Could Venture Capital Be the New Frontier in Great-Power Competition?

The letter landed on the desk of Vannevar Bush. An electrical engineer by training, Bush had been tapped by Roosevelt to helm the OSRD, where he oversaw the profusion of civilian expertise into the military hulk. Under his leadership, 30,000 scientists and researchers throughout the country mobilized for the war effort, leading to the development of powerful new technologies—from radar and amphibious vehicles to the manipulation of uranium atoms, eventually leading to the creation of the atomic bomb. In a cover tribute, Time magazine christened him the nation’s “general of physics.”

In 1945, Bush sent his recommendations to the president in a report titled Science, the Endless Frontier. Allied victory was imminent, and Bush aimed to devise a blueprint that might usher in a boom of postwar research. In an eloquent introduction, he bound the pursuit of national prosperity to the quest for scientific progress, summoning a portrait of the scientist as pioneer, blazing forward to expand the frontier of knowledge.

But inspiration could not do it alone. Basic research was the seed of technological innovation, he wrote, yet “we cannot expect industry adequately to fill the gap.” He called for a renewed government commitment to replenish the coffers for science where the market would not. The report’s prescriptions laid the basis for the National Science Foundation and, in the decades to follow, paved a lasting triumvirate among academia, industry, and government that would be credited with incubating many of the technological advancements clinching the American century.

Not long ago in this century, attorney Jordan Blashek studied the document and absorbed its consequences. He had come of age in a globalized world, where technology answered to the flow of capital holding no values, borders, or allegiances. But in 2021, as an executive at Schmidt Futures, the philanthropy started by former Google CEO Eric Schmidt, he absorbed a changing world. “The U.S. venture-capital system has been the greatest engine of value creation, maybe in history,” Blashek told Foreign Policy. “That doesn’t mean it’s infallible.”

In Blashek’s view, the Chinese model—deploying government funds to build strategic sectors and nurture domestic champions—highlights where the U.S. approach is most lacking: crowding investment and talent into some areas while leaving deserts in others. Weakness and complacency have set in. “We’ve had the luxury over the last 40 years of saying American innovation is the best in the world,” he said in a podcast interview. Today, he no longer believes that is the case.

A former U.S. Marine twice deployed overseas, Blashek had answered the nation’s call before. He saw the chance to do so again. An idea hatched and grew, and it launched this summer as America’s Frontier Fund (AFF)—named in homage to the brainchild of Bush. Just as Bush’s report had stirred the government to foot the bill for science, America’s Frontier Fund seeks to enlist the country’s private capital markets for the crusade of its economic rejuvenation.

Billing itself as the nation’s “first non-profit, deep-tech investment fund,” the organization’s stated mission is to “advance U.S. and allied leadership and protect democracy around the world.” With deep ties to the U.S. defense community, flagged by some as ripe terrain for self-dealing, it seeks the American advantage in a bifurcating world. In such a world, etched by great-power competition, financial returns no longer rank above values and venture capital can no longer afford to be mercenary.

China invests for power, Blashek said, whereas the United States invests for profit. Success for America’s Frontier Fund is to do both.

Vannevar Bush—the U.S. electrical engineer, inventor, and head of the Office of Scientific Research and Development, which directed scientists during World War II—is seen circa 1943. Hulton-Deutsch Collection/Corbis via Getty Images

ARD pioneered a novel form of financing: private equity-based investments serving risky start-ups that were neglected by the stock market and traditional banking sector. The approach would be tested and tinkered with until the right mix took off, manifesting over time into an indisputable pillar of the American growth engine.

Since the end of World War II, “the one thing that the United States was the leader in—no question—was venture-capital finance,” said James Brander, a business professor at the University of British Columbia. In the 1970s and 1980s, venture capitalists backed future titans such as Apple, Microsoft, and FedEx. In the 1990s, they minted the likes of Amazon, Netflix, and PayPal. In the new millennium, they facilitated the rise of the sharing and gig economies.

Through it all, the venture-capital industry swelled as its constraints fell away. In 1979, the U.S. Labor Department relaxed its “prudent man rule,” which had curbed pension funds from dipping into riskier assets. The year prior, the U.S. Congress had slashed the capital gains tax from 49 to 28 percent; in 1981, Ronald Reagan became president and further knocked it down to 20 percent.

The new administration’s policies heralded a bright new morning for venture firms. From an annual average of $42 million between 1973 to 1977, venture capital fundraising ballooned to $940 million in the half decade following—more than a 20-fold increase—while previous tenets of community and social responsibility eroded to a new ethos defined by “driving commercial ambition,” writes Sebastian Mallaby, a Council on Foreign Relations senior fellow, in his book The Power Law: Venture Capital and the Making of the New Future.

Venture capital, like the country that created and fostered it, thrived in freedom. So, too, did the era’s ascending political economy, which elevated market forces into virtues, replanted U.S. industrial centers to foreign lands, and sewed supply chains around the globe to shave cents off each component part. As constraints fell away, venture capitalists fanned out and spread around the world.

Their most lucrative landing was in China. American venture firms first arrived there in 2005, tapping a barren landscape and rapidly prompting an explosion in Chinese entrepreneurship, innovation, and wealth creation. From just $2.4 billion in 2008, venture funding for Chinese firms skyrocketed to more than $100 billion a decade later. In 2017, China surpassed the United States as the world’s top source of venture returns. The next year, China quartered 206 homegrown unicorns—private firms valued at more than $1 billion—three more than the United States. Last year, despite a weakened economy due to Beijing’s pandemic restrictions, venture activity in China hit a record $131 billion.

Shifting geopolitics have cast these achievements in a new light. Foreign capital flowed not only to Chinese social and delivery apps but also to technologies with military applications, both potential and proven. U.S. investors netted a windfall, observed Mallaby, while “China gained strategic industries.”

A DJI drone store is seen in Shenzhen, China, on Dec. 3, 2015.Stockyard/VW Pics/Universal Images Group via Getty Images

During the Trump administration, a growing awareness in Washington finally tipped into alarm. “Because of its disproportionate contribution to economic growth and innovation, venture capital has become a pillar of national power; it cannot be left out of geopolitical calculations,” Mallaby writes. In 2019, the U.S. government banned the military from buying Chinese-made drones or their parts. The legislation was a targeted shot at China-based DJI, the world’s leading drone manufacturer. Meanwhile, the U.S. Commerce Department has blacklisted a growing pool of Chinese companies for abetting atrocious human rights violations in Xinjiang, China—notably SenseTime, China’s largest facial recognition start-up. Both were among the legion of Chinese firms to receive backing from U.S venture capitalists.

Transactions once cushioned within the commercial realm have been increasingly dragged into the province of national security. During his final months in office, then-U.S. President Donald Trump signed an executive order blocking Americans from investing in firms linked to the Chinese military. Financiers called it a “historic” penalty on the U.S. capital markets.

Venture firms have developed a lucrative symbiosis with digital platforms and consumer technology—offering rapid surges to market and endless, low-cost scalability—while showing comparably less appetite for “deep” technologies.

In Beijing, the move hardly cast a ripple. According to a report by the Center for Strategic and International Studies, the Chinese government spends more on industrial policy than any other country in the world—around twice as much, in dollar terms, as the United States. The centerpiece of China’s industrial ambitions is the Made in China 2025 plan, announced by Chinese Premier Li Keqiang in 2015, which sights global leadership in 10 key high-tech sectors, from artificial intelligence and robotics to electric vehicles and aerospace.

To bankroll these goals, Beijing has turned to a policy instrument known as industrial guidance funds—also called “government” guidance funds—which blends state funding with private, equity-based management. With a funding target of $1.6 trillion, the funds have so far raised an estimated 60 percent—a sum approaching $1 trillion.

“We have no comparable financing channel,” William Bonvillian, a lecturer on technology policy at the Massachusetts Institute of Technology, told Foreign Policy. In the United States, government support for important industries can be traced back to U.S. revolutionary Alexander Hamilton. Beginning in the 1950s, military funding for the Defense Advanced Research Projects Agency (DARPA) famously laid the foundations for the modern internet; this year’s CHIPS and Science Act seeks to stimulate the domestic semiconductor industry. Yet the drivers of innovation have largely been treated as the domain of private industry.

The result is a forked economy, defined both by glut and blind spots. Venture firms, in particular, have developed a lucrative symbiosis with digital platforms and consumer technology—offering rapid surges to market and endless, low-cost scalability—while showing comparably less appetite for “deep” technologies—such as advanced manufacturing, biotechnology, and quantum computing—which often require significant upfront capital and longer periods to maturity. “We are losing our lead in technologies,” said Gilman Louie, chief executive of America’s Frontier Fund, at a congressional testimony in June. “This situation is unacceptable.” Last year, U.S. venture firms invested $9 billion in hardware start-ups, Louie told lawmakers, a fraction of the $124 billion that went into software.

“Venture capital has grown significantly, but its investment model doesn’t match hard tech,” Bonvillian said. “That’s a big gap in the system.”

Whereas most venture funds are locked into a custom of 10-year investment horizons, America’s Frontier Fund pledges “patient capital,” giving start-ups a longer runway to commercialize. Levine, a quantum physicist, points to the microelectronics sector, which got its start with the invention of the transistor in the 1940s. “It took 11 years to get from concept to discovery, then another 10 years and upward from transistor to integrated circuit, and then another five to 10 years to microprocessor,” she said. Today’s breed of venture firms would have looked to cash out well before.

The organization’s closest predecessor is In-Q-Tel, the venture arm of the CIA, created in 1999 to funnel government funding into key “dual-use” technologies, such as Palantir, a data-mining company, and the cybersecurity firm FireEye. Prior to taking the reins at America’s Frontier Fund, Louie led In-Q-Tel for seven years. Among his proudest achievements, he said, was building out its capacity to mobilize other investors. During peak periods, the firm managed to corral up to $20 of private investment for every government dollar. In the same way, Louie said, “we want to be the money that shines a light on these new opportunities, so the rest of the capital markets will follow us.”

Venture capitalists deal in projections of the future. Most attach to the same elements of prophecy: untapped markets, visionary founders, and inexorable trends. The successful quest is the one that ends in treasure. For America’s Frontier Fund, the treasure is overtly political, and its desired future shares the same priorities as the federal government.

Guiding the firm’s investment methodology—dubbed Frontiercast—are key government inputs that include the U.S. Department of Homeland Security’s guide to critical infrastructure, the White House’s list of critical technologies, and the Defense Department’s military and security updates. Among its assumptions, such a vision projects a zero-sum global economy and binds the United States’ preservation to its capacity for production and innovation. The traditional venture capitalist’s quest is rejected for the story of the state.

“Today, national security and economic competitiveness are very much linked,” said Levine, who led the development of Frontiercast. “The strength of the U.S. economy is the front line of the defense of our nation.”

U.S. President Joe Biden looks at a quantum computer as he tours the IBM facility with IBM CEO Arvind Krishna in Poughkeepsie, New York, on Oct. 6. MANDEL NGAN/AFP via Getty Images

Today, Raytheon Technologies counts 174,000 employees and a valuation of $126 billion selling defense products to U.S. and foreign militaries. Its influence reaches the highest rungs in Washington: In 2019, Trump nominated Mark Esper, a former Raytheon lobbyist, as his secretary of defense. The following year, U.S. President Joe Biden tapped retired U.S. Army Gen. Lloyd Austin, who sits on Raytheon’s board, for the same post.

In the twilight of his life, Bush offered a mixed assessment of his contributions. He reflected on his 80th birthday: “I do think the military is too big now.”

In each domain, a tool takes after its masters. Steering America’s Frontier Fund is a coterie of lieutenants proven in arenas of competition and conflict—whether military or commercial. Steeped in such views, the organization runs the risk of pooling resources into already swollen, defense-adjacent spheres—at the expense of other, more collaboration-oriented sectors like public health or green energy.

At the same time, its broad affiliation with top government, defense, and tech industry insiders has drawn scrutiny for potential conflicts of interest. Schmidt, the ex-CEO of Google who has cast himself as a central liaison between Silicon Valley and the Pentagon, played a key role in the firm’s conception and provided initial funding. Former U.S. Defense Secretary Ashton Carter sat on the board, and former U.S. National Security Advisor H.R. McMaster currently does. So does Michèle Flournoy, a former top defense official in the Clinton and Obama administrations, alongside former top executives from the CIA, Federal Communications Commission, and IBM.

“The prospect of a government contract, especially in the lucrative area of defense, could generate outsized gains for early investors,” warned a report by the nonprofit watchdog Campaign for Accountability. “It is also unclear if any safeguards could prevent AFF principals from profiting from their inside knowledge and ability to direct public investments.”

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In the business world, pledges to do well by doing good are cheap to come by. Few live up to both ends of the promise. Too much government involvement can also sink the effort—particularly in venture-capital investment.

Brander, the University of British Columbia professor, co-wrote a 2014 study analyzing the performance of government-sponsored venture-capital firms around the world. He found that most firms belonged in one of two categories. When venture-capital firms are established and managed by government employees, “their job is to invest in ventures perceived as being in the national interest—although often what that means is the political interest of whichever politicians are controlling it,” Brander said. “The record of those companies [in funding successful start-ups] is poor.” In Europe, government-led venture efforts crowded out more skilled private investors. After six years, the average European venture fund generated a negative 4 percent return.

The second approach is for governments to provide investments, tax concessions, or other forms of financial support to an otherwise privately managed fund. In those cases, “the actual record is pretty good,” Brander said. Launched in 1993, Israel’s Yozma, a $100 million government fund, paired generous state subsidies with regulations granting additional freedom and benefits to private venture operators. The result was a thriving venture ecosystem that ranks among the best in the world. “It is important to get the incentives right,” Brander said.

“You’ve got to be able to show it’s better to open up a factory here in the U.S. than in Shenzhen.”

America’s Frontier Fund fits neatly in neither mold. Its parent organization is organized as a 501(c)(3) nonprofit. Returns on investment flow to outside limited partners while the firm’s managers remain compensated on a fixed salary. An initial fund is in the early stages of fundraising from private investors, though future funds may separately receive public funding.

To date, America’s Frontier Fund says it has received no government funding. Since the passage of the $280 billion CHIPS and Science Act, it has submitted a public proposal to advise the government on semiconductor investments. “The government’s never really done this before,” said Kevin McGinnis, a special advisor to America’s Frontier Fund who previously worked in the U.S. Office of Management and Budget’s National Security Division. “They need new partners.”

The Commerce Department has announced plans to begin allocating funds next spring. Given the firm’s nonprofit structure, “we can play a more independent, neutral role,” said Blashek, the firm’s president. “We’re not just selling our own portfolio companies. Our interests are the national interests.”

Yet in an increasingly fraught business climate, decisions are unlikely to sort out so cleanly. “Government interests and private sector interests are often not aligned,” said Anupam Chander, a law and technology professor at Georgetown University. Recent years have witnessed escalating trade tariffs, export controls, and investment restrictions—manifestations of a broader U.S.-China “decoupling” most evident in the advanced tech sectors that America’s Frontier Fund is targeting.

“The private sector often wants to sell to as many parties as it can,” Chander said. “The government says, ‘No, no, no, please only sell it to our friends.’” Even Intel, which lobbied heavily for government subsidies through the CHIPS and Science Act, has chafed at state directives that might threaten its bottom line. “If Chinese customers want more chips from the U.S., we should say yes,” Intel CEO Patrick Gelsinger told the Economist.

A similar dynamic may also reproduce tensions internally. “I’m slightly concerned that a nonprofit [venture capital] will also be a noneffective [venture capital],” Mallaby told Foreign Policy. In his history of venture capital, Mallaby observed that even ARD, the Boston-based investment firm that gave rise to the industry, eventually succumbed to competition, in part due to its tradition of “disdaining financial incentives.” Doriot, the former military officer who ran ARD, told his portfolio managers: “Capital gains are a reward, not a goal.” Prized lieutenants decamped for more lucrative openings or to start their own outfits. By the 1970s, ARD had become a shadow of its former self. “If you take that carrot off the table,” Mallaby said, “there isn’t quite that hustle anymore.”

America’s Frontier Fund, in its premise, feeds on a different reading of people’s motivations. “There is one part of the country that believes in the value of greed,” said Steve Blank, a Stanford University adjunct professor who advises America’s Frontier Fund. “And a different part of the country that actually believes in the value of service.” Earlier in his career, Blank founded and ran a number of successful technology companies. For the past decade, he has devoted himself to educating public-minded entrepreneurs and start-ups. “I’ve spent time in both worlds,” he told Foreign Policy. “There are the best and the brightest who are in Delta Force, and in the Marines, and—yes—in venture firms who want to serve their country.”

Yet, framing it as such a binary might spell the enterprise’s undoing. “You can’t simply wrap yourself in the flag and hope the capital markets are going to be patriotic,” Louie said. Pushing out the frontier too far risks pulling away from the pack. The pack may not follow. It may retreat. It may fix on other horizons. Louie recognizes that the infallibility of free markets still dominates the American ethos. For America’s Frontier Fund, the real test is to show that the American heartland can, ultimately, still produce greater returns than China.

“You’ve got to be able to show it’s better to open up a factory here in the U.S. than in Shenzhen,” Louie said. Although plenty of businesses are continuing to invest overseas, he went on, “our bet is that there is more money to be made here.”