Preserve This Early-Stage Bet That Benefits National Security
The war in Ukraine is proving how critical innovation is to military success. As this war unfolds, the world watches as small commercial drones play an invaluable role on the battlefield. Meanwhile, small-satellite companies pivoted seemingly overnight to provide communications and intelligence infrastructure. Seemingly oblivious to this reality, some members of Congress are calling for an end to the Department of Defense’s longest running and most successful innovation program, while others have advocated for ending its first-stage innovation research grants.
The Small Business Innovation Research (SBIR) program, active since the 1970s, uses small phase-1 technology discovery and larger phase-2 prototyping efforts to evaluate, qualify, and prove emerging technology for military applications. SBIR’s opponents argue alternatively that the volume of proposals overwhelms reviewers, the contract value is too small to be useful, and a handful of companies gobble up the lion’s share of awards. Such arguments miss the mark as they fail to account for defense innovation’s foundational premises: attract maximum participation from technology startups, test their value in meeting government needs, and move only a select sub-group on to prototyping. The American innovation system will thrive when the SBIR program is structured to rapidly test and validate the maximum number of new technologies against government needs.
The aim of this article is not to deliver a point-by-point critique, but to explain why SBIR phase-1 awards are an essential step to maximizing the potential of dual-use technology. Phase-1 awards are an accessible pathway for a technology startup to discover if they have real potential to be a dual-use company. They encourage and allow maximum participation from technology startups, allowing the U.S. military to benefit from the broadest possible range of venture-capital-funded technology. Phase-1 awards allow a performer to validate and flesh out their use-case so that the resulting phase-2 has technical feasibility to get into the hands of warfighters and impact the mission. It simply cannot be overstated that mission impact for warfighters is the only valid performance indicator for defense innovation, so it should be the primary driver of the innovation pipeline.
When he chaired the Defense Innovation Board, former Google chief executive officer and chairman Eric Schmidt famously quipped that the Department of Defense “does not have an innovation problem; it has an innovation adoption problem.” His comment echoed the now-famous passage from the 2018 National Defense Strategy titled “Deliver performance at the speed of relevance.”
Why am I talking about startups? Because they have the technology, the development budgets, and the drive to find product-market fit and scale as fast as the market will allow. Defense Innovation Unit director Michael Brown has stated that the U.S. military needs commercial technology because it is not developing what it needs organically. By tapping dual-use commercial technology, the Department of Defense can access better solutions in critical areas such as portable power, computer vision, and autonomy while leveraging the scale inherent with venture-funded commercial solutions. The Silicon Valley Defense Group’s Emerging Technology and Venture Capital Working Group data shows that venture capital investment in defense-relevant technologies has increased 300 percent between 2014 and 2018, while defense research and development spending declined by nearly the same margin. Total venture capital investments have been growing on a breakout scale for the last decade.
I recently completed a thesis (publication pending) detailing the materiel innovation pipeline, an eight-step process that an emerging technology startup with minimal or no experience working with the Department of Defense could navigate to rapidly field a solution that creates mission impact for warfighters. To understand why phase-1 awards are necessary, it’s critical to see where they fit in the full process from an AFWERX “Ask Me Anything” event to a program of record.
The pipeline is not complete. In fact, the defense innovation ecosystem has been quite successful with the first five steps but continues to struggle with the last three. Progress over the last five years has been remarkable, including demonstrating that open topic phase-1s bring new companies to the defense market, increase their chances for raising venture capital, and increase their likelihood of winning a non-SBIR government contract. The introduction to a recent research paper co-authored by AFVentures director Jason Rathje provides substantial data and analysis about the early success.
The Materiel Innovation Pipeline rests on a foundational key concept: 20,000 solution providers are better than 20. According to this study by Georgetown’s Center for Security and Emerging Technology, the materiel enterprise is dominated by approximately 20 to 25 industry majors, and within that club five companies book nearly as much revenue as the rest of the industry combined. To break this stranglehold, America needs new pathways for thousands or tens of thousands of companies to enter the technology funnel each year.
The Department of Defense awarded nearly 2,000 SBIR awards in Fiscal Year 2019 against nearly 10,000 submissions. Simple logic and my personal experience working with hundreds of technology startups dictates that some companies considered applying and declined, while many others who would have been a great technical fit never even considered SBIR. So how does the Department of Defense get those 10,000 or 20,000 new entrants to engage, test the waters, and qualify themselves as capable of joining the National Security Innovation Base? There are two critical steps: funnel fill and use-case development and validation.
Step 1: Funnel Fill
Admit it — defense innovation is fun! T-shirts and hoodies at work, Star Wars-inspired organizational structures, kombucha (and beer) on tap, tacos for every meal, cool socks, and all the robots! Okay, so you’ve heard the panel on “going faster” and “Other Transaction Agreements” a few dozen times, and yes — it’s repetitive. Boring maybe. But that session isn’t for you. It’s for the thousands of first-time entrants attracted by the promise of non-dilutive capital.
For those who are unfamiliar, the defense innovation ecosystem is the collection of organizations and people that connect U.S. military stakeholders, startup technology, and resources to deliver innovative solutions that create mission impact for warfighters at the speed of relevance. Scores of cells represent every conceivable agency — too many and too ever-changing to count or list, but MITRE’s Acquisition in the Digital Age site maintains a reasonably comprehensive and current reference list. Though their individual business models vary, each entity is organized towards the same seven objectives: to attract non-traditional companies (startups) to the defense market; to make the military community’s problems more open, accessible, and collaborative; to make proposals and submissions shorter, simpler, and easier; to get from solicitation to contract faster and speed payment; to make intellectual property terms more flexible; to enable more and better customer interactions and iterations; and finally to facilitate transition to a fielded system that creates mission impact for warfighters.
They have commonalities: located in startup hubs, using non-standard software tools such as G-Suite, no uniforms in sight, and constantly appearing on panels and hosting webinars. As members of the Army Application Laboratory explained in a recent “Ask Me Anything” event during Capital Factory’s Fed Supernova, they’re not trying to engage companies with GovWin accounts: “we publish about what we do on LinkedIn very extensively, on Twitter extensively, and make sure that we are speaking to our marketplace. Our marketplace is not the primes … it’s the people who know how to use Twitter.”
The government faction of the defense innovation ecosystem is dwarfed by the scores of non-government people, personalities, and organizations: for-profit, non-profit, public-private partnership, and partnership intermediary agreements. They come in every legal designation, and they host events, academies, and accelerators. There are even defense innovation “influencers” on various social media platforms amplifying content and opportunities, attracting even more startups.
While some may chide it as irrelevant innovation theater, funnel-fill activities achieve three key objectives: attract emerging technology startups who have never worked with the Department of Defense in a meaningful way before; give them enough information about military problems, technology priorities, and gateway criteria to make an initial determination whether to pursue further; and introduce startups to resources that can help them submit their first significant proposal. Most significantly from the department’s perspective, the majority of funnel-fill activities are performed by the non-government side of the defense innovation ecosystem at no direct cost to the government.
Step 2: Use-Case Development and Validation
Having made the decision to explore dual-use, the next step for a startup is to develop a use-case. Very rarely will a startup’s commercial technology or product directly translate to a U.S. military customer with no configuration or integration. In particular, technologies that deliver capability in a multi-domain operations context require domain-specific understanding, including the operating and technology environment where the solution will be deployed, and the dependencies and required integrations.
To have a reasonable chance of generating mission impact for warfighters, a use-case needs to address four questions. What problem does the technology solve for a military customer, or what mission-related capability does it provide? What value does it create for what user(s) in what contexts? What data, supplies, commodities (e.g. fuel), etc. does the solution require to function? What hardware or software systems must it integrate with for the user to interact with the solution?
In my interactions with hundreds of entities across the defense innovation ecosystem — startups, investors, program representatives, and enablers — I rarely hear people speaking about use-cases at this level of detail. Further, no matter how many webinars AFWERX or the Army Applications Laboratory hosts, they will never scale the required level of granularity across the full range of problems that they intend to solve. This is unfortunate, because the failure to understand and account for operational factors during product design and development prevents startups (and their customers) from building a solution that integrates. Frequently the effort results in a product that demos well but solves nothing.
Wasn’t This Supposed to be About Phase-1 SBIRs?
The second step was technically called “use-case development and validation,” but a use-case cannot be “validated” without customer and user feedback, no matter how recent your domain experts’ experiences and contacts are. It should be inferred that the level of detail required to fully develop a use-case includes some amount of customer discovery, engagement, and feedback. The “product,” now in a wireframed state, would have incorporated this feedback and overcome feasibility objections.
SBIR jargon calls this process “feasibility study.” In the phase-1 proposal a company describes conceptually how their technology and research approach can accomplish the research and development objectives. During phase-1 performance, they validate that concept and further develop and refine it into a plan. In practice, the phase-1 performance spans the very end of step 1 (qualifying the technology) and all of step 2. The best phase-2 proposals incorporate their discovery relating to the four use-case questions and detail a technology approach to build a solution that not only solves the problem, but can also integrate and scale. Ergo, deliver mission impact.
The phase-1 offers an accessible and funded pathway to develop and validate the use-case. And because it’s accessible and funded, particularly when packaged with streamlined submissions and contracting, lots and lots of companies can do it. And lots and lots of companies are doing it — the high volume of phase-1 submissions is the goal, not a flaw in the system. What happens if the startup fails to validate their use-case, finds that the customer doesn’t really care about their proposed feature of function, or learns that the solution would never integrate? Kill the project at phase-1. Fail fast.
Let’s compare that to the foreseeable result if there is no phase-1 option and companies are required to go straight to phase-2. Proposals for the second phase are much more detailed and difficult to write, making them less accessible. This means fewer new entrants. Startups would still be required to engage stakeholders and users to validate and flesh out their use-case, but without funding or a contracted relationship to facilitate access. Fewer qualified use-cases. The companies most equipped to submit a very detailed technical approach are those specifically organized for business with the Department of Defense. This would mean more SBIR mills. Customers must wait two years for the first opportunity to pivot or offload projects that are not working. Fail slow.
With deeper analysis, this smells a lot like the old way. To deliver continuous innovation at the speed of relevance, the Department of Defense needs a new way. The good news is that there are early indications that it’s working!
Building a true national security innovation base requires thousands or tens of thousands of new companies and solutions to enter the funnel each year. Phase-1 enables and attracts new entrants. Those companies must be qualified as a fit — both the company and the technology — to develop and deliver a capability that is relevant to multi-domain operations. Phase-1 enables companies to find a technology fit. Once qualified, the company needs to develop a detailed use-case that accounts not only for a lab-based solution, but also for one that could deploy to the user base and integrate with their existing systems and workflows. Phase-1 results in better phase-2s.
Phase-1 SBIRs are a useful filtering tool and ensure maximum participation from dual-use startups. Use them wisely rather than discard them.
Kevin Landtroop is a former cavalry officer and attorney in the U.S. Army and currently develops strategies for technology startups to develop use-cases and deliver cutting-edge solutions to the national security community. Kevin founded the Texas Defense Innovation Forum, served as vice president and the inaugural director of the Center for Defense Innovation at the Capital Factory in Austin, Texas, and teaches Hacking for Defense at the University of Texas. Kevin currently works with a portfolio of over 100 dual-use companies helping them to overcome program and contracting challenges to deliver mission impact to warfighters.
Image: AFWERX Public Affairs