Connections Within the Defense Ecosystem
By Patrick Collins
The previous article in this series addressed small and medium sized enterprises, how the government takes on market as well as technical risk to support them, and how large firms often acquire smaller firms to absorb their innovations.
Those engaged in the defense innovation business know there are a multitude of organizations across the military services, joint department efforts, the private sector, and the non-profits. Some offices or programs are designed for researchers, some for start-ups, and others for everything from academics to multi-national corporations. Through my research, I found that a few key niches seem to group the overwhelming number of entities according to mission or theme. This article breaks down the throng into clusters focused on 1) General Research and Development, 2) Those with a specific software focus, 3) Network facilitators, and 4) Those with a venture capital role.
General Research & Development
Several government organizations provide research funding across the ecosystem. These research programs primarily reside within each of the military services but have expanded to include the new CIA laboratory announced in September 2020. Often, the branches of services will have several entities, but this is usually not wasteful duplication. For example, the Navy’s corporate laboratory, the Naval Research Lab (NRL), is technically a part of the Office of Naval Research (ONR) and conducts its in-house research. ONR also funds external research through grants at universities and elsewhere.
Most of the time, research and development is structured around prioritized programs and challenges. In such cases, an organization identifies areas they expect are important for the future and solicits companies to help provide desired capabilities. Organizations like DARPA act as early customers to young businesses, administering a cash injection to fund research and development. To qualify for funding, firms need to prove that they are sufficiently relevant to an existing program or a technological need. In the past, DARPA helped to launch such notable innovations as stealth, The Advanced Research Projects Agency Network (ARPANET) — which would eventually become the basis for the Internet — and many more. Today, challenge areas include, but are not limited to, the fields of energy storage, artificial intelligence, materials, and quantum computing.
As small businesses scale up, the government designates specific programs to provide them with early funding. One of the largest and best known is the Small Business Innovation Research (SBIR) program; and a closely related sister program is the Small Business Technology Transfer (STTR) program. SBIR/STTR’s goals are to encourage entrepreneurship and support both the defense and the broader commercial technological industrial base by providing early funding without taking equity ownership. In 2018, the SBIR program budget was $3.1 billion — $1.3 billion of which was distributed by the Defense Department, and the remainder by agencies including Health and Human Services, NASA, and the Department of Energy. SBIR and STTR can fund a firm through three phases of growth. The first phase offers awards ranging between $50,000 to $250,000 for up to one year as they prove the technical merit of a concept. Firms having advanced to phase 2 can unlock an additional $750,000 over a period of two years. Phase 3 has the potential to be the largest and longest lasting, but is limited to firms that will have only government contracts and would not otherwise be viable in the commercial economy — likely pure-play defense companies. A few organizations leverage SBIR funds — the Air Force’s T3 Transition Accelerator, for instance, by putting teams through a 10 week course culminating in a pitch day where they can win an SBIR award and gain exposure to military and commercial investors as well as customers.
Whereas SBIR has existed since 1982, the Defense Innovation Unit (DIU) is a more recent effort focused on supporting new defense technologies and the industrial base. There are a few things that make the DIU unique, including its headquarters. In addition to Washington DC, the DIU strategically decided to base out of Silicon Valley in order to encourage firms that historically may not have considered the DoD a customer, and have since expanded to Austin and Boston. DIU enables rapid prototyping and can have a contract to begin work completed within 60 to 90 days (fast by government standards). Furthermore, successful prototypes are then eligible for streamlined follow-on contract vehicles. In a reversal of traditional SBIR/STTR contracts seeking to spin technology out of defense, DIU seeks existing technology to bring into government applications. Congress increased DIU’s budget from $46.6 million in 2020 to $66.9 million in 2021, but funds can also be leveraged from defense services and agencies to execute more development funding.
Given the rise of the information economy and the associated need for the military to advance its software tools, it is no surprise that a cluster of outfits across the defense industry now fund and support coding improvements. The Air Force chief software office is responsible for DevSecOps as well as a software ecosystem for the service and the rest of the defense department. Within that software ecosystem, the Air Force runs several innovation hubs which seek to accelerate software improvements and adoption. In a fun nod to programming culture, many have pop-culture references for names such as Kessel Run (Star Wars) and Kobayashi Maru (Star Trek). Similar to these efforts, the new Army Futures Command set up its Software Factory in a concerted effort to attract technical talent in the Army as well as to support software development at the lowest tactical levels across the Army.
At the joint level, the Defense Department created the Joint Artificial Intelligence Center (JAIC) in 2018 in order to develop and scale artificial intelligence capabilities. Part of its mission is to engage with commercial, academic, and international partners.
Networking/ Connection Building
Separate from those organizations which seek to fund and develop new technologies and innovations, others within the ecosystem support the process by creating networks between the government, the private sector, and academia. Additionally, some of these organizations enable firms to leverage government infrastructure — such as testing ranges — while building relationships.
Within the DoD, a popular approach to wider collaboration is through the various WERX organizations. Under the umbrella of DEFENSEWERX, the department stood up a handful of innovation hubs operating through Partner Intermediary Agreements (PIA), creating non-profit organizations which engage academia or industry on behalf of the government. These entities bring together researchers, corporations, and customers in an effort to identify new approaches and accelerate technology transfer. As SOFWERX states on its website, their hope is to create a high “rate of return on collision” for all participants — the military benefits from solving hard problems and corporations benefit from the introduction to a customer. Ideally, by generating a creative environment for experimentation, the whole is greater than the sum of its parts. While not under the DEFENSEWERX umbrella, AFWERX performs the same mission for the Air Force and administers SBIR/STTR funding in new ways. Even the new Space Force is set to spin a SPACEWERX unit out of AFWERX this summer. US Cyber Command created its own PIA to establish Dreamport as a vehicle for prototyping and collaborating with the public, and in the space sector there is the Catalyst Accelerator. Above even the joint DoD level, there is a GOVWERX for the entire federal government that seeks to transition technology into a program of record.
The Navy lacks a ‘WERX’ organization but strives to achieve similar results through Navalx and its geographically based tech bridges serve as connectors across the Navy and Defense Department to disseminate lessons learned and best practices for supporting grass roots innovation. However, this lacks an investment ability. Collectively, these entities act like government-initiated communities of interest.
Related to these initiatives, the previously mentioned DIU oversees the National Security Innovation Network (NSIN). NSIN operates programs designed to facilitate national service from the civil sector, to promote collaboration with DoD, and to accelerate technology adoption. Part of those collaboration and acceleration efforts include connecting the department with venture capital.
Communities also form in the non-profit sector, peopled by those possessing a patriotic desire to improve how things are done. Their ranks include many current servicemembers, government employees, veterans, former government officials, and industry representatives. Our own Defense Entrepreneurs Forum, for example, seeks to promote a culture of innovation in the defense community through local networks, regular events, business partnerships, project sponsorship and facilitation, and a regular podcast. The Public Spend Forum takes a different approach — it sets out to make the defense marketplace more efficient by helping companies navigate the bureaucracy of government contracts.
Taking a page from the private sector, the government is also in the venture capital (VC) game. One of the earliest forays into the VC business was by the CIA when it stood up In-Q-Tel in 1999. In-Q-Tel targets near-ready technologies with investments of $500,000 to $3 million so as to help firms cross the valley of death and become successful parts of the defense industrial base. By signaling a willingness to invest in a firm, In-Q-Tel gives other VC firms confidence to do so as well, creating an 18-fold multiplier effect for the government.
To further leverage private sector venture capital, the Defense Department launched the trusted capital marketplace in November 2019. This is a new concept for the defense ecosystem designed to surge the amount of commercial investment available for both small and medium sized sensitive defense businesses. The pilot program pre-clears venture capital firms to invest in sensitive technologies without waiting for a security review. It is also planning expansions to both trusted international capital suppliers and foreign-based businesses, creating a global trusted market. The goal is not just to accelerate the growth of new firms, but also to provide an alternative option to foreign sources of capital that can — and do — buy equity in emerging defense technology to acquire their intellectual property. It is a direct response to competition with China for the technologies that may drive the defense capabilities of the future. As of July 2020, this public-private partnership has over 90 participating firms representing over $20 billion. Financing from the trusted capital marketplace will supplement the existing entities already mentioned and who have participated in AFWERX innovation events .
Finally, in the purely private sector, there are firms focused on providing venture capital to defense start-ups and/or acting as intermediaries by providing consulting services and arranging for introductions between firms and investors. These include organizations like Starburst Aerospace, Janes Capital Partners, and Second Front systems, among others.
Visualizing the Ecosystem
The graphic below organizes the many entities involved in the defense innovation space by where they sit in the R&D, Software, Networking, and Venture Capital niches; which organizations have acquisition authority; and how all these niches often overlap with one another. This is not an exhaustive list and the size of each entity is not reflective of its budget or importance. Not represented here are the thousands of private sector firms, including those successful without the help of any of these programs or networks. Hopefully, this depiction helps readers structure the industry in a useful way. Individuals trying to navigate the market may benefit from understanding where to go at different stages or where to find different types of skills and support.
Capturing graphically the complexity of the defense innovation ecosystem is challenging, and undoubtedly, readers may have alternative suggestions or ideas for improvement to this approach. Feel free to expand the conversation in the comments below and make this an interactive discussion to benefit the DEF community. For another visual representation of the ecosystem, the below chart represents the same information in a slightly different way for greater ease of interpretation.
Patrick Collins was a DIA intelligence officer for ten years and holds a master’s degree in security studies from Georgetown and an MBA from the University of Cambridge. He joined DEF in the spring of 2020 and is interested in defense innovation. The views expressed here are his own and do not represent those of any department or agency.
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