After cashing in from relatively simple internet applications like Facebook, Snapchat and others, entrepreneurs have started tackling harder problems. “Deep tech” requires significant capital and long R&D timelines, potentially creating a big impact. Private investment in deep tech grew 81 percent between 2015 and 2018, the Boston Consulting Group found, and includes 4,198 U.S. companies.
The trends toward deep tech provides a major opportunity for the Department of Defense. For example, Adranos Inc. is increasing rocket range by 40 percent. Before the Army’s xTechSearch, the company worked on a new solid propellant without even considering defense applications like hypersonics.
Two issues continue to stymie the DoD’s reach into commercial deep tech. First, defense agencies are spreading small dollars across a large number of companies.
“I think we have a totally flawed system where you have people in government who feel like they’re checking the box by allocating a little bit of capital to many projects,” said Josh Wolfe of Lux Capital. “As venture capitalists, we don’t put $250,000 or half a million into a hundred companies. We try to double down on the best teams with the most cutting-edge technologies.”
Deep tech companies in advanced materials, for example, require nearly five times more investment on average than firms in the same space using off-the-shelf technologies.
Funding dual-use tech remains problematic for the DoD. The Air Force at its “pitch day” plans to make over 1,000 small bets a year at $50,000 each. Phase two pitch days from the program executive offices have started making some medium bets at roughly $1 million.
Working to overcome the scaling problem, the Air Force plans to make 10 or more “strategic” bets of perhaps $6 million starting in March 2020. The awards come from the service’s pot of Small Business Innovation Research funding totaling about $660 million a year, and require matching investments from private sources.
Transitions to major programs of record, where most of the defense budget resides, have not yet been demonstrated. Only two defense companies have reached billion-dollar status since the end of the Cold War, said entrepreneur Peter Thiel. Breaking into the market required a decade of lead time.
A potential bright spot is other transactions consortia, where defense program offices with the big dollars can quickly allocate funding to nontraditional contractors. While OTs are on the rise, so far there haven’t been enough transitions into procurement.
A second issue for deep tech companies is access to shared services and enterprise tools. “If you raise $2 million, you can’t afford to go spend $500,000 on some expensive equipment,” said John Melas Kyriazi of Spark Capital. “Easier access to shared equipment makes a big difference in research and development.”
Just like Amazon Web Services’ cloud service dramatically lowered the barrier to entry for software as a service startup, deep tech companies need access to lab equipment, complex tooling, wind tunnels, test chambers and other shared services. Many of these capabilities are monopolized by traditional defense primes who have acquired the capital from past contracts.
The Air Force has taken the lead on addressing enterprise tools, starting with their DevSecOps layers including Cloud One and Platform One. New software applications would not have to build the full stack from scratch, saving time and money. Enterprise tools is one of three lines of effort used by the Joint Artificial Intelligence Center to accelerate development.
While making steps forward, Air Force acquisition executive Dr. William Roper commented that “digital transformation ... is harder to fit into the budget process.” Defense budgets not only take multiple years to get approved, they are defined by program end items. This restricts intermediate enabling technologies to existing primes capable of winning major programs.
Enterprise tools, whether in the DoD or at shared services companies, must expand into hardware to lower barriers to entry. Bigger bets on commercial deep tech companies must also be made. For both of these initiatives to occur, the budget process needs investigation by leaders in defense and Congress.
Eric Lofgren is an incoming research fellow at the Center for Government Contracting at George Mason University. He manages a blog and podcast on weapon systems acquisition. He previously served as a senior analyst at Technomics Inc., supporting the U.S. Defense Department’s Cost Assessment and Program Evaluation office.