Innovation and Security

Stephen DeAngelis

May 29, 2007

Getting Department of Defense contracts has always been good for one’s business. But since President Eisenhower warned about the growing power of the military-industrial complex, people have generally believed that only large defense companies get such contracts. The Pentagon does have programs in place for small businesses, but Pentagon insiders have often worried that the process is still too complicated and leaves some very innovative companies on the outside looking in. To overcome this challenge, the Department of Defense has tapped the expertise of venture capitalists to help them find innovative solutions to challenges its forces face [“Tech Investors Cull Start-ups for Pentagon,” by Matt Richtel, New York Times, 7 May 2007.]

“The nation’s military, in its search for the next surveillance system, bioterror vaccine or robot warrior, has decided to take a peek into the garage. Through a program that recently emerged from an experimental phase, the Defense Department is using some of the nation’s top technology investors to help it find innovations from tiny start-up companies, which have not traditionally been a part of the military’s vast supply chain. The program provides a regular exchange of ideas and periodic meetings between a select group of venture capitalists and dozens of strategists and buyers from the major military and intelligence branches. Government officials talk about their needs, and the investors suggest solutions culled from technology start-ups across the country. It is in some ways an odd coupling of the historically slow-moving federal agencies and fast-moving investors, who deal in technologies that are no sooner developed than they are threatened with obsolescence. But the participants argue that the project, called DeVenCI for Defense Venture Catalyst Initiative, brings together two groups that have much to gain from each other and that have had trouble finding easy, efficient ways to work together. Those on the military side of things have adopted the Silicon Valley vernacular to explain the idea of systematically consulting investors to find new technology.”

It should come as no surprise that when concerned citizens — who also happen to be very creative — see young men and women in uniform getting injured, maimed, and killed, they turn their considerable skills to solving security challenges. They also, of course, would like to see some profit from their efforts. The challenges they see are immediate, but the acquisition process with which Congress has saddled the Pentagon makes rapid procurement extremely difficult. The reason is that Congress must balance the needs of the military with job creation and job protection in their various constituencies. With more jobs being created by small businesses than large ones, this new program addresses the concerns of both the military and the Congress.

“‘We’re a search engine,’ said Bob Pohanka, director of DeVenCI, noting that the program is a chance for military procurement officials to have more intimate contact with investors who make a living scouring laboratories and universities for the latest innovations. Venture capitalists ‘have knowledge of emerging technology that may be developed by companies as small as two guys in a garage,’ Mr. Pohanka said. ‘These are companies that are not involved in the D.O.D. supply chain.’ For the investors, it is a chance to get closer to a branch of government with vast spending power that is a potential customer for the start-ups they have backed. That can be particularly valuable because the venture capital industry, far from enjoying the success of the dot-com boom, has languished in recent years and is looking for new markets and sales opportunities.”

In the golden years of government laboratories, the services invested a lot in basic science as well as research and development. Breakthrough discoveries often found their way into the domestic economy (think about how the world changed as a result of the space program). Although government labs still conduct excellent research, more often than not, private sector research and development now drives the domestic economy. This program is aimed at taking advantage of those sunk costs.

“The project is in its early stages, having convened three meetings since October [2006]. And there are questions about whether a bureaucratic and careful system built around long-term relationships between the military branches and their contractors can be compatible with the quicker culture of Silicon Valley. … There is nothing fundamentally new about the military trying to gain access to cutting-edge technology. For much of the 20th century, it financed and led that development. But that has changed in the last several decades as innovation has started to move at light speed in the private sector.”

DeVenCI is not the first government program to try and marry government needs with the strength of venture capital.

“Since the Sept. 11 attacks, the military has reached out more to the private sector, trying to make use of a range of technologies in pursuing security and fighting wars. Some venture capitalists have catered to those demands, creating firms aimed at military and security needs. On the public sector side, the Central Intelligence Agency in 1999 started In-Q-Tel, a venture that identifies and invests in start-ups and technologies whose products could be used in intelligence. And the Defense Advanced Research Projects Agency backs new technology and has helped create many important advances, including the Internet. What makes DeVenCI unusual, its participants say, is that by bringing together military procurement agents and technology investors it is creating a kind of brokerage for ideas. But it had humbler beginnings, starting out on more of a special case basis not long after the attacks on the World Trade Center and Pentagon.”

As I have noted in a couple of earlier posts [A New Approach to Innovation and More Prizes for Innovation], finding ways to get innovative people connected with organizations that have challenges looking for solutions is not as easy as it may seem. The Pentagon is tapping into the expertise of a group that makes a living doing just that. The program has already started to bear fruit:

“One of the early participants was Ted Schlein, a partner at the venture capital firm Kleiner Perkins Caufield & Byers. Mr. Schlein said he and a handful of other venture capitalists met with military officials to hear about their needs and then looked for useful technologies. The relationship bore fruit, Mr. Schlein said. He cited a meeting he had several years ago with then-Defense Secretary Donald Rumsfeld, who was carrying a confidential file. ‘Rumsfeld said, “I can’t show you what’s in this folder, but you solved some problems for us,”‘ Mr. Schlein recalled. By the end of 2005, this team had made suggestions that led to the adoption of 15 technologies for military and intelligence uses, DeVenCI participants said. In early 2006, the Defense Department decided to expand the project, and it paid for an office with four full-time staff members led by Mr. Pohanka. They signed up 11 venture capitalists from 30 applicants to serve two-year terms. These investors are sent hundreds of pages of information, most of it unclassified, about the needs of military agencies. Then the members of the group get together in person, as they did in March in Arlington, Va., with representatives from about 50 procurement agencies for various military branches.”

Lest anyone think that the big defense contractors and Congress are concer
ned about this program, Richtel writes:

“The idea of these meetings is not necessarily to short-circuit the usual military procurement process, which usually involves doing business with one of a handful of big companies like Lockheed Martin and Raytheon, DeVenCI officials said. Rather, the idea is that the military buyers will see technology that they can recommend to those massive contractors for new or continuing projects, or, conceivably, that they will sign small initial contracts with the start-ups so they can further develop a technology for military use.”

This process gets new technologies to the troops faster because it can use contracts that have already been awarded rather than having to start from scratch and lumber slowly through the DoD acquisition process. This is probably about as good a work-around as can be found for the moment. As I noted earlier, there is more than simply profit motive involved for some innovators. Richtel ends his article with the story of once such innovator. He writes:

“But it is not all business, the venture capitalists say. For some, there is a patriotic component, one that sometimes tests their own philosophies about the role of the military. In 1969, Kevin Fong, a high school student, attended antiwar protests on the campus of Stanford University in Palo Alto. Now 52 and a managing director with the Mayfield Fund in Menlo Park, he said he believes that American soldiers need the best equipment possible. He is one of the new participants in DeVenCI. ‘There’s a part of me that says the military and conflict are going to happen and you have to be prepared for it,’ he said, explaining part of the reason for his interest. But he said his first impulse to help came from a recognition that participation in DeVenCI could be good for business. ‘When the DeVenCI people approached me, they said the magic words to a V.C.: “We’ll hook you up with buyers,”‘ Mr. Fong said. ‘How can you resist that?'”

How indeed? The more complex the world becomes, the more difficult it will be for organizations to find outside innovators who can address the challenges they face. I predict that there will be more groups emerge that, like corporate headhunters, will be in the fulltime business of looking to make those connections.