Here is AJ Piplica, CEO of the hypersonic vehicles company Hermeus, on the Venture Stories podcast discussing the importance of generating revenue ahead of the private capital that will be needed to achieve deep tech objectives:
For a company like us — or anyone starting out — you’re not going to go raise $1 billion of private capital to develop a new aircraft and pour all that money before you’re getting to revenue. I think that’s where the key is. It’s not how much does it cost necessarily. Boom has come out and said it’s going to cost $8 billion. I wouldn’t be surprised if it did at the end of the day. The question is, where does all that money come from? For us, it comes from a development strategy that has multiple S-curves of growth in it. At each stage of technical derisking, you’re building a product and solving a really important set of challenges for customers.
Much in the way SpaceX — it’s going to cost billions and billions of dollars to put a person on Mars, but they didn’t go raise all that money privately. At each stage of derisking the technology to get there, they found really important problems to solve for customers and it builds a business along the way. Falcon 1, Falcon 9, Dragon, Starlink, now Starship. Each of those is dual-use in terms of, demonstrate technology to go to Mars, as well as building the financial foundation to do so. It’s the same thing for us, with Quarterhorse, get us to Mach 5 and back, solve problems for customers on hypersonic flight test side, and build the first S-curve in the business. Darkhorse, do the same thing and continue.
Quarterhorse is the scaled prototype that will prove out reuseability at hypersonic speeds and it will be remotely piloted. Darkhorse will be capable of longer range and passenger flight. AJ notes that while the ISR missions flown by the SR-71 Blackbird is an obvious military use case, providing a networking node across the vast distances of the Pacific is another one. (Note: Hermeus is one of 27 recipients that will be eligible for task orders on the new Advanced Battle Management System contract.)
I think this idea of multiple s-curves in a major program is important not just from an entrepreneurial sense, but for all defense programs. It forces an incrementalist approach based on practical near-term applications. You could say that DoD’s Technology Maturation and Risk Reduction phase is equivalent to Quarterhorse, that post-Milestone B phase is like the Darkhorse, and the production follows. But I suspect Hermeus will have more of these S-Curves than just three. Quickly pushing to test and iteration are two of the company’s operating tenants.
At any rate, consider that Hermeus landed a $100 million Series-B round. If it were like a defense program, prior to getting its Series C it would have to specify the exact capabilities, cost, and schedule for the entire lifecycle (development, production, and sustainment)… Oh, and Series C would have to be fully funded to include all requirements for Series D, E, and even the IPO. The whole future of the thing is predetermined in the baseline plan. It is Cost Calvinism, as Earnest Fitzgerald once put it.
DoD’s three milestones don’t provide enough room for all the S-curves that need to happen on complex programs, with options across a portfolio of programs to scale the most promising efforts. But with multi-year planning and budgeting cycles in DoD, defense programs cannot react to opportunities and funding requirements in the way private capital does.
Here’s AJ on the importance of PPBE reform to the Department’s ability to transition new firms and technologies:
There are other barriers to companies working with DoD. The budgeting cycle is probably the biggest one. I don’t actually think we have an acquisition problem. All the tools are there from an acquisition standpoint. There’s maybe a bit of a culture thing in terms of middle management working with the tools available, but a two year cycle to get into your customer’s budget is an incredibly daunting challenge for a startup that raises funding for the next 18-24 months.
… I think the one place legislation really needs to improve is on the PPBE side — so Planning, Programming, Budgeting, Execution. There are some small things you can change. Raising the reprogramming thresholds and allow budget owners in DoD to shuffle dollars around more easily. Especially for innovation and crossing the valley of death programs as they are transitioning to programs of record. That’s a huge knob that can turn.
I’ll give you an example of this. When the Air Force was preparing their budget for fiscal year 2023, Hermeus was probably 12 people. By the time that budget made its way to Congress essentially a year later, the company was 60 people and significantly derisked the hypersonic aircraft as well as raised $100 million. So much change happened so quickly in the startup world. Just within the scope of Air Force setting its budget and Congress approving it, where you can’t make a lot of changes, it becomes very difficult to get cadence match between the two styles business. More tools to allow flexibility in how budgets get allocated and expended is part of the way legislative pieces can come into play and accelerate the modernization enterprise in the Department.
I couldn’t agree more. In case you missed it, be sure to check out my conversation with AJ Piplica on the Acquisition Talk podcast.
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