Katherine Boyle joined me on the Acquisition Talk podcast to dive deeper into her stark warning on DoD’s relationship with the tech community. “After five years of DOD saying ‘we want to work with the best startups’, we have, at most, two years before founders walk away and private capital dries up. And many, many startups will go out of business waiting for DOD to award real production contracts.”
Katherine is a general partner at a16z, a venture capital firm, previously having left General Catalyst and the Washington Post before that. Her focus is on American Dynamism, or firms trying to solve major social problems with technology. “This is not govtech, this is not technology that’s selling into government to make incremental changes.” For example, Anduril is a defense startup in her portfolio. It doesn’t respond to an approved requirement but rather develops the capabilities in AI/ML, sensor fusion, and networking that it believes will revolutionize military operations.
In the episode, we touch on:
- How to get away from “spray and pray” investment mentality
- Why software is the most important tech innovation in history
- How revoking the draft changed the American character
- Can a startup sell into government and commercial at the same time?
- What needs to change in the culture of acquisition
Download the full-text transcripts
Katherine argues that DoD has done an excellent job opening the front door to new firms who can win $50K or $1M dollar contracts. But it isn’t proven that the front door can lead to recurring revenue if the technology succeeds. DoD doesn’t need to award large production contracts to every company, it needs to double down on the very best companies with a proven track record. Awarding $20M to a handful of companies over the next year will continue to give promise to the idea that new entrants can succeed. Investors and entrepreneurs will respond.
One of the fears is that new entrants are losing contracts to the big primes despite delivering better technologies. The acquisition system rewards officials for working with big primes who can navigate the process. “If we had that system in Silicon Valley,” Katherine said, “IBM would still be the number one company.” She believes all the authorities are there for acquisition officials to start awarding production contracts to the best new entrants — those that can deliver product in five days rather than the five years it takes a prime. The culture, however, will have to change, and this gets into a long history of how attitudes toward public service have changed since the 1970s.
A Concentrated Strategy
One of the problems in the recent mentality of investment is the statistical approach: equally fund a lot of companies and hope one grows to become super successful. Katherine calls this a “rookie mistake.” She explains:
The problem is that you don’t actually have buy-in to any of those companies so when you actually look 10 years down the line, the return is minimal. The best venture capitalists take a concentrated strategy approach… where you’re investing capital and continuing to work with the best companies, the top, say the top five companies in any given space that is the best strategy to make sure that those companies not only are successful, that they have access to capital and that ultimately you are aligned with what they are doing.
DoD, however, has taken the spray-and-pray approach. She says that:
In every press release I see about this, it’s “we’ve invested in 2,500 companies.” That number is insane to a venture capitalist. There are not 2,500 good companies. We’re lucky if there’s 50 good companies, let alone five great companies.
Rather than spread $100 million across 1,000 firms, a game changing strategy is to spread that across just five firms. By “king making” these companies, it really signals to investors that they have a customer and increases their access to capital. “Picking the winners is something culturally that the government does not like to do,” Katherine said, “and unfortunately, it’s what it’s going to have to do.”
Katherine observed how China not only picks the best companies, but forces them to work with the state on critical problems. Capitalism is still the superior system, but government must be willing to incentivize America’s best talent by paying competitive rates and providing a fair opportunity to deliver value.
I sometimes push back on this view of China. I’ve heard in government and in industry that the top-down nature of China allows it to move faster and press their talent into defense work. But perhaps the Chinese system actually provides more discretion to its officials and allows for the types of development processes that DoD’s culture stifles. Fast, iterative, competitive — perhaps China’s government is more attuned to these principles than the United States. As a RAND analyst noted in 1971: “It is ironic we have this switch in roles, that Soviet aircraft production is similar to what I would call profit-motivated capitalism.” I’d like to know more about how military acquisition actually works in China.
Some Good Quotes
- “DOD over emphasizes process under emphasizes speed. And anyone who knows anything about theory of war, which a lot of people in the DOD do realize that a very fast adversary is that an advantage.”
- “I can’t even point to a company that can handle selling to defense and selling to commercial at the same time as an early stage companies.”
- “There is a way of building companies and it is a ethos and a culture and an incentive system that allows really talented people in Silicon Valley to build faster than possible and bureaucratic organizations. It’s a mix of talent, a mix of how we’ve taught these companies to grow and build. And it’s not something that can be replicated by government.”
- “I genuinely believe that the thing that changed American character was revocation of the draft… The thing that we lost when was we completely changed what it meant to serve your country. And I don’t know that we can get that back.”
Listen to the whole thing! It is important that acquisition and contracting officials take ownership of the culture change and joy in their responsibility. That means getting out of comfort zones and asking, “how can I get to yes?” Most authorities already exist, but it takes moral courage to use them and bring along the frozen-middle that’s skeptical of change. As Katherine said, “It has nothing to do with whether Silicon Valley firms succeed or fail. It has everything to do with whether the country succeeds or fails.”
Thanks Katherine!
I’d like to thank Katherine Boyle for joining me on the Acquisition Talk podcast. Follow her on Twitter @KTmBoyle. Read her twitter thread here and article on American Dynamism here. Here’s a good article she co-wrote, Investing in Defense and she occasionally writes on substack. Listen to her talk about investing in deep tech, independent thinking, civic tech, and American renewal.
End note: Since we recorded this podcast, one of Katherine’s investments (Anduril) won a SOCOM counter-UAS contract with a potential value nearing $1 billion. Co-founder Palmer Luckey called it “the most important contract we have ever won.” With a dollar obligation of just $1 million, however, it remains to be seen whether the contract will meet or exceed the mark of $20 million a year.
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