A new law allows Pentagon to become venture capitalist to support domestic firms deemed vital to national security
SANTA CLARA, CALIF. -- When Jerry E. Crowley threw a lunch last fall for potential investors, he was looking for a few risk-taking venture capitalists to help out his company, Gazelle Microcircuits Inc., a small startup electronics firm here in Silicon Valley.

But instead of someone from the private sector, Crowley managed to tap a totally unexpected source of funds: the Department of Defense (DOD). What's more, the money came not in the form of a traditional research-and-development grant but as a direct investment that could, if Crowley's company takes off, actually yield a profit for the Pentagon.

The novel agreement is between Gazelle and the Defense Advanced Research Projects Agency, or DARPA, the Pentagon's R&D arm. It was made possible by an experimental program passed by Congress last year that allows...

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