Rebuilding the On-Ramp
Practical contracting changes can accelerate the development of innovative technology.
Hunter Scott is a Founding Engineer at Reach Power.
In the 20th century, the government had access to the latest technology because it was funding and directing most of the technology itself, along with prime defense contractors. But now the tables have turned: industry is outpacing government R&D and startups are moving at blistering speeds, proliferating game-changing platforms and capabilities powered by software rather than expensive, exotic hardware. These capabilities need to transition to the warfighter at a speed that matches this progress. The Department of War (DoW) has recognized this change and is in the middle of large-scale reforms aimed at speeding acquisition of these new technologies. But buying the technology when it’s mature is only part of the equation. If the DoW wants to encourage defense innovation at the scale and speed of Silicon Valley, it must allow startups to run the same successful playbooks that they use for commercial customers. The on-ramp for startups doing business with the DoW needs to be rebuilt.
Escaping the Commercial Valley of Death
In the commercial world, startups use several techniques to move fast and avoid the valley of death. First, they’re able to sell a small number of unpolished prototypes to a small group of passionate users. This is an indicator that they’re making something people want: at least a few people have a problem serious enough that they’re willing to accept an imperfect solution for it. The quick and early feedback from these users fuels the iterative process of making the product better: not just more “finished,” but better at solving the real problem. It’s usually straightforward for a company to be able to charge for their prototype once the commercial customer agrees to buy it. This isn’t always the case with the government.
Second, startups can leverage letters of intent (LOIs) to indicate to investors and themselves that someone intends to buy the finished product. These letters are often used to attract VC investment, giving startups enough runway to get the first polished version of the product delivered. The DoW in its current form is not compatible with this method of early product development. Portfolio Acquisition Executives (PAEs) and warfighters can’t offer those kinds of LOIs, even though the letters are completely non-binding. A contracting officer must be involved. There is no way for the DoW to indicate in a formal way that it wants to buy the future version of a product.
Y Combinator advises startups to do only two things when they’re trying to find product- market fit: write code and talk to users. Talking to commercial users is relatively easy; finding and talking to warfighters, much less watching them use your product, is a lot harder. Opportunities exist with exercises and experimentation events. Unfortunately, these events are often exclusive and infrequent, meaning new companies can’t get user feedback on their product when they need it most.
How the DoW Can Rebuild the On-Ramp
The DoW could do a few things to prevent defense startups from falling into the valley of death. First, there should be a mechanism for units to procure or test prototypes directly from startups without complex contracting. This would allow startups to get warfighter feedback early and often, like they do in the commercial world. It would also allow decentralized decision making by units, allowing them to go after the specific problems that they’re facing. Selling prototypes and pilots that cost a small amount of money ensures that the unit, with limited budget, has skin in the game and actively pursues solutions to real problems. It would also provide initial revenue for startups that are funding their product development.
Startups also need access to contract vehicles to sell things to the government, yet they can be difficult to obtain, especially for a company that is trying to do business with the government for the first time. Reforming the Federal Acquisition Regulation (FAR) is a good start, but getting into a position to transact with the government at all remains a major barrier for new defense tech companies. Without a contract vehicle, companies that are awarded Research, Testing, Development, and Evaluation (RTD&E) money can end up waiting many months to put that money to work. In some cases, if the government takes too long to get the money on contract, it disappears (I know this because it has happened to my company).
One solution that some companies use is to pay another company to use their prime contract as a “landing pad” for money so that it can quickly get on contract. This is a bad deal for everyone (except the prime contractor): the government doesn’t like it because there’s now less money for the intended project, and the startup doesn’t like it because it must sacrifice 8 to 10 percent of the total contract value. This is a huge waste of money for the taxpayer and is especially hard on startups that need to invest almost all of their contract revenue into product R&D .
DoW should make contract vehicles easier to access, especially for small and new companies. Existing defense industry consortia could help to solve the problem of companies needing a place to “land” awarded money. The awarding office could transfer money to Other Transaction Authority (OTA) contracts that are held by the consortium, and companies could join the consortium and pay a much lower fee than if they subcontracted directly from a prime contractor. This is already done sometimes, but to make it work well, OTA contracts with consortia should be modified to explicitly allow any DoW office to use this mechanism. Likewise, subcontracts performed this way should not need to be recompeted after the money is transferred to the consortium.
Next, PAEs and colonels should be allowed to issue a capped number of LOIs for products each year. These would have no price associated with them, but would declare an intent to purchase a number of units or software licenses. This would provide a formal way for warfighters to communicate demand to the DoW and to VCs about capabilities that they want. Critically, it would also allow warfighters to show demand for capabilities too novel or unique to have an existing formal written requirement or capability gap.
Finally, DoW needs to increase opportunities for warfighter feedback of products and capabilities. Several avenues for this already exist, like Special Operations Command (SOCOM) Technical Experimentation events and numerous other exercises listed on Vulcan (SOCOM’s innovation scouting platform). The problem is that these events only happen a few times per year, they’re not always coordinated and sometimes overlap, and startups must vie for a small number of slots to be accepted. Many other events don’t have a public application process at all, so companies must be referred or recommended by government insiders.
The DoW must match the speed of technology development by assessing more companies faster. Rather than individual events, the Office of the Undersecretary of Defense, Research and Evaluation (OUSW R&E) should have a rolling assessment program that continuously runs at one location. Dedicated assessors at OUSW R&E would observe demonstrations lasting roughly one or two days and post an abbreviated writeup to Vulcan. This would allow the DoW to learn about more technology and to watch and chart the progression of companies and technologies. It would also allow the thousands of units and offices within the DoW to find and follow the specific capabilities that they’re interested in. This would reduce the risk that a critical capability is passed over just because there weren’t enough slots, an application reviewer didn’t recognize it, or the application was poorly written.
Measuring the Results
How would we know if these new policies were working? One metric would be the number of new technologies and capabilities evaluated per year. Compared to the current number, we should see a huge increase, and this metric could be benchmarked against the number of new defense tech companies being founded and VC activity. We should also see more contract activity from these companies. Ultimately, we should see more new capabilities fielded per year.
Our national security depends on our ability to match the speed of technology with the speed of transition. Contracts, demos, and PR mean nothing unless the technology makes it out of the lab and into the hands of the warfighter, contributing meaningfully to the lethality and dominance of the United States. A few simple changes could help startups deliver that technology.
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