Steve Blank

The U.S. Department of Defense is coming to grips with the idea that the technologies it needs to keep the country safe and secure are no longer exclusively owned by the military or its prime contractors. AI, machine learning, autonomy, cyber, quantum, access to space, semiconductors, biotech are all being driven by commercial companies.  At the front-end of these innovations are startups – organizations the Department of Defense hasn’t previously dealt with at scale.

They’re now learning how.

Mrinal Menon is one of my Hacking for Defense students at Stanford where he’s currently in the MBA program. He’s a former U.S. Navy Surface Warfare Officer. Jeff Decker is a co-instructor of the Hacking for Defense class and the Stanford program director. Jeff is an Army Second Ranger Battalion veteran.

Mrinal and Jeff’s article below explains how startups can adapt and thrive while working with the Defense Department. And how the Department of Defense is learning to work with startups.

This article previously appeared in Fast Company.

At a time when young companies struggle to find technology sectors not dominated by Silicon Valley’s giants, most startups remain oblivious to one of the largest markets in the world, the U.S. Defense Department. The military awarded $445 billion in contracts in 2020. By comparison, last year’s global market for software-as-a-service, one of the hottest sectors for startup creation and investment, was estimated at $104 billion.

There’s a willing market here, too. The Pentagon is eager for help from the nation’s innovators. The military is clamoring for cutting-edge technologies in areas like artificial intelligence, machine learning, and autonomy. To attract interest the Defense Department is handing out unprecedented numbers of small contracts and in 2020 seeded 1,635 firms with more than $1.5 billion in early funding. Dozens of outreach programs across the military now offer quick revenue to early-stage companies. A startup could land a contract worth up to $3 million within months of entering the defense market.

This emerging opportunity reflects the urgency of keeping pace with rivals like China and Russia, who are furiously integratingcommercial technologies like AI, quantum computing, and unmanned systems into their armed forces. If former Google CEO Eric Schmidt’s prediction about China overtaking the United States in AI comes to pass, the People’s Liberation Army could be better prepared than the U.S. military for future conflicts in which cyberattacks and drone swarms play a larger role than warships and fighter jets. Without adopting cutting-edge commercial technologies, the U.S. military may be rendered obsolete.

Yet, for every newly minted success like Palantir or Anduril, thousands of companies struggle to find follow-on opportunities after receiving early innovation contracts. Historically, more than 80% of new entrants exit the defense market before they have a chance to see recurring revenue. Anduril founder Palmer Luckey has sardonically noted that the only defense companies to reach unicorn status in the past 30 years have all been founded by billionaires able to endure long gaps in funding. To truly compete with technologically advanced rivals, the Defense Department will ultimately need to enable a broad pool of innovative founders to succeed. Until this ecosystem materializes, however, building a successful defense business is likely to take years of grueling effort. Before committing to work with the military, startups must look past the allure of early money and carefully assess whether the defense market is right for them.

The Key Questions For Startup
Despite the Pentagon’s newfound enthusiasm for innovation, startups in the defense market continue to encounter longstanding obstacles. Most companies face uncertainty when trying to bridge prototyping awards with more permanent follow-on contracts. Startups that successfully fulfill innovation contracts don’t automatically scale. Instead, their solutions must still compete for funding in a formal budgeting and acquisition process before being eligible for widespread adoption . This ordeal takes two years or more, during which startups should anticipate little or no revenue as they try to push their product through the bureaucracy.

While earning the first $1 million in the defense market can be relatively easy, landing the next $10 million is extremely difficult. Before committing to work with the military, startups should carefully consider whether the defense market is right for them by asking three questions.

Is there strong interest for the product?
Those that offer solutions to high-priority problems have the best chance of sourcing funding and follow-on awards. Startups should assess how well their technologies align with the needs outlined in the defense budget, various modernization strategies, and problems posed by defense innovation hubs. For example, “flying taxi” startup Joby Aviation aligned its electric vertical takeoff and landing aircraft with the Air Force’s stated interest in advancing the market for air mobility vehicles. The 3D mapping company Hivemapper found traction with the Army by targeting its need to autonomously resupply field artillery units.

Is the company prepared to endure revenue gaps?
As noted, companies may go years without defense revenue while trying to bridge early contracts with larger opportunities. During this period, startups will need to sustain business development activities and may incur additional regulatory and compliance costs to ensure their product is usable by the military. Investors are also likely to express impatience with the long timelines of defense sales. The best prepared companies can either raise sufficient funds to keep operating or count on revenue from other sources. Palmer Luckey’s Anduril has aggressively pursued financingto sustain growth. Recently public enterprise-AI firm C3.ai entered the defense market having already built a successful commercial business in the energy vertical. Similarly, 3D-printing homebuilder Icon’s technologies have applications that extend well beyond national security use cases to commercial housing markets.

Can I balance the needs of my defense and commercial customers?
The best-positioned startups solve fundamentally similar problems for both military and commercial users. Satellite imagery firm Orbital Insight’s Go platform, for example, automates imagery analysis for defense analysts, investors, and agribusiness alike. Some amount of customization is inevitable given that military users often have specific mission requirements or technical constraints. However, companies that can serve military customers without fundamentally altering their existing product roadmap are likely to be most successful.

Incidents like Google’s withdrawal from Project Maven have highlighted the potential for conflict when commercial companies decide to work with the military. This tension tends to be lower at startups where an early team willingly signs on to pursue defense business. Regardless, companies should be mindful of the reputational impacts working with the DoD could have on their existing business.

The Case for Optimism
Companies eyeing the defense market have reason to be optimistic. There are a growing number of efforts to remove obstacles to partnerships between high-tech startups and the military. For example, the Air Force last year created the Strategic Financing (STRATFI) program. STRATFI provides the Air Force’s most promising commercial innovators, a list which includes Icon and Orbital Insight, quick access to large contracts worth up to $15M. Another positive sign is President Biden’s nomination of former Symantec CEO Mike Brown to oversee the Pentagon’s purchases of new technologies. As director of the Defense Innovation Unit (DIU), Brown has spearheaded investments in commercial technologies and helped C3.ai, Joby Aviation, and other Silicon Valley standouts navigate funding gaps. If confirmed, Brown could accelerate much needed reforms to military acquisition processes.

A startup that makes it through the hurdles may find a massive market with a stable set of customers eager for better technology solutions. The U.S. government pays its bills on time, defense budgets are shielded from short-term volatility, and contracts may be guaranteed for multiple years. Once onboarded, military users can quickly become long-term customers given the challenges involved with switching to another product.

Filed under: National Security |