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Crossing the valley of death - Startups and US military

By Silicon Foundry

Startups working with the U.S. military face a “valley of death.” Here’s how innovation units are helping to bridge that gap.

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Emerging technologies are changing the nature of war—and they’re being adopted by America’s near-peer adversaries. In order to maintain its technological advantage and outpace countries like Russia and China, the United States military is investing in emerging technologies including artificial intelligence, machine learning, quantum computing, advanced air mobility, and microelectronics. According to Bloomberg, the U.S military awarded a record-breaking $445 billion in contracts in 2020. The Small Business and Innovation Research (SBIR) program, which funds startups and small businesses in order to stimulate technological innovation, last year awarded grants to 1635 U.S. firms working with the the Department of Defense (DoD).

Even though the U.S. military is committed to equipping its forces with emerging technologies, it can be challenging for technology startups and the Department of Defense to work together. The military technology acquisition process is long and bureaucratic. There can be extensive gaps of two years or more between the time that startups are first granted a prototype award and the time when the military adopts a solution and issues a contract. Defense companies often refer to this period as the “valley of death.”

“Startups that successfully fulfill innovation contracts don’t automatically scale,” explained Mrinal Menon and Jeff Decker in a recent Fast Company piece. (Menon is a Stanford MBA candidate and former Naval officer; Decker runs Stanford’s Hacking for Defense Project and is an Army veteran.) “Instead,” they wrote, “[startups] must still compete for funding in a formal budgeting and acquisition process before being eligible for widespread adoption. This ordeal takes two years or more, during which startups should anticipate little or no revenue as they try to push their product through the bureaucracy.”

That’s a tough sell for startups that are accustomed to operating quickly and are under pressure from investors to generate revenue. It also impacts the DoD’s ability to work with technology companies in the long term. Research from The Center for Strategic and International Studies shows that between 2001 and 2016, 60% of new entrants into the federal contracts market exited after three years. An ecosystem of DoD-led innovation groups aims to change that by closing the gap between startups and the military in order to foster innovation and ensure that the DoD has access to the leading-edge technologies it needs.

There are dozens of DoD innovation groups, each with different value propositions, approaches, and funding sources. The Defense Innovation Unit (DIU) was created by the Obama administration in 2015 in order to accelerate the development and adoption of commercial technology for military use and create stronger relationships between Silicon Valley and the Pentagon. The DIU works with all branches of the military. It is currently led by Michael Brown, the former Symantec Corporation CEO who co-authored a Pentagon study that identified Chinese investment in American emerging technology startups as part of a broader technology transfer effort designed to fortify the Chinese state.

Brown told Politico Pro earlier this year that the DIU has made a concerted effort to scale. The organization now has dedicated teams that identify critical national security problems and scour the innovation ecosystem for commercial solutions with military applications. But he said there’s still work to be done to make it easier for startups and the DoD to work together.

“While I’m very proud of what we’ve done at DIU, we’re not frictionless compared to [technology companies’] other customers,” Brown told Politico Pro. “There are still things that make it a little more difficult working for DoD than other commercial customers they might work with. So we’re continuing to try and break even more barriers down so that more companies will consider us.”

One way to break down those barriers: put innovators and Armed Forces personnel together in the same space. That’s what Capital Factory, an innovation hub with offices in Austin and Dallas, Texas, is doing at its Center for Defense Innovation.

“Our goal is to go beyond bridging the “Valley of Death” and activate the existing Texas ecosystems that can contribute the necessary substance to fill in the valley,” said Jorge Manresa, CVP of Industrial Capacity Expansion for Federal and Defense Programs at the Center for Defense Innovation. “The symbiotic relationships we create between our national security components, the startups, academia, investors, as well as state and local non-profit resources, can work to create a unique collaborative ecosystem to overcome many of the known barriers to entry.”

Branch-level innovation units also aim to make the military acquisition process easier, faster, and more transparent for technology companies. Army Applications Laboratory (AAL), which works out of Capital Factory’s offices in Austin, is the Army’s innovation unit. Their model: assemble cohorts of companies and task them with solving Army problems. Dr. Casey Perley, AAL’s Director of Insights and Analysis, told Silicon Foundry that the organization’s goal “is to get the best technology to the warfighter. We have to break down barriers so that companies that haven’t traditionally worked with us can share their ideas.”

AAL identified three barriers to partnerships between the Army and technology companies: access, transparency, and speed to capital. The organization works to overcome them by posting calls for proposals on social media, simplifying and expediting the application process to participate in its programs, and being upfront with companies about the path to revenue. AAL made its contracts deliverable-based, “which is a big deal,” Dr. Perley said, “because it allowed companies to invoice their first payment the second week they worked with us. That meant that companies weren’t paying out of pocket to work with the DoD.” AAL also created SPARTN SBIR, a program that connects technology companies to SBIR funds, because those dollars are, in Dr. Perley’s words, “incredibly flexible”—there are fewer requirements for SBIR funds, and budget cycles aren’t determined years in advance. Dr. Perley points to AAL’s recent Fire Faster cohort, which sought to automate the process to reload self-propelled Howitzers, as a success. Fifteen participating companies received $200,000 in funding and were given eighteen weeks to develop a concept brief and present it to Army stakeholders. The companies spent time at Army base Fort Hood, where they discussed their ideas with Army personnel and saw a field artillery battery fire live in order to gain a deeper understanding of the problem they were working to solve. At the end of the program, five companies—most of which had limited or no experience working with the DoD—received direct-to-Phase II SBIR contracts to build prototypes. “To us,” Dr. Perley explained, “that showed that if you level the playing field and reduce these barriers to entry, non-traditional companies can really shine.” The prototyping process can take 18 months to two years to complete. Since AAL is just two years old, it remains to be seen whether any of its program participants will go on to gain longer-term contracts and have their technology widely adopted across the Army. “Technologies from two of our five completed projects are being used by soldiers right now,” Dr. Perley said. “They haven’t been adopted at scale yet, but there’s been additional revenue for those companies, and they’ve made that impact on the war fighter that is our ultimate goal. While we don’t have the data to show transition at scale, because we’re too young, we do believe that all of our metrics are pointing towards a lot of our technology continuing to have that transition potential.” When it comes to the DoD’s broad quest to adapt emerging technologies, Dr. Perley is hopeful. “The calls for flexibility in acquisition, the calls for being a better business partner, aren’t just coming from the innovation units. It’s coming from people all the way to the top. It’s coming from people in Congress. I believe it can be done.”