Silicon Valley wants to help defend America: We need their help

Several geopolitical developments have led to closer alignment in values between Silicon Valley and the defense department than we’ve seen since the end of the Cold War.

For the first time in two generations, we see technology companies not just willing to work with the government, but actively pursuing opportunities to do so.

Even a few years ago, this alignment seemed nearly impossible and certainly unlikely. Consider the activist employee uproar at Google over the company’s attempted participation in Project Maven.

More and more, tech companies have realized the importance and benefit of working towards the benefit of our national defense and interests.

But they face a lot of challenges to their participation. We need to make it easier for them to help.

Speed of Innovation

The New York Times ran an article this week outlining several defense tech and dual-use startups working to help field newer technologies, both in Ukraine and to the DoD directly.

These companies bring the Silicon Valley mentalities of working hard, disrupting established orders, building products that customers may not even know they need yet, and executing at speed.

All of these are critically important as the pace of technological change and geopolitical events accelerates. And, they fly in the face of traditional aerospace & defense practices and timelines. Traditional defense companies only move after receiving a detailed request from the government, with associated appropriations from congress. As a result, the timelines take years.

In Silicon Valley, a company can form, raise capital, create multiple product offerings and even potentially exit before the founders start another company in the same amount of time that a traditional defense program could take.

By contrast, these defense tech companies are finding ways of delivering capabilities at the point of need, when its needed.

A personally relevant example of this comes from my good friends at  Terminal Autonomy . This company has moved its manufacturing facility in Ukraine and is partnering with various end-users in Ukraine to expedite the feedback loops between production, employment, analysis, feedback, and modifications. As a result, the warfighters actually get what they need and much faster than the years traditional programs would take.

Of course, One Way Aerospace isn’t alone in their attempts at disrupting the business cycles of the defense department and industry. The New York Times article mentions several other companies including Fortem Technologies —building counter-drone technologies, Capella Space —providing synthetic aperture radar satellites, HawkEye 360 —detecting radio-frequency emissions using satellites, and even SpaceX—which provided Starlink services to Ukraine.

Further, I’ve shared my (now slightly outdated) industry landscape and even PitchBook has recently created a similar market map as part of their Vertical Snapshot: Defense Tech.

Challenges Facing Defense Start-ups

Of course, leaning forward comes with significant challenges.

The NYT’s article highlights that while the military provides small grants and short-term contracts (including SBIRs) to many start-ups, those agreements often expire too quickly and are not large enough for young companies to meet their payrolls — or grow as rapidly as their venture capital investors expect.

These funding programs are an important tool for the DoD to help companies bridge the notorious Valley of Death. Essentially, the funding is in part designed to help a company keep the lights on while the department goes through the programming, planning, budgeting, and execution process associated with large scale defense programs.

And SBIRs have undoubtedly increased the flexibility of the department, but they’re still not always adequate for companies seeking to rapidly scale production of a necessary product. These companies often remain operating at significant risk. In other words, the Department of Defense needs to continue to find ways to support the technology companies that are finding valuable and innovative solutions for the problems warfighters face.

Defense start-ups are also under pressure from their investors. Most defense tech investors have come to realize that defense start-ups may take even longer than other types of technology companies to lock in revenues and see profitability. Nevertheless, the structure of VC funds and commitments to limited partners may lead to defense start-ups feeling pressure to show cashflow. This could lead to diverted attention from the most promising and needed products to those that can sell quicker (or that can secure short-term grants and funding).

Opposition from Entrenched Interests: Price Gouging

Of course, the success of these start-ups in the aerospace and defense industry may not be in everyone’s interest. This reality becomes even truer if the success of these start-ups comes with reform of the existing defense processes.

The period of time that saw Silicon Valley largely ignore defense also saw a massive consolidation of the defense industrial complex. The Department of Defense encouraged this consolidation, seeing it as a potential cost saver. It seems that sentiment was highly myopic.

Earlier this week, CBS’ 60 Minutes ran a segment about a six-month investigation that found the larger defense contractors are engaging in practices that are tantamount to price gouging. I have a lot of respect for these companies and they do provide critical materiel and services to the government. The reduced competition, however, has allowed such dominant positions that these companies have essentially reached monopoly pricing for their goods and services. The department has become a cash-cow for them. In Fiscal Year 2022, Lockheed Martin, the largest defense contractor, took home $35 billion in revenues from defense contracts. The second largest contractor, Raytheon, took home $20 billion. Together the top-5 defense contractors (the Primes) received nearly $100 billion in defense contracts. This has created an amplifying feedback loop, forcing the government to raise the defense budget to record levels and have also made replenishing dwindling supplies of munitions and weapons difficult.

And, while the companies contribute massively to our national security, they’re in no rush to change the systems that have led to their dominant market shares and led to these massive revenues.

I had a conversation with an intrapreneur at one of these primes recently. He relayed his frustration at getting innovative programs approved. Reading Ashlee Vance’s newest book, a passage reinforced the intrapreneur’s frustrations. An official at one of the Primes exclaimed that “we don’t do a damned thing without the government asking for it.”

We desperately need innovation and modernization across the department and industry. We need the most cutting edge technology that allows us to maintain the razor-thin edge over those who would see the destruction of the western way of life. And, we need to not hamstring our economy or our government’s budget as we do so.

Overcoming Challenges and Promoting Collaboration

The first step to overcoming the challenges facing defense start-ups is expectation management. Start-ups and their backers need to understand that embarking on innovation is hard and doing so within the constraints of the defense industry is even harder. There will be frustrations and headaches and plenty of disappointments.

Building an advisory network is critical as well. This network can alert start-ups to business opportunities and help founders conduct cost-benefit analyses on those opportunities. For example, in a recent conversation with a founder, I ultimately advised against a particular SBIR opportunity as it would not move the needle for the company and would likely distract from their core business.

These start-ups also need to look for opportunities for collaboration with the defense primes. As I mentioned, the primes are filled with executives and employees that are strongly motivated by a sense of purpose and contribution to national defense. It’s often true that the various defense agencies are wary of start-ups without track records. A defense prime can lend credibility to an effort. Their subcontracting opportunities also can provide necessary revenues and capital to the start-ups. In return, the prime is able to outsource the more forward-leaning (and consequently risky) innovations.

Through all of this, the government must continue to provide set-asides for small businesses and find innovative ways to provide longer-duration contractions and non-contract vehicles to start-ups. One such often discussed vehicle are other transactions (OTs) used for research and prototyping.

Finally, we need increased accountability from the government in enforcing fair pricing and timelines.

Conclusion

We’re in a really unique period of time where Silicon Valley’s values align more closely with the Department of Defense than at any point since perhaps the creation of Fairchild Semiconductor.

Unfortunately, these companies still face massive challenges in bringing innovation to the department and helping field the most lethal and capable force that will defend our country and our way of life into the future.

We must continue to work to prevent monopolistic practices and ensure that these companies that want to support us are able to do so.

And, of course, we need to…

Keep building!

Andrew