Three of the co-founders of the Air Force Ventures program at AFWERX joined me on the Acquisition Talk podcast to discuss how they transition startups and new technologies across the valley of death and into major programs of record. While AFWERX is only approaching its third birthday, they’ve had some tremendous success. Over the past 18 months, they’ve contracted with 1,000 companies — many of which were new to doing business with the DoD. They brought in over $1 billion in matching venture capital dollars in 2019, more than the past 15 years combined.
And yet, one of the often head complaints is that the DoD spreads small dollars far-and-wide rather than making big bets on non-traditional firms. The process for changing that narrative was the focus of our conversation, including:
- The Strategic Finance (STRATFI) program and “pitch-bowls”
- How to create a vibrant industrial base without creating new defense primes
- Reducing time to first program dollar from 6 years to a matter of months
- Lofty goals of repeatedly creating new dual-use unicorns
- How to line up funding that isn’t tied to specific solutions or vendors
A lot of people perhaps imagine the people at AFWERX having coffee on Sand Hill road with VCs and startups, but in reality almost all of their time is spent refining the back end of the acquisition process. For example, AFWERX worked with organic software developers at Hill Air Force Base to automate several parts of the contract administration process, so less time is spent copying information from PDFs. As a result, AFWERX has been able to reduce time to contract to about one month, a target many contracting offices have been unable to achieve.
Podcast annotations
The Air Force Ventures program is a process where startups and non-traditional contractors can enter the defense market. I wrote a post outlining the process back in December 2019. It starts with the AFWERX “front door” leading to small bets of about $50K. Approximately a thousand of these small bets are made each year with a three month execution period. The next step are medium bets of about $1 million, of which there will be 100-300 per year. And finally, the large bets of perhaps $10 million through the Strategic Finance (STRATFI) program, which is intended to bridge the “valley of death”.
One of the big differences from how small business interacted with the DoD before is that program offices bring their own money to the table, rather than just relying on SBIR set-aside funds. Something like $260 million in actual program dollars was brought to the table last year, which means the real customer is getting involved, putting skin-in-the-game, and planning to on-board the best technologies. Here’s Chris on why the process is different than before — and more likely to result in transitions at scale:
Before we awarded any of those STRATFI contracts, they needed to have buy-in from a PEO [program executive office] — someone on the acquisition side — but also a requirements provider from the MAJCOM, so the people who are going to be going out and POMing for these things [i.e., lining up funding]. We want those people who are in control of the resourcing and acquisition processes bought in before we make these large bets.
In March 2020, AF Ventures had their first STRATFI “pitch bowl” where 21 companies received roughly $550 million in funding. It was comprised of $100 million in SBIR funding, $100 million in Air Force program dollars, and $350 million from private sources. That translates to more than $26 million per company, with the government’s share coming in close to their original goal of $10 million each.
One of my early criticisms was the following: say AF Ventures is able to make strategic bets of $10 million or so, which can sustain the firm long enough until the PEOs and MAJCOMs can build them a real program of record with recurring revenue. You may then have a “chicken-or-the-egg” problem. Not all 21 firms will likely succeed and get a program of record. But you have to know basically at the outset who the winners of the STRATFI phase will be in order for the programmers to start lining funding up for them 2 years ahead of time. Chris and Steve have a couple good responses, and here’s one from Jason:
As you know Eric, good requirements that are written into the budget are written as requirements not tied to specific solutions. There’s certainly cases where funds are already budgeted for a requirement, and one of the capabilities that we back meets the requirement at a higher performance level, or does it cheaper for the Air Force.
You talk about the full spectrum of what drones can accomplish in the commercial sector — there are a lot of Air Force bases that need to be inspected and are inspected and paid for out of 3400 [O&M] money. So there’s no reason why markets like that shouldn’t be penetrated by innovative companies that can meet the mission needs. So it’s not always that we need to so some new budget action for this thing.
That’s a great point. I think there’s still a lot of program funding, particularly in RDT&E and Procurement, that’s targeted to specific solutions and companies. 3400 Operations & Maintenance funding is a bit more flexible. But Jason is definitely right that greater focus on the requirements rather than solutions can allow for more flexibility. The Air Force, for example, has Tech Transition Program element of $219.5 million in FY21 that states broad mission requirements. For example, here is part of the quite remarkable justification:
Experimentation is focused on rapid learning and then pivoting based on that learning. Therefore, specific plans are not detailed to prevent locking into an approach that will likely shift based on current experimentation efforts.
Most program elements are not like that, however. Of the Air Force’s 21 strategic bets, many of them are working on very different capabilities. Depending on which ones are worthy of transfer, they will have to come from different program elements with different sponsors. Even if the budget justification is written to a general requirement, another more subtle issue may arise.
Often, there already exists a close relationship between the program office and the contractor. It can be really difficult to upset those plans and expectations in order to divert funding to a new company. Budgets are already tight as it is, justified in years past to detailed plans.
In some cases, the incumbent may go to their Congressman for support if funds are in jeopardy. It could also be a risky proposition for a program office to support a new program element for transitioning a startup. Officials’ careers and organizational standing are often tied to specific program elements, which may get downgraded if they become cannibalized for a new program. As budget scholar Aaron Wildavsky wisely noted:
Budgeting by programs, precisely because money flows to objectives, makes it difficult to abandon objectives without abandoning simultaneously the organization that gets its money for them.
Despite some hard open questions like these, I have to credit the folks at AFWERX for doing so much to help transition new firms and technologies. These are problems that have not been cracked in over 60 years. With the STRATFI program as well as a slew of other innovations like tech accelerators, agile contracting, challenges, spark cells, and so forth, AFWERX is pushing out the boundaries of the status quo.
A great paper from Amanda and Alex Bressler shows the impact AFWERX is having in data. For example, SBIR/STTR Phase I contracts going to new entrants was hovering around 11%-13% each year, and in 2019 that jumped to 30%. The improvement was led by the Air Force. In 2019, the researchers found that the Air Force brought 5x the number of new companies into the DoD using SBIR/STTR than the rest of the DoD combined (345 vs. 63). That’s huge, considering the number of new entrants in the DoD has fallen from 15K in 2010 to just 4K in 2019, with a fair number of those being off-shoots from existing contractors.
Only time will tell whether AFWERX and their allies including NSIN, SOFWERX, and DIU will be able to crack the code on scaling new startups. The point for them isn’t to create a new breed of defense primes. Rather, the idea is to entice companies with dual-use technologies that no longer have to segment out entire business units with the sole purpose of dealing with the government. This could put them on a fast track to supporting the rise of several billion-dollar companies (unicorns) who are valuable not just because they can capture defense dollars, but because they are also viable in capturing a much larger commercial market.
I’d just like to point out one quote that I think demonstrates the thoughtfulness of the AFWERX team:
It really comes down to the relationship between the legislative and executive branch. One of the things we’ve been trying really hard to do is get as much information and as much transparency out about what we’re doing as possible. We spend a lot of time preparing briefings. As soon as we’re done with our contracting sprints we publish the companies we’ve awarded to with as much information as we can. We try to prove through transparency to not only the legislative branch but also the general public that what we’re doing is being good stewards of taxpayer funds. As long as you do that, you allow people to build trust in what you’re doing. Congress can fulfill their oversight responsibility.
There’s a ton to learn from the insights from Chris, Steve, and Jason. Make sure you listen to the whole thing!
I’d like to thank Chris Benson, Steve Lauver, and Jason Rathje for joining me on the Acquisition Talk podcast. Spend some time reading the AFWERX Book and listening to the Disruptive AF podcast. There’s lots more to learn from the AFWERX newsletter as well. Jason has a couple tremendous War on the Rocks articles, including “The Rift Between Silicon Valley and the Pentagon is Economic, not Moral,” and “Solutions, Garbage Cans, and Platforms: How to Drive Commercial Solutions into the Military.” Read them if you haven’t. Here is Steve on the Air Force podcast and a short YouTube video on doing business with startups. And here is an excellent brief from Chris and Austin DeLorme from the AcquisitionX conference on Air Force Ventures.
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