Can the Air Force scale small companies into a program of record?

Remember the dreaded “valley of death” in technology transition? The Air Force plans to bridge the valley by progressively scaling up its pitch days. A new company can walk in the door and if all goes well, a couple years later will have a program of record under its belt. That could be huge. It’s unproven, but let’s take a look at the process. The following comes from an excellent brief given at the Acquisition X conference from Capts. Chris Benson and Austin DeLorme.

Small bets (~$50K)

The Air Force plans to have 3 rounds per year of Phase I pitch days. Companies can apply online with a 5 page pitch. About 1,000 awards of $50,000 are expected. A 3 month execution period is provided. The contracts and payments are given the same day. This means that the Air Force actually writes up a simple contract before the pitch day even occurs, and signs it there on the spot for deserving companies. I believe these use a government purchase card.

Medium bets (~$1 million)

The next step is Phase II pitch days, which may be run by the Program Executive Offices. The PEOs are the ultimate customers. It is important that PEOs take part to ensure a smooth transition so that companies address real military requirements. The Phase II awards come in at about $1 million, and require 15 page proposal with a short video demonstration. Perhaps 100-300 awards will go out each year.

A big difference for Phase II pitch days is that they require matching from private investment. A company will have to wrestle up $1 million in outside investment to secure $1 million from an Air Force innovation hub like AFWERX. Nuances abound, however. For example, the matching can come in the form of pre-sales. There can also be $2 of government funding for $1 of private investment if that comes from a PEO customer rather than an innovation hub.

Large bets ($10 million +)

The third phase makes up large bets of $10 million or more. These are “strategic” SBIR awards, which come in dollar amounts much greater than traditionally allowed by the SBIR program. Perhaps 10 or 20 strategic bets will be made each year, with a period of performance less than 2 years. None have occurred yet, the first “pitch bowl” is planned for March 2020. Private matching requirements are higher. $2 of private funding is needed for $1 from a government innovation hub, and this time, a PEO customer must be secured to match another $1. The matching requirement is then 1:1:2.

(Note, this information is to the best of my knowledge. The matching requirements were not perfectly clear to me from attending the presentation. While the slides say that large bets are $10 million or more, that likely includes private matching — due to SBIR funding caps, the award can be up to $3 million from AFWERX and $3 million from a PEO. However, there are intimations that there will be no caps, so perhaps they meant $10 million+ in government funding.)

Winners of the “strategic” SBIR award can scale their developments and get in line for a program of record. They should already have a government customer in a PEO, securing the transition.

Continuing challenges

Air Force innovation hubs like AFWERX will not provide introductions from companies to government customers in the PEOs. The companies themselves must knock on doors, discover requirements, and so forth. One can imagine if about 1,000 small bets are made each year, the small AFWERX staff cannot spend all its time fielding questions and playing match maker. But that also puts new companies in a bit of a hard spot if they don’t know the defense ecosystem, and will perhaps have to pay for access to government customers through retired generals or contracting officers.

Of course, securing private funding for a startup making a defense play can also be very hard. Peter Thiel said that SpaceX and Palantir had to wait more than six years before outside investors were willing to take on the risk. It might be that the Air Force will have to first demonstrate scaling into a program of record, and the big rewards that brings to companies, before private investors will start believing enough to make such investments.

Undemonstrated transition to a program of record remain an issue. Will the PEO have to coordinate a new funding line item in the budget for the winners of the “strategic” SBIR phase? That will take at least 2 years in the PPBE process. It presumes that the winners will be known ahead of time, because the execution period is only 2 years. The budget process for funding a new program of record will have to begin at the same time the “strategic” SBIR is awarded. A possible request could look something like: “to be determined from this list of projects.” In general, approving offices will not find that adequate, particularly Congress.

The transition seems plausible if it occurs into an existing program of record. For example, if the scaled project comprises a component on a major weapon system then the government could use already programmed funding. Well, usually the funding request was based on the needs built into the existing plan and contractor teaming. That would mean a contractor will have to be let go from the program of severely curtailed. That can be difficult.

Conclusion

I am very happy to see the Air Force tackling the valley of death problem with creative solutions. Scaling new companies through three rounds of pitch days and into a program of record is well worth a try. But it is not clear that the budget process is flexible enough yet to allow for that last hurdle. And so pitch days are limited primarily to SBIR set-aside funding, while traditional contractors have their grips firmly set upon the majority of defense acquisition dollars that are programmed through the usual PPBE process.