To Promote Defense Innovation, Fund the Defense Innovation Unit
For the last two and a half years, I have worked with dual-use and defense tech startups, investors, servicemembers, civil servants, and government contractors who are all trying to accelerate the military’s adoption of commercial technologies. The challenges we face are well known, and we’ve read no lack of proposed solutions. Previous articles in War on the Rocks, for example, have called for acquisitions reform, building a bridge between small business solutions and Pentagon needs, investing in lower-cost, attritable systems, and reforming the Planning, Programming, Budgeting, and Execution process.
However, the 2024 Department of Defense Appropriations Bill contains the single most promising proposal I have seen for getting private sector technology where it needs to be to address America’s most pressing national security needs. Specifically, the bill and its accompanying report contain provisions that will significantly increase the budget of the Defense Innovation Unit, enabling it to lead the Department of Defense’s engagement with startups and nontraditionals.
In this leadership role, the Defense Innovation Unit will be positioned to secure a knowable, effective pathway for smaller companies receiving research and development funding to transition to contracts providing recurring revenue. Such a transition pathway is lacking in today’s ecosystem. If the status quo remains, this will continue to hamper the Department of Defense’s ability to create a market for the kinds of technologies that are now allowing Ukraine to hold off a numerically superior Russian military. In my current position, I have an indirect financial interest in this issue. But I also have some experience in it, and I think the U.S. government has an interest in getting this right as well.
A Brief History of Defense Innovation in the 21st Century
Over the course of the last seven years, the front door to the Defense Department has been opened wide for startups and nontraditionals looking to do customer discovery, gain end-user feedback, and refine their technology to fit the needs of servicemembers.
This effort began with Ash Carter. In 2001, Carter published a book calling for the Pentagon to restore its dormant relationship with Silicon Valley. He also served as the Pentagon’s top acquisitions executive, where he led the effort to rapidly procure and field Mine-Resistant Ambush-Protected Vehicles. This experience showed him how slow and encumbering the Pentagon’s acquisition system can be. In 2015, Carter became the first Secretary of Defense to visit Silicon Valley in two decades, where he announced the creation of the Defense Innovation Unit and began to build a bridge with the technology industry.
Since 2016, the Defense Innovation Unit has awarded contracts to 3D-print vehicle hide structures for the Marine Corps, build virtual reality simulators for Air Force pilot training, launch Earth observation satellites, develop data tools to quicken certifications of new combat aircraft configurations, and enable Air Force squadrons to make their own jet fuel in a combat zone. The Defense Innovation Unit also launched the Kessel Run Software Development Organization and pioneered an initiative to test, certify, and approve drones for military acquisitions.
Defense tech unicorns Shield AI and Anduril Industries have received contracts from the Defense Innovation Unit. From 2016 to 2022, the unit used other transaction authority contracts to award $1.2 billion to companies with existing technology solutions to military problems. During this time, an additional $4.9 billion of follow-on production contracts were awarded to companies that performed successfully on Defense Innovation Unit prototype contracts. From October 2021 to September 2022, ten companies that received prototype contracts from the Defense Innovation Unit were transitioned to contracts with a potential value greater than $10 million. The Defense Innovation Unit was able to accomplish this despite having its budget cut by 20 percent.
Inspired by the Defense Innovation Unit, the Air Force established AFWERX as its own innovation arm. Championed by Dr. Will Roper, the acquisitions executive for the Department of the Air Force and an Ash Carter protégé, AFWERX pioneered the use of Small Business Innovation Research Grants to provide non-dilutive funding to startups building technology to solve Air Force and Space Force problems. Other government organizations, including the Army Applications Laboratory and the Defense Advanced Research Projects Agency, have also leveraged Small Business Innovation Research Grants. The expanded use of these grants, along with other transaction authority contracts, has broadened the national security innovation base by providing thousands of startups with small amounts of non-dilutive funding.
Despite this progress, the military still has not established effective transition pathways for startups and nontraditionals. There are some startups that have achieved transition. Far more have performed well on various kinds of smaller contracts but have yet to receive the recurring revenue that would put them on a predictable path to profitability. Furthermore, the most successful defense tech startups, Palantir and Anduril Industries, were both founded by entrepreneurs who had already made hundreds of millions of dollars from starting and selling successful tech companies before they went into defense tech.
The Way Ahead
The 2024 Department of Defense Appropriations Act has an accompanying report that recommends that the Defense Innovation Unit be given the authority over more than $1 billion as a part of a “hedge portfolio of many smart, affordable, modular, and sustainable systems.” This would increase the unit’s current budget tenfold.
The House of Representatives’ version of the 2024 National Defense Authorization Act includes language that would codify the authority of the Defense Innovation Unit and establish an organized structure to the current defense innovation ecosystem. Section 925 of the National Defense Authorization Act designates the Defense Innovation Unit director as a direct report and principal staff assistant to the Secretary of Defense on all matters related to defense innovation and as head of the nontraditional innovation fielding enterprise. The nontraditional innovation fielding enterprise will be comprised of a single organization from each service that has a proven track record of successful public-private partnerships. Presumably, this includes organizations like AFWERX. Under this new structure, the director of each service organization would report to the director of the Defense Innovation Unit. The Senate’s version of the 2024 National Defense Authorization Act does not include these expanded authorities, however, which means that they would need to be renegotiated in conference before a final version is sent to the president to be signed into law.
If these authorities and budget are given to the Defense Innovation Unit, it will mark a watershed moment in the ongoing effort to accelerate the military’s adoption of commercial technologies. With them, the Defense Innovation Unit will be positioned to identify pressing problems faced by combatant commanders, match them with technology solutions that have already been supported by organizations in the nontraditional innovation fielding enterprise, and, finally, field solutions. Technology can then be tested, refined, and validated by end users, which will give companies critical feedback on how to improve what they built. Companies will be on a more predictable path to profitability, and investors will be more bullish on backing defense tech startups.
Without these authorities and budget, the balkanized patchwork of organizations awarding research and development funding to startups will continue to lack unity of effort. A very small number of companies will be able to succeed, thanks in large part to “the passionate few working extreme hours with extreme top cover.” Too many startups will perish in the valley of death between research and development dollars and recurring revenue from the federal budget.
The Need to Move Faster
It has been over eight years since Secretary of Defense Chuck Hagel announced the Third Offset Strategy, which emphasized the need for “robotics, autonomous systems, miniaturization, big data, and advanced manufacturing, including 3D printing.” Additionally, it has been five and a half years since Secretary of Defense James Mattis announced the 2018 National Defense Strategy, declaring that “Great Power competition, not terrorism — is now the primary focus of U.S. national security.” Despite this rhetoric, and subsequent efforts to build the capabilities needed to execute these strategies, the U.S. military is still largely dependent on platforms built or designed decades ago.
The war in Ukraine has shown the value of weapons systems made by major defense contractors, including Raytheon’s Javelin Missile and Patriot Missile Defense System, as well as Lockheed Martin’s F-16 Viper and High Mobility Artillery Rocket System. It has also shown that startups can provide capabilities to intercept Iranian Shahed attack drones, track Russian troop movements, and analyze Russian radio communications. This combination of exquisite weaponry from major defense contractors and lower-cost technologies from startups and nontraditionals will continue to dominate the battlefields of the 21st century. Major contractors recognize this and are investing accordingly.
If enough startups and nontraditionals fail to secure recurring revenue from military contracts for no other reason than the government’s antiquated, years-long process of deciding what to budget for and buy, smaller companies will walk away from selling to the military, and so will their investors. In my time at the Center for Defense Innovation in Austin, I saw a multitude of government organizations working to harness commercial technology to solve military problems. The Defense Innovation Unit’s position as a direct report to the Secretary of Defense, track record of transitioning technology solutions, and use of other transaction authority contracts, which are not beholden to federal acquisition regulations, make the unit uniquely qualified to lead the Department of Defense’s engagement with startups and nontraditionals.
Expanded authorities and budget for the Defense Innovation Unit will bring speed and flexibility, rapidly delivering solutions to combatant commanders’ pressing problems. The supply that exists in the commercial technology sector will be funneled to the people who need it. Companies with promising technology will be able to de-risk their capabilities, furthering their chances of success in becoming a program of record in the defense budget. In other words, the Defense Innovation Unit will fulfill its previous director’s vision for helping the Pentagon become a fast follower that can rapidly acquire and field new commercial technology to solve strategic military problems.
Ben McNally is a client lead at Gallium Solutions, where he works with dual-use and defense technology companies. Prior to Gallium, he was a federal venture associate and programming lead at the Capital Factory’s Center for Defense Innovation in Austin, Texas. He is a graduate of the University of Texas at Austin, where he was an undergraduate fellow at the Clements Center for National Security.
Image: U.S. Army photos by Pfc. Gabriel Silva
Correction: Due to an editor error, this piece was not specific enough about the author’s interest in the argument until his biography at the bottom. The text has been updated to provide this information earlier.
