitor. In shipbuilding, China produces over 200 times the annual tonnage of the United States. The world’s largest “defense” companies by revenue are not Lockheed, RTX (Raytheon) Corporation or Northrop Grumman, but China’s Aviation Industry Corporation of China (AVIC) and China State Shipbuilding Corporation (CSSC), which each generate over $100 billion annually.*

China’s advantage is structural, with its domestic civil-military fusion strategy ensuring that its largest publicly-traded commercial manufacturers are simultaneously optimized for military surge production. Internationally, more than 200 Belt and Road agreements have secured bilateral financial relationships with a vast majority (more than 150) of the world’s 193 nations, assuring global supply chains and significant involvement in foreign markets. Meanwhile, China has simultaneously weaponized the periodic table, dominating key segments of the global critical minerals supply chain (accounting for roughly 90 percent of rare earth processing) while it increasingly plays a leading role in the production or refining of many of the approximately 50 minerals the U.S. Geological Survey designates as critical.

Set against this competitive global backdrop, U.S. national security challenges cannot be ignored. A Defense Science Board study completed in 2025 found three persistent failures in the American industrial base: it is too small, accounting for merely one-third the scale of China’s in many sectors; it lacks mobilization capacity, including and especially the ability to surge from commercial to military production; and its supply chains are fundamentally vulnerable, with thousands of weapon system components sourced from single suppliers—some of them Chinese.

The United States cannot manufacture its way out of these problems through appropriations alone. But it can leverage what China cannot replicate: the sophistication, breadth, and depth of American capital markets.

The Market is There, But More Growth Credit is Required

Over the past decade, venture capital has awakened to the defense technology sector. U.S. venture capital deployed $339 billion across more than 16,700 deals in 2025 alone, the second-highest annual total on record. And from 2022 to 2025, well over $150 billion in dual-use venture funding flowed into more than 300 firms — spanning hypersonics, quantum computing, autonomous systems, and next-generation manufacturing. The Silicon Valley Defense Group estimates that over $70 billion in venture capital has been invested in defense technology companies over recent years.

This is genuinely good news, as it exemplifies increasing private sector commitment to advancing the science and technology that supports our warfighters. In the Reagan era, for example, American scientific funding came in roughly equal parts from government and private sources. Today, approximately 80% of scientific funding now comes from commercial sources. Private capital is developing technology faster and at greater scale than government programs alone ever could.

But the venture capital model has a structural problem when applied to defense manufacturing. Venture funds operate on a power law: they need their winners to return 10x to 20x on invested capital to cover the inevitable losses in a comprehensive portfolio. That math works when companies can scale fast in low-capital-expenditure environments, like enterprise software. It breaks down when a company needs $50 million to $150 million in upfront investment to build a factory capable of producing 1,000 drones per month before a single government contract is in hand.

The result is a well-documented “valley of death”: the funding gap between prototype development and full-scale production requiring companies to invest heavily in manufacturing capacity before securing reliable government procurement revenue. Even celebrated success stories such as SpaceX and Anduril survived early-stage capital gaps primarily because their founders had exceptional personal resources. Few companies have similar access to such a bridge over the dangerous valley.  

Meanwhile, the DoD’s contracting timelines rarely align with the 12-to-18-month fundraising cycles that keep venture-backed companies alive. Less than 1% of DoD’s $450 billion annual procurement budget currently reaches venture-backed companies. And with venture dry powder (roughly $300 billion in 2025 alone) competing against the voracious capital appetite of AI companies offering faster growth trajectories, defense-focused startups increasingly find themselves at a significant—but understandable—disadvantage.

What this illustrates is a simple problem set: the ecosystem is missing a lower-cost, patient capital instrument for companies that have moved past the technology risk stage but have not yet achieved the revenue profile required for conventional bank lending: growth credit.

A Possible Solution: Growth Credit and the Small Business Investment Company Critical Technology (SBICCT) Program

Growth credit occupies a critical middle ground in the capital stack. Where venture equity demands 30% returns for early risk, and large private credit funds writing $100 million-plus checks have no appetite for the lower middle market, growth credit lenders providing $5 million to $25 million in direct loans can be structured to deliver 10–15% net returns to investors while providing affordable, non-dilutive capital to companies that need it most.

The critical public-private mechanism that enables this at scale is the Small Business Investment Company Critical Technology (SBICCT) program that was originally created via a memorandum of understanding between the Small Business Administration and the Department of Defense in 2023. Its structure is straightforward but its leverage—and its potential—is powerful.

For every dollar of private capital a licensed SBICCT fund raises, the federal government provides two dollars in debt at the 10-year Treasury rate. For example, a fund that raises $1 from private investors can deploy $3 to a portfolio company, with the government’s $2 costing approximately 5%, and the private dollar earning the spread above that. At a 10% cash-on-cash lending rate to portfolio companies, investors in the fund earn senior credit returns of approximately 15% net—a compelling yield for a senior secured instrument.

Critically, the SBICCT license comes with non-financial benefits that dramatically reduce risk and increase portfolio company success rates. Licensees gain streamlined access to national laboratories, support for portfolio company security clearances, and direct access to principal directorates within the 14 critical technology areas the DoD has designated as priorities.

The program’s definition of “small business” is also deliberately broad. A manufacturer with fewer than 1,500 employees qualifies regardless of revenue, meaning the program can serve companies that are operationally mature but still capital-constrained by conventional banking standards.

Nevertheless, the Challenges are Substantial…

Despite its promise—and the potential of the SBICCT—growth credit for defense small business faces structural obstacles that the market has not yet fully solved.

The chicken-and-egg problem. Growth credit requires a clear path to debt service, usually in the form of revenue, or at minimum a credible contracted offtake. But DoD contracting timelines are notoriously slow, and the Department will not typically award a production contract to a company that does not yet have manufacturing capacity. But there’s a Catch-22 inherent in this requirement: companies cannot build capacity without capital. This is not a theoretical problem: it has stalled real companies with real technology at the cusp of scaling.

The Silicon Valley Bank gap. The collapse of SVB and First Republic in 2023 eliminated what had been a large and relatively flexible source of venture debt for early-stage technology companies. Non-bank lenders have been slow to fill that void at the lower end of the market, and conventional banks remain unwilling to lend against choppy or government-dependent cash flows.

Capital concentration. Even within the venture ecosystem, consolidation has created a winner-take-most dynamic. The top 50 venture firms now capture approximately 80% of new LP commitments. Megafunds like Andreessen Horowitz, which has grown to over $15 billion in total commitments as of early 2026, can support companies from seed through growth, but they are not optimized for the slower-burn, longer-contract-cycle realities of defense manufacturing. Companies that are not among the early winners find themselves effectively shut out.

Acquisition process friction. The DoD’s acquisition system remains misaligned with private capital timelines. Multiple overlapping programs such as the Small Business Innovation Research (SBIR), Small Business Technology Transfer (STTR), Defensive Innovation Unit (DIU) contracts, and the Office of Strategic Capital all signal different things to different investors, creating confusion rather than confidence. Non-specialist investors lack the vocabulary to assess what a given contract signal means for a company’s trajectory, which depresses interest in the space and inhibits optimum uptake of the valuable resources.

The dilution dilemma. For founders who have already given up significant equity through early venture rounds, raising $50–150 million in additional equity to fund manufacturing scale-up would dilute them from a reasonable ownership stake to single digits, eliminating the financial incentive that justified the original risk. Debt, structured appropriately, preserves founder alignment and rewards early equity investors rather than washing them out.

…But There is a Path Forward

Despite these headwinds, practitioners identified several actionable priorities that can convert these challenges to opportunities.

Increase uptake, expand and standardize the SBICCT pipeline. The SBICCT program represents exactly the kind of public-private partnership that can direct lower-cost capital to the critical middle of the defense industrial base. But awareness among small manufacturers is sporadic and inconsistent. For example, in states like Oklahoma and West Virginia, which host tens of billions in aerospace and defense industrial activity but have limited access to high-finance capital markets, awareness of these resources remains low.

Not only should awareness of existing programs be increased among key investors and companies, but the SBA and DoD should consider expanding the program beyond its current parameters to include additional product types. This could include, for example, equipment loan programs that allow small manufacturers to finance capital purchases without requiring full EBITDA qualification—a program that would reach companies that are operationally ready but financially ineligible under existing criteria. Additionally, simplified licensing pathways would lower the barrier for growth credit funds looking to deploy into the lower middle market.

Institutionalize venture-credit collaboration. Venture capital and growth credit are complementary instruments. Equity investors should build standing relationships with growth credit providers the same way private equity firms maintain relationships with preferred bank lenders. Bringing credit into the capital raise early (as a dilution-management tool rather than a last resort) preserves equity upside for founders and investors while extending runway and enabling facility investment. This requires education within the venture community and proactive partnership-building by growth credit providers.

Consolidate the demand signal. A credible, consolidated statement of DoD manufacturing requirements (i.e., how many drones, what specifications, what volume over what timeline) would allow growth credit investors to underwrite on contract risk rather than technology risk. The current fragmentation of programs and signals across multiple commands and innovation offices makes it difficult for capital allocators to construct theses. Consolidation, or at minimum a common taxonomy of what different contract types signal, would materially expand the pool of investors willing to engage in the defense technology space.

Conclusion

The United States’ single greatest strategic asset in its competition with China and other global competitors is the depth and sophistication of its capital markets. But that advantage only translates into national security capacity if the right financial instruments reach the right companies at the right moment in their lifecycle.

Venture capital has come to defense technology in force, but more can be done. The next step is building the credit infrastructure to help the companies venture has seeded to actually produce and compete at scale, and to build the factories, the production lines, and the supply chain—all without requiring founders to give away the businesses they created in exchange for the capital needed to build.

The SBICCT program is a promising foundation. Growth credit platforms operating in the lower middle market are beginning to demonstrate the model. What is needed now is the ecosystem alignment between equity and credit investors, between DoD demand and private capital supply signals, and between federal lending programs and the small American businesses they were designed to serve, toward a singular purpose: make the capital ecosystem work at the speed and scale the national security environment demands.

Frank Finelli is a Senior Advisor at The Carlyle Group and a BENS Board Member with over 25 years of service to the organization. Tanveer Kathawalla is Managing Partner at Pioneer 1890, focused on acquiring and modernizing legacy aerospace and defense companies for the next-generation defense industrial base. Michael Bruno is Managing Partner at Elrose Capital Management, a growth credit platform providing direct lending to defense industrial base companies within the 14 critical technology areas.

*These totals reflect combined revenues from large, state-owned conglomerates that include substantial commercial and industrial activities; these state-owned enterprises are opaque, and defense-specific revenue is not publicly disaggregated. By contrast, U.S. firms such as Lockheed Martin report predominantly defense-related revenue with transparent financial disclosures. In 2025, Lockheed’s revenue exceeded $65 billion—nearly exclusively in defense-related revenue.

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