war on the rocks

Commercial Accelerators and the Defense Department: A Blueprint for Collaboration

March 14, 2018

Three thousand two hundred and sixty-nine. This was the number of companies to graduate from more than 170 different accelerators across the United States and Canada in 2016. Since 2005, these short-duration programs, designed to expedite a company’s maturation, have helped their graduates secure over $19.5 billion in seed and early Series round funds.

Zero. This was the number of commercial accelerators the Department of Defense partnered with between 2005 and 2015. By last year, a few groups within the department had started to explore how these programs could be useful to national security innovation, but the interest remained limited. While private industry embraced accelerators, the department watched idly as its technological advantages eroded. The early failure to partner with commercial accelerators has resulted in a lost opportunity to shape future technologies today. Partnering with accelerators will give the Department of Defense access to emerging technologies and ideas, both early enough in their growth cycles and at a low-cost entry point. This will enable the department to connect with non-traditional defense companies and entrepreneurs, embrace risk as a means to long-term success, establish innovative resourcing avenues such as a loan program office, and mitigate foreign adversaries’ ability to secure next-generation technologies before U.S. warfighters do.

Why the Department Needs Accelerators    

The accelerator experience is an “intense, rapid, and immersive education aimed at accelerating the life cycle of young innovative companies, compressing years’ worth of learning-by-doing into just a few months.” An accelerator’s structure and technology portfolio can vary, but traditionally revolve around nurturing a selected group of companies known as a “cohort” for a fixed period. At a cohort’s initiation, accelerators traditionally provide a small amount of capital in exchange for equity. Even after a company graduates from the accelerator cohort program, the staff continues to provide direct support and guidance. A startup traditionally raises venture capital funds after graduating from the accelerator to further drive technology infusion and exponentially increase profitability. Three top accelerators alone — Y Combinator, TechStars and 500 Startups have 1,060 companies actively producing solutions within the commercial space.

Herein lies the benefit for the Department of Defense. Relationships with accelerators provide a sweet spot to enter the process late enough that a technology has moved toward commercial maturity, yet not so late that an adversary such as China would have already acquired this innovation by investing in the startup. As venture capital flows into the technology after graduating from the accelerator to expedite commercial usage, the department would have a time advantage relative to others, by already being aware of the technology’s application. For truly promising technologies, the department could provide funds to guarantee the technology’s continued maturation under the department’s oversight.

The considerably diverse technologies within accelerator portfolios can help solve national security problems. Accelerators can provide the department with technologies in the enterprise software and cyber domains; biomedical products by design; healthcare applications for the warfighter; autonomous systems and artificial intelligence for intelligence, surveillance, and reconnaissance; and myriad other applications. The accelerator community has the technology the department needs to solve current and future defense challenges. All that’s missing is the relationship.

 Some might argue the department already has an overabundance of technology and the real issue is how to develop it. A decade ago this argument might have been correct. But in today’s rapidly evolving technology environment, where ideas born in a garage materialize into technology that can threaten or benefit national security within months, the department must seek new ways to understand innovation early. From cyber security and artificial intelligence to synthetic biology, accelerators provide a non-bureaucratic, established, and continuous avenue for the Department of Defense to access innovation.

Accelerator companies can seamlessly enter the existing defense acquisition process at multiple points either as a competitive prototype or, if promising enough, under a rapid development and militarization activity. In addition, these efforts can augment the laboratory research and development efforts of the individual military services to help shape investment decisions early on and create a competitive technology landscape.

The current options startups have for working with the Department of Defense are highly imperfect. In many cases, companies have to submit complicated proposals, wait for long, drawn-out contract awards under continuing resolutions, and deal with unresponsive personnel. Based on my conversations with startups, the firms simply do not have the ability or the time to manage this bureaucracy. Most startups are broke. They are seeking to secure funding as quickly as possible to avoid bankruptcy, and the Department of Defense’s processes are glacial in comparison to the investment community’s. To the department’s detriment, Chinese investment has exploited this gap. Pursuing business with the Department of Defense has become not only unnecessary, but in many cases inconsequential, to a startup’s success.

Accelerators can provide the department a reprieve from these limitations by acting as a conduit between the government and startups. In fact, accelerators offer startups the ideal opportunity to expedite business through a resourced and networked environment. An accelerator’s responsibility is to establish a structure designed to drive firms towards profitable commercialization first and foremost. Under a partnership with accelerators, the Department of Defense would only be a collaborator, not the owner of the process. The department’s collaboration could range from embedding personnel as mentors or specifically contributing funds to the accelerator’s operations. By not limiting capital pipelines for startups early on, as the department may under budgetary constraints and contracting delays, accelerators provide an optimal roadmap for the department to participate throughout a startup’s efforts until the company achieves an exit, whether a merger or acquisition, an initial public offering, or a major defense contract. In any case, the department gains a valuable opportunity to help grow the technology base while developing trust with early-stage startups. Furthermore, the initial funding required to either prove or dismiss a technology’s value to the defense world under this scenario is a fraction of the cost of acquiring it. In this way, the department becomes a partner in pushing technology boundaries with marginal up-front investment costs.

Insiders use the term “Valley of Death” to describe technologies the Department of Defense declines to take past the late phase of science and technology. There are many reasons for a technology not to make this transition, but perhaps most perplexing is that the department does not embrace some of these failures. Taking risk early on can lead to disruptive technology breakthroughs. If the Department of Defense can take more risk and accept more failures earlier in the technology development process, the velocity of new ideas within accelerators can drive defense innovation. This philosophy facilitates an ability to engage with high-risk, high-reward accelerator startups to harvest the best and discard those not needed.

How Would Investing Directly in Startups Work?

The Department of Defense should initiate a loan program office to work in parallel with accelerators to fund startups, similar to how the Department of Energy Loan Program Office works with renewable energy investments. The department would only invest in technologies of interest, but unlike traditional grant programs, the loan program becomes self-sustainable at no long-term cost to the government. The Department of Energy counterpart was established under the George W. Bush administration to loan capital to industry for high-risk renewable energy projects and other efforts. To date, that office has loaned $34.2 billion, and is projected to break as reimbursements surpass the initial investment.

A Department of Defense loan office could focus on providing low- to medium-sized loans between $100,000 to$500,000 to startup companies, using an interest-based payment structure rather than extracting valuable equity from the startup as a shareholder. This provides a win-win, where the department obtains initial buy-in for technology as it matures at minimal costs, while start-ups secure highly beneficial capital terms, yet retain complete ownership. This is attractive to accelerators, as the vast majority secure equity from each company entering their program. No intellectual property would likely be exchanged, and if the Department of Defense wanted to capture the technology immediately, a follow-on defense contract could be offered to fast-track it to the warfighter. Competition with industry would be minimal as subsequent financial rounds would require venture capital or corporate investment.

At a minimum, the department can pursue technology reviews and investigations, also known as horizon scanning, across thousands of companies and portfolios. The National Defense University (NDU), where I am a student, is uniquely positioned to potentially play a role in the due diligence reviews for this program. This would directly align the servicemembers and civilians being trained as the department’s next strategic leaders with tomorrow’s technology. For example, my class recently visited the Pittsburgh accelerators AlphaLab and AlphaGear, affiliated with the State of Pennsylvania’s Innovation Works. It was a unique opportunity to directly engage startups within the accelerator model, to understand the possibilities, from autonomous systems to consumer products. Along these lines, individuals at NDU could work, and perhaps be embedded for a period of time, with accelerators to review technologies and provide feedback to department leadership.

Preventing Adversaries from Gaining the Edge

U.S. adversaries have benefited from the Department of Defense’s hesitation to enter early-stage investments. From 2010 to 2016, China invested $30 billion in early-stage technology through more than 1,000 deals within the United States. Similarly, Russian firms and government-aligned entities participated in over 300 funding rounds involving American startups in the past seven years. Many investments could have direct military application or can mitigate existing U.S. military advantages.

A White House white paper recently concluded that “government controls supposed to protect potentially critical technologies are falling short.” The Committee on Foreign Investment in the United States (CFIUS), which has jurisdiction over these issues, was never intended to address the brute force investment strategies that America’s adversaries are employing. China and others are simply buying startup technology to transfer American innovations to their homelands. Minimal investments in startups by China are very different than the multi-billion dollar acquisitions the committee traditionally reviews. Congress is seeking to expand CFIUS’s oversight, but a parallel strategy would be for the Department of Defense to enter the early stage investment arena to head off China and Russia’s strategy.

Several innovative groups within the Pentagon have, in fact, begun to individually pivot towards accelerator activities. In 2016, the Air Force launched a space accelerator in partnership with the National Security Technology Accelerator (NSTXL). This year, the service partnered with TechStars to establish an autonomous technology accelerator in Boston. An office called MD5, within the Office of the Secretary of Defense’s Manufacturing and Industrial Base Policy, seeks to create new communities of innovators to solve national security problems through an education, collaboration and acceleration model.

Most intriguing and revolutionary could be DARPA’s internal accelerator model. This model aids existing projects by attempting to establish commercial markets for transition if a defense market does not exist, and connect project graduates with investment. This overcomes the conundrum that futuristic DARPA technologies face: not having commercial opportunities and being brushed aside after government funding ends. As Congress and Department of Defense leadership explore acquisition reform, there is an opportunity to make accelerators a permanent component of the defense technology innovation ecosystem.

In the National Defense Authorization Act for FY2016, Congress established the Section 809 Panel to recommend ways to streamline defense acquisition. According to the panel, private industry sees defense acquisition as “a process that features excessive layers, tremendous amounts of paperwork, and timeframes that do not fit the way most firms do business.” Accelerators are a potential solution to this problem, helping the department forge enduring relationships with the most innovative companies the nation has to offer. These programs’ return on investment is unmatched anywhere within the Department of Defense. Partnering with accelerators will enable the Pentagon to stay ahead of today’s rapidly evolving technological curve to secure necessary advantages for America’s warfighters on the battlefield.

 

Joshua Israel is an Army civilian and currently a Senior Service College student at the National Defense University’s Dwight D. Eisenhower School for National Security and Resource Strategy. He has previously held progressive leadership positions in Government and Industry from an engineering subject matter expert, to an acquisition manager, to a business and financial management director. He holds an MBA from New York University’s Leonard N. Stern School of Business, an MS in Engineering Management from the University of Maryland, Baltimore County and a BS in Chemical Engineering from Virginia Tech. The views expressed in this article are the authors’ alone and do not reflect the official position of the U.S. government, the Department of Defense, Department of the Army or National Defense University.

Image: U.S. Navy/Mass Communication Specialist 2nd Class Victoria Ochoa