war on the rocks

The Rift Between Silicon Valley and the Pentagon Is Economic, Not Moral

January 28, 2019

There remains no shortage of hand-wringing over the state of engagement and collaboration between Silicon Valley and the Department of Defense. This was front and center at the panel I appeared on at the Reagan National Defense Forum in December. From advisory boards like the Defense Innovation Board and the Section 809 Panel to entire organizations like the Defense Innovation Unit (DIU) to the National Geospatial-Intelligence Agency (NGA) Outpost, there has been great effort to close the gap between the Valley and the Pentagon. With many of the rapid advances in commercial technology so clearly applicable to warfare, the Defense Department is becoming more reliant upon and eager to engage with commercial tech companies for new capabilities.

Needless to say, it has been a bumpy, slow start. Unfortunately, many discussions on the topic center around generational or cultural differences. Rifts based on the moral objections of millennials make for catchy headlines and impassioned debates. And use of the broader debate over AI ethics as a scapegoat for the disconnect between the Valley and the Pentagon also distracts from the real drivers of the rift. As a young founder-CEO with ties to national security, I am often asked why tech startups and millennials don’t want to work with the Defense Department. Yet, a class I help teach at Stanford titled “Technology and National Security” hits capacity every year. With 200 students, it is one of the largest in the department. A mix of undergraduate and graduate students crowd the seats to hear lectures from leaders like former Secretary of Defense William Perry, Gen. John M. Murray (Futures Command), or Gen. James M. Holmes (Air Combat Command). These students are passionate about national security and leave the class intrigued and inspired by the incredible national security challenges facing the United States. This seems generally true outside the university, with a survey by the Reagan Institute showing that millennials have confidence in the military at rates very similar to older generations. So, if it is not generational or cultural moral objections, why is it so hard to increase defense engagement with Silicon Valley?

The answer is simple: economics.

Defense contracting is a risky business for fast-moving commercial companies, especially startups. Without aligned financial incentives, high-tech companies cannot pursue the national security market and therefore, many state-of-the-art commercial technologies will never reach the warfighter.

For commercial companies, the Defense Department and intelligence community are markets. These markets, like any, have their own risks and opportunities. Many layers of bureaucracy were created to protect taxpayer dollars from waste and corruption. As a result, America has one of the least corrupt military acquisition systems in the world. However, those layers of bureaucracy obfuscate the national security demand, limiting information access. By the time a call for a capability is shared with commercial companies, it is a jargon- and buzzword-filled multipage document posted on sites only the defense industrial base knows how to navigate. My investors often ask me to mentor other startups that are interested in working with the Defense Department — seeing it as a possible market for fledgling high-tech startups. Most of these companies would love to work with the Pentagon, but it is really difficult to find the right alignment. Whether it is a conversation about foreign ownership issues or whether to approach the Defense Innovation Unit, In-Q-Tel, or look into the Small Business Innovation Research program, I do my best to point them in the right direction. Companies cannot accurately, or quickly, identify which buyers (i.e., money owners) in these national security markets could use their products because the department has such a complex purchasing structure and an over-classification of banal security issues that face most enterprises.

For tech companies, this means navigating a complex, esoteric and high-risk market. When a tech company considers working with the Defense Department, complexity and risk are the main consideration. Is this a market where my company will thrive? Without a return on investment, entering a new market can kill the company. Especially when entering that market may take years to create a profit.

The tension is personal. I started a company, Geosite, because of my frustration over the inability of warfighters in the Naval Special Warfare community to easily access and utilize geospatial data — a complex technical and bureaucratic problem. But commercial incentives don’t allow me to focus that much on the national security problems that led me to start my company. Because I want my startup to survive, grow and continue to create cutting-edge technologies, I spend most of my time focused on the commercialization of our technology in the energy industry. In fact, I have a fiduciary responsibility to do so! Building a new company is far more feasible with the scale and speed of adoption in the commercial market — whereas building a product focused on the defense market would slow me down, probably resulting in stymied growth. Ongoing research by a colleague at Stanford, Jason Rathje, even shows that companies who receive government grants from the Defense Department experience much slower growth than comparable companies who do not. My working hypothesis is that departing from a strategic product plan, necessary for meeting defense needs in the current procurement culture, causes this protracted growth.

Most products need to be adapted before being used by the Defense Department. The scale and complexity of the department’s needs are often beyond that of commercial applications. Understanding the implications of these modifications is important beyond defining the modifications themselves. Technology companies, large and small, continuously make decisions about the direction and focus of their company and products. When a company decides to modify or create a product for the Defense Department, it can often have path-dependent consequences for the future of their company. This requires careful consideration of which diversions from their product pathway will allow the company to continue to thrive as a whole.

It is also worth noting that return on investment for each product or service a company makes is measured individually. Aside from long-term strategic bets, each product must be profitable on its own — separate from the company as a whole — or it will be considered a failure. When Google chose not to pursue follow-on work from the Maven contract, it was driven by an employee petition. For a company as large as Google, Maven was a fairly small contract and the public relations fiasco was hardly worth the revenue it would bring. So, as a fiscally responsible company, they decided to move on and win any public relations battles they could along the way. Google then pulled out of the Joint Enterprise Data Infrastructure (JEDI Cloud) competition and most think their reasons for doing so were a continuation of the concerns raised over Maven. Admittedly, this was part of the official stance. However, I believe Google would not pull out of a $10 billion competition if they thought they could win against a competitor that successfully built the cloud architecture of the CIA. Competing for these contracts is expensive and extremely time-consuming. While a company like Google does have the resources and expertise to compete, if the return on investment is not there, they will pursue other projects which align with their economic interests. This economic logic also holds with regard to Google’s work in China, which — despite employee protest — continues because it will produce major profits.

These are the economic reasonings of a tech giant. Smaller tech companies have even less incentive to work with the Defense Department. The strategy for startups is to grow really, really fast. This revenue-driven growth model is different than a profit-driven growth model on one key dimension — if these companies don’t grow quickly, they die. Their investors obviously know this – giving their venture-backed portfolio companies at most an 18-month runway to start earning revenue from customers. Ultimately, this is great for the technology ecosystem as a whole and the consumer, because investors are “de-risking” novel products, technologies and markets. But it’s terrible for the Pentagon. If a company has a technology that will be useful to national security and it takes the Defense Department two years from first discussion to contract signing, it will be too late. By the time the contract is awarded, the company may have died or moved on. Ask yourself: If you were in my shoes, would you work with the Defense Department? Or would you take a lower-risk and, let’s face it, probably more successful route for your company?

Taking the Defense Department on as a customer results in high-risk sales cycles as well. Most companies have wide top of funnel sales system to hedge their bets across many customers. This isn’t possible when it comes to working with the Defense Department, where technology purchases are aggregated into few competitions across only a small number of initiatives. As a point of comparison, the first narrow target market for my startup is 20,000 businesses. In other words, with the first application of our technology we have 20,000 possible enterprise-level customers. The probability of winning a specific sale in any industry is typically low, but with many chances to compete for a sale, the risk of any single attempt to generate revenue is significantly decreased. With the Defense Department, there are only a couple of opportunities a year. This makes the sales cycle much, much riskier.

The high risk and complexity of taking on the Defense Department as a customer will continue stemming the flow of commercial technology into the military. Finding ways for the Pentagon to leverage commercial technology is crucial for the future of warfare. I am excited to see initiatives that radically lower barriers to entry for nontraditional defense contractors. Smaller, less complex contracts allow both tech companies and the government to hedge their bets while fulfilling their fiduciary responsibilities. This is a great start and shows deep understanding of the needs of commercial tech companies. This issue is incredibly complex and there will be no silver bullet. As the United States modernizes its military, fundamental shifts in the approaches to engagement with the tech companies will be just as revolutionary for warfare as will be the technology themselves. Focusing on cultural and generational divides, while fun to debate, distracts from the core rift between Silicon Valley and the Defense Department: economics.

 

Rachel Olney is a Stanford University PhD candidate and the Founder and CEO of Geosite Inc. Her research focuses on Innovation in Bureaucratic and Hierarchical Organizations with much of her research on Cyber Command. As the CEO of Geosite she leads a venture capital backed Silicon Valley startup disrupting the geospatial data industry.

Image: af.mil