DIUx 2.0 Should Focus on Forging Pathways for Innovation

June 8, 2016

Secretary of Defense Ash Carter’s announcement earlier this month outlining a new “iteration” of the Defense Innovation Unit — Experimental (DIUx) sent an important and encouraging signal to entrepreneurs, technologists, and investors who aim to do business with the Department of Defense (DOD). Carter’s wise decision to double down on the DIUx, despite pressure from members of Congress and other traditional defense firms, represents a real glimmer of hope for startups that have long been frustrated by the Pentagon’s slow, complex, and opaque acquisition system. Empowered with a new leadership team, a bolstered budget, and a direct line to Carter, the DIUx must now step up and deliver.

The DIUx’s top priority should be defining clear pathways for innovative commercial technology firms to access the defense market. Creating these pathways won’t be easy and will require a careful combination of leveraging the portions of the acquisition system that do work, as well as leading the charge to fix the parts that are broken. Fortunately, there are groups both inside and outside the Pentagon, such as the Senate Armed Services Committee (SASC), who are already taking steps in the right direction. The DIUx should serve as a catalyst and champion for these ongoing reform efforts and also work to stitch together the various new and existing ‘innovation’ programs to form clearly defined pathways. These pathways will serve to better align incentives between buyer (the DOD) and seller (the thriving ecosystem of innovative U.S. firms). They will also outline how a startup that provides a valuable product or service to the Department of Defense can both capture meaningful revenue quickly and grow that revenue over time.

Unfortunately, the current market dynamics are a long way from fostering this mutually beneficial cycle.  Over the last decade, DOD leaders have wisely recognized the imperative to access the innovation coming out of commercial firms. As Secretary Carter explained, “Since creating DIUx, it’s become even clearer to us how valuable emerging commercial technologies are to military systems and operational concepts.” However, the Pentagon has yet to successfully create the market conditions to do so in a repeatable and scalable manner.  During my time leading government-focused teams at several technology startups, I’ve experienced firsthand the numerous challenges within the system.

First, the DOD has historically been risk averse when it comes to procuring technology. Both the legal framework undergirding the defense acquisition system and its organizational culture are biased heavily towards risk avoidance. This encourages decision-makers at every level to choose the safer option, often choosing known incumbents over disruptive startups or keeping costly, failing programs of record alive for far too long.  Hopefully, as Ben FitzGerald and Loren DeJonge Shulman recently argued, Carter’s bold decision to shakeup the DIUx will send a message that failure is acceptable, as long as the Department learns and adjusts quickly.

Second, the barriers to entry for “non-traditional” commercial firms to access the defense market are extremely high.  In order to have a real chance of successfully winning business with the Pentagon, startups must make significant upfront investments to hire knowledgeable staff, achieve technical and financial compliance with government regulations, undergo rigorous vetting, and compete in the cumbersome bid and proposals process. Additionally, it’s virtually impossible for startups to interact directly with DOD leaders and mission owners, making it difficult to understand the true nature of the challenges they are trying to solve and for those users to be aware of emerging innovative capabilities

Third, the acquisition process is painfully slow. This challenge is the one most frequently cited by entrepreneurs who have worked with the Department of Defense, and even senior leaders recognize it is a serious problem. Stephen Welby, Assistant Secretary of Defense for Research and Engineering, recently explained:

If you’re a company…in early stage funding, you can’t wait for us. While we do due diligence and put you through a formal process it takes six months…to [even] get to the first conversation.

For venture-backed companies especially, this time-to-revenue issue is the most significant deterrent to working with the U.S. military.  Fortunately, Carter has recognized this issue as well, calling for the entire Department —led by the DIUx — to “move at the speed of business.”

Fourth, the DOD’s default is still to procure customized, government-owned solutions rather than commercial alternatives. While this might make sense for a certain set of highly specialized capabilities, such as submarines and fighter jets, it makes little sense for much of what the Department needs to procure today. Many of the technological components outlined as vital to the success of the Department’s ‘third offset’ strategy, such as deep learning systems, robotics and autonomous systems, and cyber defense and attack platforms, are already commercially available. Oftentimes they’re available better, faster, and cheaper than the traditional defense industrial base can produce. While doing so may incur some additional risk around intellectual property ownership and supply chain vetting, the DOD has little choice if it wants to gain access to these critical capabilities.

This list of challenges and impediments is daunting, often driving leading startups to avoid doing business with DOD altogether. I’ve personally witnessed many tough boardroom conversations focused on justifying major upfront investment to build government sales teams and explaining long, unpredictable sales pipelines to investors. A recent illustrative example was the decision by iRobot to spin off its government-focused business unit (now called Endeavor Robotics) under pressure from impatient investors. This decision is particularly concerning given the emphasis that the Department of Defense has placed on robotics and autonomous systems in its third offset strategy. Even those who continue to try to do business with the Pentagon have serious frustrations and concerns about the long-term prospects of the market.

These vexing challenges offer a perfect opportunity for the DIUx to step in and serve as a super-empowered catalyst, forging a new model that will encourage startups to work with DOD. In his recent speech outlining the creation of “DIUx 2.0,” Carter emphasized that the organization

will be a test-bed for new kinds of contracting with start-up firms. They’ll work quickly to execute time-sensitive acquisition programs. And they’ll move at the speed of business — we know how fast companies run here, and in other tech hubs around the country, and we expect DIUx 2.0 to run alongside them.

In order to make this vision a reality, the DIUx should clearly define innovation pathways that outline how successful startups can rapidly start and scale their defense business. When articulated properly, these pathways will enable startups to convincingly make the case to their investors that the upfront costs and risk associated with the defense market will result in meaningful revenue in both the short and long-term. In order to rapidly develop and implement these pathways, leaders at the DIUx should focus on the following:

1. Create more opportunities for innovative companies to understand the U.S. military’s top challenges, and for DOD leaders and mission owners to be exposed to promising startups. The direct exchange of ideas between those with a problem and those with potential solutions is critical to success, yet is currently very difficult given the multiple layers of bureaucracy built into the defense procurement and requirements processes. The DIUx tackled this challenge head on its first iteration, facilitating over 500 meetings between innovative companies and defense stakeholders, as well as a series of valuable competitions, hackathons, and informational events.  This increased engagement is a necessary first step to break down barriers, but it is far from sufficient to address the broader misalignment of incentives. Without the real possibility of commercial success (i.e. revenue and growth prospects), most startups will not continue to engage with the DIUx or other defense groups over time.

2. Be willing to pick some winners early. The Petagon must be willing to accept more risk up front and place bets early, vetting and investing in promising startups whose products or services align with DOD’s most critical needs. Building upon the success of the intelligence community’s effort to operationalize this model through In-Q-Tel, the Department should stand up its own venture-capital entity to compliment In-Q-Tel. The Pentagon already took a very positive step in this direction by requesting $40 million to invest through In-Q-Tel in its FY2017 budget proposal. The Department should move more quickly and aggressively in this direction, however, working to create a DOD-specific venture entity that would be part of a broader U.S. government-wide venture network. The Pentagon must also continue to leverage, and gradually expand, the set of effective rapid acquisition offices, such as the Army’s Rapid Equipping Force and the Air Force’s Rapid Capabilities Office, which proved highly effective during the last decade plus of combat operations.

3. Create meaningful transition vehicles for winners. Once a company has proven its ability to provide value during an early-stage project, DOD should reinforce and reinvest in this success. Currently, there is a major gap for startups trying to expand and transition from a successful initial project, such as an In-Q-Tel work program or R&D-funded prototype project, towards broader and deeper business with DOD. The DIUx should move aggressively to bridge this gap, establishing a set of flexible transition contract vehicles for startups that have proven their capability. In the spirit of reinforcing success, these contracts should be fast, flexible, and sole-source. At the same time, in order to balance against potentially doubling down on a bad bet, these transition contracts should also be relatively small, last no longer than two years, and be subject to normal oversight. Once again, the Department seems to be headed in the right direction here, having requested up to $65 million to fund “innovation set-aside” contracts aimed at non-traditional performers in their FY17 budget proposal.  Congress should wholeheartedly support, and potentially even expand, this effort in the upcoming National Defense Authorization Act (NDAA) legislation.

4. Leverage enterprise-wide contracts to share and scale successful capabilities broadly across DOD. After successfully delivering in the early stage and through transition contracts, commercial technologies should be made available across the entire department for anyone who requires the capability. Unfortunately, under the current stove-piped acquisition system, startups are often required to use dozens of different contract vehicles to sell the same product to different agencies and organizations within the Department of Defense, creating a mismatch between supply and demand and costing both parties valuable time and money. The Pentagon must move aggressively to change this dynamic, instead making proven technologies available through low-friction commercial-like procurement models. DIUx should develop and enforce best practices across the Department of Defense in order to transition proven commercial technologies to enterprise-wide vehicles, such as Blanket Purchase Agreements (BPAs), GSA schedules, or other similar vehicles. They should also work with forward-looking leaders on Capitol Hill to push through much needed reforms that focus on streamlining commercial acquisition methods within the Department. In particular, many of the bold reforms outlined in the SASC’s NDAA bill, such as bolstering rapid acquisition authority and streamlining regulations of commercial items, would be extremely valuable in better aligning incentives between DOD and startups.

In light of the growing set of security challenges around the globe, it is imperative that the United States maintain and expand its military technological advantage.  Accessing non-traditional, commercial sources of innovation must be a key part of this effort. Led by the newly reinvigorated DIUx and in partnership with allies on Capitol Hill and across government, the Pentagon must push to create clearly defined, measurable pathways for innovative commercial firms to access and serve the defense market. Only then will the Department of Defense, and by extension the entire country, fully benefit from the robust high-technology ecosystem within the United States.  This effort will not come easily, as it will inevitably challenge the status quo and many of the stakeholders who benefit under the current system. But if there’s one thing that defense leaders and entrepreneurs should be able to agree on, it’s that nothing worthwhile ever does.

 

Patrick Ryan is Senior Vice President at Dataminr, where he leads the public sector team. Previously, he co-founded Praescient Analytics and Second Front Systems, both focused on delivering cutting-edge technologies to the U.S. government. Patrick is a Term Member at the Council on Foreign Relations and was a Next Generation National Security Fellow at the Center for a New American Security.  Follow him on Twitter: @pkryan04

Image: DoD, Senior Master Sgt. Adrian Cadiz