“In terms of how to build a startup and how to scale really fast, you can’t have two missions,” said Katherine Boyle, an investor with venture capital firm General Catalyst, during a Defense News roundtable in California. “You can’t be a 10-person startup saying: ‘OK, we’re going to sell to the DoD, but we’re also going to sell to these commercial customers, and it’s just going to work out magically.'”
“We actually think this is a better model,” Boyle said. “If you’re scaling rapidly, you have to be very focused on your customer set. And if you’re going to have to sacrifice a customer, even if you’re a multibillion-dollar company, you’re going to sacrifice the one who’s moving the slowest. And that’s usually the government.”
That was from the C4ISRNet piece, “Silicon Valley investors to DoD: Dual-use tech is a bad strategy.” I tend to agree. The government has very particular marketing, compliance, and sales process. They do not transfer very well. Just like consumer tech firms have little overlap with enterprise, commercial enterprise differs vastly from government enterprise. Small firms need focus.
Besides, defense firms have attempted to enter commercial markets for many decades. What really has changed to make this foray more successful?
Dual-use is at the heart of some DoD efforts. For example, Air Force pitch days requires firms to find commercial investors (or pre-sales) to match government funding. It’s not clear that strategy will produce many startups solving problems for hypersonic missiles and other areas. Another example is the Trusted Capital Marketplace. Here, instead of simply giving promising new firms funding, the government seeks to create a platform for private investors to put down the capital.
Here is more from the C4ISRNet article:
“Where I’m not on board is where a traditional defense company is being asked by the government to integrate dual-use capabilities as a way to prevent that oligopoly from being shaken,” [Trae Stephens] said. “We have to break this oligopoly. We can only do it if we find companies that are willing to own their responsibility for execution on programs.”
In other words, double down on promising firms by assigning them real programs of record and holding them accountable for execution.
David Tate comments: “It sounds like you’re coming around to my notion that we should think of the defense prime contractors as a regulated public utility :-).
We’ve tried TSPR before; it was an unmitigated disaster. Until we (collectively) understand why TSPR failed we should be very hesitant about trying again. I keep coming back to the fact that Boeing made healthy profits by failing on FCS and JTRS GMR and FAB-T. What would we need to have done differently to keep that from happening? If Boeing isn’t willing to risk major losses on defense programs, we can’t force them to sign those contracts… How can we make them accountable for poor performance without making them so risk-averse they won’t accept the tasking? If we make them 100% dependent on DoD tasking, does that mean we can’t afford to let them fail?
I wouldn’t say treat them like regulated public utilities because I don’t think defense firms doing innovation benefit from economies of scale — indeed, the very “bigness” and bureaucratization of defense primes is why the DoD is looking to startups to shake things up.
Of course, when we choose quantity reproduction of major hardware, there is undeniable economies of scale at work. But how much scale is efficient? I think that efficient scale has been coming down over the decades due to the rise of information technology which turns everything into “as a service.” DoD needs to integrate itself into that framework by making explicit programs out of intermediate “as a service” companies as well as final output “lead systems integrator” companies.