Innovations: Essential Approaches to Ushering in the New Era of Public-Private Technological Innovation
Chris O’Donnell, performing the duties of assistant secretary of defense for acquisition, said in November 2021, “Against the backdrop of a strategic competitor, our approach to acquisition must have the flexibility to adapt to the evolving environment.”1
This opening INNOVATIONS column for 2022 suggests that China’s evolving innovation capability calls on the Department of Defense (DoD) to access the latest technologies by enlisting private capital and imitating its practices.
The column comes to us from two members of the Common Mission Project Board of Advisers—Peter Krow, managing director at Willett Advisors and Chris Moran, executive director and general manager at Lockheed Martin Ventures.
The Common Mission Project (CMP) defines its mission this way: “We are building an international network of mission-driven entrepreneurs to solve the greatest challenges of our time. We are unleashing entrepreneurship as a form of national service.” There are three common elements of the critical world challenges that this network must solve, according to CMP. They:
- Cut across government, private and non-profit sectors.
- Are constantly evolving in a fast-moving world.
- Require a problem-based approach to ensure solutions are relevant, grounded and implementable in the real world.
At the core of CMP is the Hacking for Defense®2 course, which began at Stanford University in 2016. The class, now taught at 47 U.S. universities, offers the DoD and intelligence community a chance to collaborate with student teams to develop innovative solutions to emerging threats. In 2020, CMP launched three new “Hacking for” programs: Hacking for Homeland Security (H4HS), Hacking for Diplomacy (H4Diplomacy) and Hacking for Oceans (H4Oceans).
In Hacking for Defense, DoD and the intelligence community supply problems for student teams to pick from. Teams conduct dozens of interviews questioning, breaking down, and validating those problems with the programs seeking solutions. Participants must directly contact operators and experts, and then the teams come up with proposed solutions.
As of May 2021, more than 2,000 students had completed the class, tackling more than 750 problems with a 58% solution adoption rate. The class also had spawned 14 startup companies led by those mission-driven entrepreneurs CMP seeks to build.
CMP also supports the Defense Investor Network (DIN). Bringing together national security-minded leaders in private investment with government leaders, the DIN identifies best practices, challenges and opportunities for private capital to support mission-critical initiatives. The DIN includes more than 200 members of more than 120 investment firms.
Considering this, it is no surprise that CMP favors a private investment model for solving defense problems. This article, excerpted from the CMP 2021 Board of Directors Task Force Report, explains how such an approach might work and why it is so vital to today’s urgent needs.
BY PETER KROW AND CHRIS MORAN
There is increasing acknowledgment that we need linkages between the Department of Defense (DoD) and private capital markets to fund and onboard the most cutting-edge and impactful technologies. As China prioritizes the development of advanced technologies to gain global influence—including its explicit strategy of “military-civil fusion”—the urgency grows.
The U.S. government’s well-intended response has led to a proliferation of programs seeking to address this challenge, but it does not necessarily recognize where these programs can work and where they cannot. Even with that awareness, we still need to get on the same page with solving the highest priority issues.
History has shown us that fostering public-private collaborative innovation works. The Manhattan Project was born of early government and commercial joint initiatives aimed at solving large-scale issues through long-term strategies. The foundation of Silicon Valley sprouted from military technology research. And, more recently, we’ve seen the success of public-private collaboration in aerospace technology through organizations like SpaceX.
There are two ways the DoD can not only continue to reap the benefits of public-private partnership but amplify them in the face of Chinese innovation. First, by accessing the best, most efficiently sourced technologies that align with national security needs. Second, by rebuilding bridges between DoD and private capital, and solidifying partnerships with entrepreneurs and venture capital groups working on shared missions in U.S. security and safety.
“Technology” is a broad term and it is worth examining which types of technology public-private efforts should prioritize, the unique approach each type requires and their limitations. There are three fronts of technological innovation on which the government should capitalize.
Commercial Technology
Commercial technology is devised in the interest of business, but often can have defense applications. These technologies currently focus on software (where capital-efficient business models have attracted large amounts of venture funding), as well as hardware and electronics solutions. These types of solutions are generated at high volumes to address large opportu-nities, which allow for capturing efficiencies in production and driving down unit costs.
The Defense Innovation Unit (DIU) can play a vital role in transferring the use of commercial technology into the public sector by placing orders with these companies for products or services. Though these orders of often-unproven technology are typically small, the DIU order allows a startup company to work directly with a DoD customer to find product-market fit. More importantly, DIU has a footprint in innovation centers, such as Silicon Valley, Austin and Boston, that helps create link-ages between the DoD and entrepreneurs.
We should expand this program to align innovation growth in secondary and emerging technology markets. But we also need to examine the methods DIU uses for acquisition to better align them with the needs and methods of the private capital it seeks. DIU still operates a solicitation, select and fund methodology.
The venture capital community tends to have a larger aperture for innovation and will fund opportunities that have the best chance of returning a multiple on their investment. Startups often “pivot” from their original intent to maximize value creation. So, the clear challenge here is how can the government attract more private capital to problems it needs to solve? Alternatively, can the government be more opportunistic in acquisitions to access great tech in quantity that was not in its plans?
Key limitations: We can’t use technology that our adversaries could end up controlling, so DoD needs to source technology exclusively from credible companies (the Trusted Capital Marketplace3 is a strong example of this playbook).
There is also the broader issue of procurement. We need to ensure technologies are not over-specified so that the gov-ernment can leverage them across the higher volumes produced for commercial applications and provide cost-efficient ac-cess.
Venture-backed technologies are solutions looking for markets, whereas the government focuses on problems for which it needs to find solutions. A greater openness to solutions not specified in RFPs will give the government greater access to commercial technologies and increase alignment with venture capitalists (VC).
Dual-Use Technology
This technology is funded with the intention of having both commercial and defense applications. Pursuing this vein of tech-nology can mean finding companies that may not have a large enough market for purely commercial applications but adding the defense market would make development more viable.
In-Q-Tel4 is one such highly successful model. It originated as a partnership with the CIA to advance dual-use technology in accordance with intelligence and defense needs. It has recently expanded to include some smaller initiatives with DoD.
Additionally, the potential applications of these technologies can be broad. In harmony with the 2018 National Defense Strategy,5 we need to home in on how the defense sector can specifically benefit from “large” innovations. These include AI, automation, and quantum computing as well as large “potential” categories such as biotech.
Most importantly, we need to identify them early on to leverage both public and private use to increase viability. It would be a decades-long process for the DoD to re-create In-Q-Tel. For now the best course of action is to start multiplying partner-ships with entrepreneurs and VCs to learn from their successes—and failures.
Key limitations: The scale of In-Q-Tel’s model is small; it only invests $100 million annually, which limits it to earliest-stage companies. The government must make it attractive for startups and commercial companies to work with the DoD. Since startups fail at a very high rate (more than 90% do not return investor capital), the government can instead foster startup attention. This can be achieved by organizing markets, creating large opportunities and working with solutions as presented, rather than focusing only on specific problems and needs.
Venture Capitalist-Funded Technology
It is critical for the DoD to fund technology, using venture capitalist methods, where traditional venture capitalists (VCs) have no interest. Defense technology is developed for our military, and typically has additional commercial applications. Many of the most innovative technologies to come out of Silicon Valley have origins in defense technology such as computers, silicon chips, the Internet, RF communications and more.
There are some technologies for which traditional private growth capital markets are not suited. Some defense technolo-gy projects are necessarily longer term, so the two approaches are at odds. Even long-term investors (e.g., endowments, foundations, family offices) focused on returns within a timeframe (e.g., 10 years) generally are not compatible with military innovations.
To open the potential of defense technologies in dual-use markets, we need to recognize which areas of investment are unlikely to attract outside venture funding, making companies open to DoD funding. These areas, such as hypersonics, di-rected energy and missile defense have little to no VC traction. The unknown size of the market, unclear product differentia-tion and limited commercial application make these unattractive investments for VCs.
Perhaps the most crucial benefit to public-private collaboration is the experience and credibility—not just the capital—that the government can acquire. We can outpace China with a sophisticated strategy that moves away from thinking of DoD as a customer to DoD as an investor by growing its awareness of best-in-class, off-the-shelf technology.
Technological innovation in the interest of defense is important to our national safety, but there is a bigger opportunity to replicate the advantages beyond government and advance our nation. CM
Peter Krow
Focused on investing in technology businesses for over 20 years ■ Currently the managing director of direct investments at a single-family office ■ Previously vice president with Vector Capital, a value investor in private and public technology businesses ■ Worked at Google in sales and operations; Atalaya Capital Management, a special situations investment firm; Alta Communications; and TMT investment banking group at JPMorgan
Chris Moran
Investing for 15 years in leading technology companies through corporate venture capital ■ Responsible for leading corporate investments in small technology companies that support strategic business objectives ■ Served in a variety of increasingly responsible positions in 32 years at Applied Materials, Inc.
ENDNOTES
Remarks at The Acquisition Innovation Research Center’s inaugural AIRC Day, November 2, 2021
https://www.h4d.us/
https://www.acq.osd.mil/tc/
https://www.iqt.org/
https://dod.defense.gov/Portals/1/Documents/pubs/2018-National-Defense-Strategy-Summary.pdf