Startups won't scale in defense without budget flexibility

These challenges can be met. But the concept still requires a major feat. Congress must amend the budget process so that relatively big dollars can be reallocated in the year of execution. That would require something like mission-funded accounts, as opposed to the current two-or-more-year programming cycle.

As Trae Stephens of Founder Fund concluded: “If you can’t figure out this out-of-cycle funding for companies, then you’re just going to get stuck in this multiyear budgeting process that — due to its very nature — is biased toward the integrators that have been playing the game long-term.”

Chris Brose concurred. “We have gone too far as a nation tying the hands of the [Defense] Department. I think greater flexibility for experimentation in current fiscal year is vital.”

That was the ending of my latest article in Defense News, “Should the Pentagon stop playing the role of venture capitalist?” Read the whole thing. It’s difficult to excerpt.

It seems VCs envision a world where they fund startups to a demonstration/prototyping phase, and when real information is made available, the DoD should have big dollars waiting to scale the best performers. I point to a number of hurdles for the model, none of which is insurmountable. But the biggest hurdle, of course, is fixing the flow of funds.

I’ve seen a recent upsurge in discussion over this problem. For example, a nice article by Robert Atkinson at Real Clear Defense:

Yet despite being authorized, and fully supported by DoD, Congress two years later has yet to appropriate the funds to get the program off the ground.

But I haven’t really seen anyone address the problem head on. We must fix the Planning-Programming-Budgeting-Execution (PPBE) process. Pure and simple. The whole thing is broken. It is a relic of Soviet-era 5-year plans. It presumes technology can be predicted many years out, and plans rarely change. It presumes all programs can be articulated, brought together into a single coherent plan, and optimized by a genius staff. It is the precise opposite of complex systems thinking. For example, notice how Atkinson’s recommendation tip-toes around the problem:

… it is past time for Congress to fully fund the National Security Investment Capital program to provide needed early stage funding for the types of companies and technologies DoD needs.

That isn’t a long-term solution. To the point, if Congress wanted a flexible and well-funded innovation fund, they would have established it. (The recent Rapid Prototyping Fund — defunded in the FY 2020 NDAA — doesn’t count in my mind for many reasons.) It doesn’t address the reason why we don’t have one already. Congress’ processes of insight and approval are all on the budget (future-looking) side. They don’y have regular processes for seeing where the money was actually spent and whether it led to effective outcomes.

Acquisition reform should take a break for a while and focus totally on the budget issue. It is the most important incentive in the Department. A change in budget classification from a program-orientation to a mission- or organizational-orientation seems relatively simple from a technical standpoint, but has far-reaching ramifications that need dedicated thought and management.

I would argue that the reason reforms in workforce, contracting, requirements, and milestone processes have largely failed in the past is because the PPBE wasn’t addressed. And I would ague that addressing the PPBE head on — focusing totally on that one goal — would create positive effects in every other area.

So much is already in motion on other fronts. Perhaps PPBE shouldn’t be address until we see the result of the rest of the reforms already in full swing. Or perhaps they are doomed without a change to the PPBE/budget process.

I think a good middle ground is creating a mission-funded technology transition account. Something like a “6.3-and-a-half” account that has significant funds. This pilot, if successful, should be expected to grow into all RDT&E, and then perhaps Procurement. The greatest effects of mission-funding, however, come when the missions really represent organizations. And organizations can explore missions in different ways, even competing on developments with other organizations.

But it all starts with figuring out accountability. If more discretion is given to officials on how appropriations are spent, then Congress must close the loop on accounting for where the money actually went, how effective the outcomes were, and who to hold responsible.