It’s Time For the DoD and the Emerging Tech Sector to Make ‘Big Bets’ on Each Other

 Four Ways to Sharpen Our Technological Edge in Defense

Retired four star general and Lux Capital Venture Partner Raymond Anthony (Tony) Thomas and Lux Partner Bilal Zuberi share their view on areas where the emerging tech sector and the Pentagon can reform to help shore up our national security. 

Slow and lumbering technologies on the battlefield can be the weakest link in a defense chain. Think cavalry horses in a large formation on a WWI battlefield, when trenches and tanks rendered them ineffective. Leading up to the Great War, cavalry ‘technology’ was de rigueur. But this war brought with it significant advances in technology and battle tactics - trenches, tanks, airplanes - making battle astride a horse impotent. The lesson from the Great War in terms of technology was this: it can fundamentally change the very nature of battles and can do so in real time.

Fast forward a century and we find the DoD hitched to legacy technologies and strategies that are allowing our competitive edge in national security to diminish. This, despite the fact that the private sector in the U.S. is developing some of the deepest technology in the world that could provide the sharpest technological advantage on the current battlefront..In an alarming assessment, former Under Secretary of Defense for Policy Michèle Flournoy, told an audience at the Aspen Security Forum on Aug. 6, “Our ability to deter is — it’s not gone, but it’s an eroding asset”. 

An automation and AI-enabled conflict is raging around us, posing the largest threat to our national security since the Cold War. In a recent op-ed, General John Allen and Darrell West called it a threat of “HyperWar” - a war where human decision making is almost entirely absent from the loop. The “superpower that can master AI, data analytics, and supercomputing, will inevitably prevail in conflict.” It’s no exaggeration to say the current chasm between the Pentagon and the U.S. private sector could result in a 21st century version of fighting an enemy tank while mounted on a Shetland pony. 

What exactly is the gap between the two? The private sector, especially venture backed startups, are incentivized to focus on development of advanced technologies that may be considered too ‘high risk’ for others. And they are incentivized to develop them at a fast pace in order to outrun competition and be the first in the market. The natural assumption is that there is a market for their technologies, and if they are able to deliver the capabilities to the DoD, they will be handsomely rewarded commensurate with the risk they took in working on such technologies. In reality, this is not the case.

The Pentagon and the emerging technology sector are both well-matched in terms of product-market fit, but horribly mismatched in the acquisition process and budgeting. Add in the role of Congress, and the level of complexity is almost unnavigable for most private sector technology companies.  

This needs to change. Instead of throwing up our hands and chalking up the DoD-private technology sector divide as insurmountable, we at Lux see an opportunity to accelerate the widespread adoption of the most promising creations for defense. This entails systemic changes to get the deepest technology into the hands of our service people. The two entities need each other, so it benefits both to align and change. In this article we examine in depth possible changes and amplify the areas where the biggest gains for both can be realized if reimagined and reformed.  

Below are four areas on which both the private sector and the Pentagon should focus to catalyze change and subsequently shore up America’s ability to deter forces in the current hyperwar.

1) Treat Congress As a Board of Directors

The Pentagon and emerging tech sector need to change their approach to and relationship with The Hill. We agree with Michèle Flournoy’s suggestion at the Aspen forum that DoD view Congress as a strategic partner. We take it a step further and propose that Congress should be viewed as a Board of Directors. The growing opaqueness of the Pentagon is a non-runner for lawmakers on both sides of the aisle and the result of the deteriorating relationship between the two is congressional pushback in the form of additional legislation over processes. We also agree with Flournoy’s recommendation to invite congressional members to “the war games and to the simulations and to the experimentation, and understand why these trade-offs are being made ... to try to get better buy-in and frankly leadership from some of the key champions on the Hill.”

The Pentagon’s failure to treat Congress as a partner in executing America’s defense strategy is troubling. Its startling announcement of its purchase of F-15X fighters, despite the fact this transaction doesn’t align with the National Defense Strategy outlined in 2019, left lawmakers puzzled and wary resulting in a growing mistrust between the two institutions. Senior DoD leadership’s failure to build a relationship with Capitol Hill is counterproductive to gaining technical superiority on the battlefront.

Chris Brose, former staff director of the Armed Forces Committee and now strategy director at Lux portfolio company, Anduril, notes that senior defense leaders and legislators need to have a level of knowledge about AI, machine learning and networking technologies. Assuming they do is detrimental. The private sector, he says, would be well-served in the long-run by investing their time in educating these stakeholders on the latest, deep technology. 

Here in the U.S. we have an incredible foundation to build the next generation of defense technology that will give the U.S. a critical technological advantage geopolitically. If DoD and the private sector can shift their adversarial view of Congress to one of a strategic partnership, getting the latest defense weapons in the hands of our servicemen and women would be much more achievable.

2) Reform the Acquisition Process

The current process the Pentagon uses is antiquated and flawed, making the acquisition of the latest technology nearly impossible and certainly deficient in meeting our national security needs. Despite the DoD being the early driver of technology development in the private sector in the 1950s, in the ensuing years, the Pentagon has morphed into the type of customer that the broader private sector would prefer not to serve. A Byzantine system of rules, regulations, certifications and approval authorities that are superfluous to the contract at hand make the DoD a very unattractive, if not impossible customer. The most glaring dissonance? For a tech start-up developing the latest technology it’s necessary to demonstrate market traction within 12-18 months. The DoD procurement process and project life can take 10-16 years. 

To create a bridge, there needs to be ongoing dialogue between the two entities. The Pentagon needs a better understanding of private sector motivations, both of founders, as well as their investors and financial backers. And this goes beyond the pace of acquisition processes. For example, defense leaders need to understand how problematic the DoD’s interventionist IP strategy is. It is a major deterrent for tech companies who would bid for defense projects. For startups especially, it is simply too big of an opportunity-cost with very little value creation to allow access to their IP. Instead, discussion should focus on access to government data, open source frameworks, open data standards, and standard API protocols and formats. This is an area where the private sector has tremendous expertise. The DoD would be wise to harness its understanding of architectures that are secure, but enable greater collaboration and innovation. The private sector should join the ongoing conversations as new laws and policies are developed to address technology development at the speed of relevance. 

Internally, the Pentagon also needs to put more trust into their technology practitioners and acquisition workforce to do their jobs. We are encouraged that there are indications that this is happening. Undersecretary for Acquisition and Sustainment Ellen Lord is establishing pilot programs to change the way the military buys software allowing contracting officers to purchase software under their own budget activity. The program appears to be gaining wider acceptance both internally and from lawmakers, according to Lord at a recent Professional Services Council meeting. 

Similarly, Jim (Hondo) Guerts, Assistant Secretary of the Navy for Research, Development, and Acquisition at US Navy has been advocating for greater involvement of the private sector startups in Naval/Marine Corps SBIR and STTR programs, and Dr. Will Roper, Assistant Secretary of the Air Force for acquisition, technology and logistics has been a strong advocate for enhanced funding of both early development and scale deployment of these technologies via AFWERX. The Defense Innovation Unit (DIU) has also played an important role in helping startups transition from early stage prototype-development grants to ‘operationalization’ of their technologies within DoD.

We believe initiatives like these need to rapidly expand across the DoD and more pilot programs for other forms of technology need to ramp-up immediately. The Pentagon needs to change gears and abandon its current speed of obsolescence - that is, acquiring a technology that is past its prime, which has been the status quo. Simply put, the acquisition process needs to be more adaptive and agile to leverage and access tools from the private sector to gain superiority in modern warfare.

3) Ameliorate the Budget Cycle

A facet of the acquisition process is the budget cycle, which requires years of pre-planning based on a framework established during the Kennedy administration. This framework is a reflection of the large technology systems required 60 years ago and is a direct counter-actor to innovating at the speed of relevance. 

Below are graphs that illustrate the DoD Resource allocation process and the product life-cycle of the iPhone, a classic example of a dual-use technology. The DoD approved the use of iPhones in 2013, six years into the product life-cycle and at the mature stage. Until this point, the Pentagon only approved the use of Blackberry devices, which had been in steep decline since RIM’s disastrous introduction of its Storm device in 2010 and other miscalculations on market behavior.

The fact that, in all likelihood, your average American consumer had the capabilities of the iPhone in hand well before a four-star general illustrates how utterly at odds the DoD’s budgeting and acquisition processes are with the technology market. An average budget planning and approval cycle can be 4-6 years, severely limiting the Pentagon to avail itself of cutting-edge technology.. In rapidly evolving technologies, what the DoD can acquire in 2025 probably hasn’t even been invented in 2020, so the likelihood of it being included in the budget is nil.

Consider the emerging technology where the U.S is currently leading:

• Machine Learning and Artificial Intelligence, including xAI (Explainable and Ethical AI); 
• Consumerized and miniaturized electronics and systems;
• Autonomous systems in space, water, air, and land; 
• Simulation systems; 
• Advanced manufacturing processes; 
• Brain/neuro-computing interfaces; 
• Synthetic Biology;
• Augmented and virtual reality; 
• Advanced and resilient communication networks. 
• Others

The Pentagon understands it needs the innovation coming out of the private sector but due to a radically different culture, is clumsily navigating the landscape with smallish budgets and an inability to navigate the fast moving deep tech landscape. These efforts are simply not enough for a step change and allows for missed opportunities. Within the current antiquated framework, it’s impossible to get the most agile technology into the hands of our servicepeople. For this to change the DoD needs to embrace the private sector and lower the barriers to contracting with them. 

4) Make It Fair

When it comes to market forces around which industry players devise their playbooks, we find another worrying phenomenon. That is the monopsonic relationship between the Pentagon and a handful of defense contractors or ‘primes.’ These legacy contractors aid in perpetuating a frustratingly complex procurement system. Because they help create the specifications for a contract, they win DoD contracts time and again despite there being more competitive options in the market. There is limited accountability and therefore no real incentive for primes to perform efficiently and cost-effectively. It begs the question, why are we relying on legacy strategies for futuristic technologies?

We are encouraged by the major strides in public/private projects that demonstrate what’s possible. Take SpaceX and its recent successful launch of its Dragon 2 capsule and Falcon 9 rocket. This project has given the U.S. an alternative to its previous reliance on Russian Soyuz vehicles to transport American crew members to space.  

But here’s the problem. An audit by NASA’s Inspector General shows that the agency paid SpaceX $2.4 billion for its project and contracted Boeing for the identical scope for $4.2 billion. NASA then paid Boeing an extra $300 million to speed up the schedule of its missions and ensure it will remain the second commercial crew provider. In essence NASA paid Boeing $1.8 billion more for the same project and then another $300 million due to schedule slippage.

This exemplifies how in the past, the Pentagon had the luxury of ignoring market forces and often spent billions on inferior or outdated technology or services. 

Several other cases in point are disconcerting. Lockheed Martin’s F-35 program would not have survived in a competitive market. According to a DoD Inspector General, $183 million in labor costs were directed at correcting or completing electronic equipment logs. In other words, the U.S taxpayer essentially paid for Lockheed’s failures. The company and DoD are currently in negotiations for reimbursing the government for its failures and yet the company is still accepting contractual incentive payments. 

Then there’s Boeing’s failure to deliver on its KC-46 tanker program. The technical problems have been escalated to Category 1 status; the status indicating the most urgent impact on operations on safety with Boeing telling Congress that the fix will be delayed a year. Ultimately, this results in a degradation of normal operations. 

Take another example like Raytheon, a company that essentially operates as a utility to service our defense industry. Similar to other large defense contractor firms, it enjoys an oligopoly where commercial technologies that are often better and cheaper are kept away from the procurement process with DoD. In return, it works at lower profit margins, but makes money by architecting and bidding on larger and larger Programs of Record (government multi-year contracts authorized, and more importantly, funded). The bureaucracy and complexity now built into obtaining a Program of Record is so overwhelming that most smaller, commercial entities have been unfairly denied access to major government contracts, even when the warfighter desperately asks for better technology.  

Palantir, who competed against Raytheon in a bid for a contract with the Army ended up suing the Army asserting unlawful and “risk-prone software development at a very high price.” The court ruled that the Army violated the Federal Acquisition Streamlining Act. In other words they failed to conduct adequate market research needed to determine the right technology and provider. Fortunately for Palantir, they had the heft to fight back and win. Most startups don’t.

Unfortunately, this trend continues. While Palantir is now known in some circles as “the company that sued the government”, and has to carry the baggage associated with being considered ‘greedy’ and ‘litigious’, many primes are not only able to continue to collect on contracts of the past, but are also winning new contracts in technology spaces where not many would consider them to be at the cutting edge. For example, a recent announcement that the Department of Defense’s Joint Artificial Intelligence Center will get $800 million worth of warfighting AI-enabled technology from Booz Allen Hamilton is an example. Another is Deloitte’s announcement of a $106 million JAIC contract to build an AI toolkit. Booz Allen Hamilton and Deloitte could now effectively become gatekeepers to new AI technologies brought to DoD. It’s worth noting that last month an AI pilot created by private company Heron Systems’ defeated several other AIs and a human pilot in an F-16 in a virtual dogfight sponsored by DARPA. What is the process to get small companies like Heron Systems to be vendor of choice to DoD?

Ultimately the public benefits if better, faster, cheaper technology becomes available to our military. While there are some examples of Primes partnering with emerging tech companies on major advanced technology contracts, including with some in Lux’s own portfolio, they are few and far in between. Being mired in old processes that were designed for a 1950s-era technological development pace and then perfected in their efforts to keep newcomers away, is the biggest obstacle. It’s unacceptable that cost overruns and several years' delay, not to mention fiscal waste, is more common than a project being completed to the contractual spec, budget and timeline. This needs to change.

Creating a Path Forward

Here at Lux, we see the opportunity for both startups and a potential customer who needs their products to stay relevant in today’s geopolitical sphere. We’ve invested in many companies that push the frontiers of technology for DoD use, e.g.: AirMap Anduril, Applied Intuition, Clarifai, Fiddler, Flex Logix, Nozomi, Orbital Insight, Planet, Primer, Saildrone, among others. Together, VCs have invested billions of dollars to build capabilities that are critical for our defense and intelligence institutions that are tasked to protect our freedoms. In most of these companies the total dollars invested by the private sector is equal to or higher than revenues generated from the U.S. government to date. Every dollar of public money invested to build advanced capabilities has received tremendous leverage from private dollars.

There are several individuals in both the private sector and the DoD who recognize the opportunity both commercially for these start-ups and for our increased national security with the best technology in the world. To really bridge the existing gap, we need a groundswell of support for reforming the process. Fortunately there are many technology industry participants who understand that the US military (and our allies) work under strict ethical guidelines, and that their work helps deter future wars as much as enabling defense of U.S. national security. 

The opportunity is immediate. The FY 2020 defense budget is the largest in 70 years with $104 billion set aside for research, development, test and evaluation. Despite the challenges mentioned above, we believe there is a genuine, growing interest among parties on both sides to work together and find ways to benefit from each other. It can be done and it must. WWI began mostly with the cavalry but in the space of four years tank technology evolved and completely replaced the horse. It required adaptability and adjusting battle strategy. It was necessary and we rose to the challenge then and we can again. 

The private sector and DoD are at a crossroads. It’s time to retire the proverbial cavalry and put it out to pasture. Legacy strategies reinforce legacy platforms, and we are no longer fighting a legacy war. Our enemies have adapted to ‘hyperwar’ and we need to do so fast. We can achieve this by recognizing that there is a mutual need and that technological superiority exists right on our very shores. Thankfully our private sector can be a partner to DoD. 

We at Lux, and several other investor groups (as well as interagency organizations, technology accelerators within various branches of service, and consultants/think tanks, etc.) are 100% on board to deploy our resources, networks, and most importantly, the genius of founders and entrepreneurs. We consider ourselves fortunate to invest in futuristic technology that can sharpen the U.S.’ competitive edge geopolitically. 

To the emerging tech sector and DoD, we say: We want YOU to join us in creating the future of our national security. 

About The Authors

Retired General Raymond Anthony “Tony” Thomas III is a venture partner at Lux Capital. Previously, Tony served as the 11th Commander of U.S. Special Operations Command (USSOCOM) headquartered at MacDill Air Force Base, Florida. Prior to assuming command of USSOCOM, Tony served as Commander of Joint Special Operations Command (JSOC) at Fort Bragg, North Carolina. Find him on Twitter at @TonyT2Thomas.

Bilal Zuberi is a partner at Lux Capital. He backs startups that solve big, practical problems with technically ambitious solutions, with founders who are driven to build large companies, and envision a better, more prosperous future than today. He serves on the Bards of several companies servicing the military/defense sector. Find him on Twitter at @bznotes.