We propose the establishment of a new program in which the government directly teams with the venture capital (VC) community at the earliest stages of a Tough Tech company’s development… Such a program may work like this:
The government identifies critical and under-supported Tough Tech areas that are deemed priority to the National Industrial Base. These areas must be truly dual-use. The early focus of the companies within these sectors should be strongly biased towards commercial sector success.
Early-stage, pre-seed companies apply to qualify for the program based on these government-defined Tough Tech areas. (The qualifications for these early-stage companies must be tightly defined by the government.) If the startup is able to raise private venture capital, the government will contribute up to 30% matching non-dilutive investment.
It is critical that participating VCs have such substantial “skin in the game”; their long-term commitment to the successful growth of these companies cannot be overly diluted. It is essential to not exceed the 30% matching investment cap.
The purpose of this program is to commercially launch companies, not to achieve a definitive set of program milestones — this proposal is not intended to replace the Small Business Innovation Research (SBIR) program. In fact, it will help spur the creation of a larger, more qualified pool of SBIR candidates.
That was from Orin Hoffman, On Growing Companies, Not Programs. Read the whole thing, it isn’t long. A few thoughts.
(1) I understand the need for dual-use. However, it would seem early stage companies don’t have the resources to pursue both commercial and government markets simultaneously, which have very different go-to-market requirements.
The proposal seems to be saying, government should match up to 30% of private funding for companies that are “strongly biased towards commercial sector success,” and hope that the capabilities boomerang back to government at some point in the future. The grant-aspect of the proposal could build some market intelligence capability in government, but I don’t think it will make the companies familiar with government requirements, customers, or contracting.
(2) The intention seems to be that the SBIR program will provide an avenue for these companies to boomerang back to government and give them access to sole-source phase III follow on work. Of course, this avenue is already open to everyone including pure-play government companies who will have an advantage in the proposal process (even if they have inferior products). And certainly AFWERX has made private capital matching as a criteria in its SBIR selection process.
(3) I wonder if there are thresholds and caps on government matching. For example, what if a company raises just $50K? Should they get $15K from the government or is that not worth the effort? And what about Joby Aviation which recently raised $590 million in a series C? Hoffman states government should fund up to 30%, but realistically the grant could only approach 1 or 2 percent in that case.
So I presume that the matching really occurs at the pre-seed, seed, or maybe series A rounds. By series B, the average commercial VC funding is already $32 million (which seems high to me, and you’d expect tough tech to be more capital intensive).
(4) Even the $3 billion SBIR program is small compared to the number of applicants. And as Hoffman pointed out earlier, it can take 2 man-months to get a $50K effort from SBIR with only a p-win of just 20 percent. Since there will be more applicants with VC funding than funds available, there will have to be some kind of government selection process that assures “fairness” and “oversight.” Hopefully it doesn’t look like a traditional proposal process.
(5) Can early-stage companies with private equity or other sources of funding play in this space as well?
Overall, I hope something like this proposal succeeds. It’s unfortunate that the institutional realities of government simply make such things so difficult, with nuance and nay-sayers all about. With the defense industry continuing to consolidate despite the efforts to reach out to non-traditionals, something substantial needs to change soon.
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