Take a break from LinkedIn to think about innovation in national security for a minute, and it doesn’t take long to see that early-stage startups seeking to successfully work with the U.S. Department of Defense face a daunting task.
Consider the two entities involved. A young company built around a single technology product with a handful of people and little revenue is aiming to do business with a sprawling institution that has a $727 billion budget, 2.8 million employees dispersed across the globe, and a charge above all to protect human life.
For startup founders, there are two ways to look at this size discrepancy.
One way to read it is that the DoD is too big, too byzantine, and too unbending in its reliance on massive contracts with some of the world’s largest corporations to navigate. How could a startup find a way in?
The other is that a startup only needs a tiny piece of that massive budget to make a lasting impact, and the DoD’s size actually means that there are many ways to get in.
Fortunately, both startups and the DoD are taking steps to work more closely together, and make the latter a consistent reality. There are a growing number of mission-minded entrepreneurs applying their skills, their tenacity, and their vision to build technology that can support warfighters. These founders are also finding more ways to gain a foothold in the DoD, thanks to programs created inside the government, and partners who are equally invested in leveraging innovation to secure our nation.
The emerging tech and innovation advisory firm Dcode is one of those partners, and the organization recently hosted a webinar to explore entry points into the DoD for early-stage companies. The panel featured officials with deep experience in the Air Force innovation ecosystem, and Squadra Principal for Portfolio Operations Arianne Price. Here are a few takeaways for early-stage startup founders:
AFWERX: A Front Door for Funding Opportunities
Many startups seeking to do business with the federal government start with the Small Business Innovation Research (SBIR) program. SBIR is designed to help technologists align their product with the needs of specific departments, putting the company on a path to commercialization through a use case that’s oriented to the national interest. It’s a mix of R&D funding and small business support, and it has fueled many startups’ early validation.
While the SBIR program casts a wide net, winning funding is not as simple as filling out an application. Startups must get buy-in from a program office that is seeking technology to solve a particular problem. And the SBIR program moves in phases, as federal agencies and startups work to identify potential and prove validation, to demonstrate results and, eventually, propagate growth that earns funding from an agency beyond the program itself. Startups have to figure out where they fit in, earn the support of a champion, and show how their technology can support warfighters.
To make it easier to get started, the DoD has created points of connection for servicemembers and technologists working outside the government in the form of accelerator programs. In the U.S. Air Force, the innovation agency AFWERX curates opportunities for startups to work with Airmen facing challenges that they suspect technology can solve.
AFWERX has a goal of expanding access to SBIR awards for the Air Force, and serving as a catalyst to put those funds into the hands of small businesses "as quickly as humanly possible in terms of contracting activity timelines,” said Lt. Col. Chase Eiserman, Chief of Industry Development at AFWERX and CEO of Rapid Acquisition Procurement and Industry Development at the United States Air Force, also known as RAPIDx.
AFWERX does so by working with problem owners within the Air Force to identify areas where new technology acquisition can play a role, solicit proposals and then support the award of SBIRs. AFWERX also lists “open topic” submissions for SBIRs, where businesses can submit projects that may be of interest to the Air Force that don’t have an identified problem set within the Air Force.
The Airmen who live the problems every day are in the best position to define their needs. Technologists have the expertise to build solutions.
AFWERX does not directly award SBIRs, but it serves as a connecting point that helps make a match between startups and Airmen.
“We start the pantry, and then it’s up to everybody else to come shop, and we’re making the shopping capability a lot more robust through technical systems that we’re rolling out for everybody across the federal space to use,” said Eiserman.
With a foot in the door, startups can speak directly with Airmen about the problems they’re facing, and learn to speak the language of the Air Force. It’s all valuable to a company as it seeks to understand the problems that the government faces, and determine how to position a product within the DoD.
Requirements: Connecting Startups to DoD Priorities
When seeking to do business with the DoD, SBIRs are a great place to start. They help to seed the development of technology, and put it into the hands of the people inside the department who will use it. It presents the potential that technologists and warfighters can build side-by-side, with the end goal of commercialization.
It’s also important to consider what a SBIR is not. With a SBIR, the goal is not to help an individual company win. Rather, it is to help the Air Force field new capabilities.
A SBIR is also not a long-term contract with the DoD that greenlights a product to be deployed at scale and widely used. It is R&D funding for the warfighter to test and validate for a short period of time in limited capacity.
It is a one-time grant, not recurring revenue.
To secure more sustained funding that moves technology from experiment to production, a more formal funding vehicle is necessary. This often comes through a program that is funded directly by the DoD budget. One key to securing this is a requirement, which is a statement of need from a leader in the DoD that indicates the intent to spend money to solve a problem, and buy a product or service to do it.
Image courtesy of Overwatch Imaging.
With a requirement on the books, startups have a much easier opportunity to sell their technology to the DoD, said Lt. Gen. (ret.) Clint Hinote, the former Deputy Chief of Staff for Air Force Futures.
Not every requirement becomes a program. Yet it’s a strong signal that funding is being set aside, so many startups seek to influence the creation of new requirements as they work to develop technology that will meet warfighters’ needs.
A requirement that aligns with technology a startup is building could already exist, or be in development. Startups should consult federal documents to determine this. Unlike a business, the federal government publishes information about the next wave of technologies it is seeking to purchase and use. It’s all public. After combing defense budget legislation, Squadra helped one company identify a handful of existing requirements that aligned with their technology — with real funding already appropriated. Opportunity was right in the pages of the federal register.
Within this public sphere, startups can also support the creation of a new requirement. It’s a nonlinear path that requires the support of champions in the DoD, a directive to explore feasibility from Congress, and eventual enshrinement in the DoD budget.
Just like they would seek to raise awareness in the commercial market, startups can also work to play a role in creating a new requirement. Think of this influence campaign across the DoD and Congress as the equivalent of marketing, with DoD and Congress as primary audiences. There are additional partners who can help to broaden its reach.
VC: Growing the Network Across Government and Commercial
With startups building technology and the government opening doors, momentum is growing for innovation in the DoD. The venture capital community is helping to drive this forward as a partner to both entrepreneurs and DoD officials by providing important dollars to rapidly test new technology, and build a sustainable business. The value doesn't come from funding alone. VCs with experience and a network in national security innovation bring knowledge that can help a business grow in the commercial market, and provide support on the journey to put technology in the hands of warfighters.
Unlike government programs, VCs are built to support the growth of specific companies. This means they can work with a company to consider all of the potential avenues for growth.
This could include the commercial market. A cybersecurity product that was developed to solve problems for the federal government may also have an application in commercial industries that handle sensitive data, such as finance and healthcare. Likewise, data software developed for enterprises may have use inside the government. B2B can go B2G, and vice versa.
Developing a dual-use strategy can be critical to sustaining a business, as revenue from commercial customers can give a company life as it navigates the Valley of Death and works on a longer time horizon to sell into the federal government.
Clockwise from left: Lt. Gen. (ret.) Clint Hinote, Lt. Col. Chase Eieserman, Dcode's Matthew Reichman, Squadra's Arianne Price.
Not all funding is created equal. A SBIR is designed to support a government-focused side of the business. Venture capital can be put to work to not only develop the commercial-facing side of the business, but also align the product and the plan across government and commercial.
“VC funds can be a bridge between these two sectors that feel very different,” said Arianne Price, Principal for Portfolio Operations at Squadra, a VC firm that invests in early-stage cyber and national security companies. At the end of the day, Price said the keys to success resonate across the two — “identifying your champions, proving out your use case, and figuring out a way to strategically achieve the milestones you need to deliver value for your customers. It doesn’t matter if the customer is Cisco or Bank of America, Mom and Pop shops across the country, or the United States Army.”
As it works directly with the team to develop the plan, product, and business, venture capital firms can also connect companies to a network that opens doors in the marketplace.
“We believe our advantage is rooted in our people and our understanding of the ecosystem,” Price said. “We tell our companies — we’ll never understand your product as well as you do, but you will never be in as many rooms as we are, simply because of our preexisting relationships and our position in the Greater D.C. area. So it’s our job to help them understand this incredibly complex ecosystem, sell into it, and develop a capture strategy.”
What are VCs Looking For?
Startups move fast, but success doesn’t happen overnight, especially not in a federal marketplace where the path to orchestrate funding, requirements, capabilities, and battlefield priorities can take years. Investors must understand that growth comes in stages. Squadra invests at the early stage, where companies don’t have lots of revenue to show.
The goal of an investment is not to complete the mission. It’s to put startups on a path to reach another phase of growth in 1-2 years. Startups at the early stage may not yet be able to show investors a chart that demonstrates exponential revenue growth, but they can offer signals in the areas of product and people that indicate they are moving into position to achieve it. Price shared that Squadra looks for the following in startups that have the potential to receive investment:
A validated use case that demonstrates how a product would make a difference to users. This includes not only demonstrating that technology is interesting, but that it would solve a meaningful problem. Identify the user, secure their buy-in, and develop champions, regardless of how far along technology is in development.
A demonstrated understanding of the complexity of the federal ecosystem. VCs want to see proof that startups know what it takes to build an influence campaign, get a product into the hands of users, and ultimately convince them to pay for it. If a strategy is built on acquiring non-dilutive funding, such as SBIRs, they should be able to map the stakeholders they need to reach in the next 12 months, and show the long term path to extend that network through champions within the DoD, defense contractors, and Congress over the next 5-10 years.
Relationships are lines, not dots.These relationships can take years to build. Squadra made several introductions for a portfolio company when it first invested in 2022. Eighteen months later, those introductions have led to “pilots, executed tests, and serious milestones that are going to allow them to prove this is technology that operators on the field want.”
The introductions turned into relationships, and they are moving toward yielding success, but this wasn’t the result of a single meeting with one person. The fact that it took a year and a half is a reminder that it’s necessary to be strategic. Continuous communication, and a willingness to help are necessary to raise awareness. You have to build, follow-up and deliver over the long-term. It’s just as important to understand who can say no as it is to know who can say yes, and have allies to help you understand the difference between the two.
“We’re not looking for growth tomorrow, but we’re looking for a team that has thought about how long it’s going to take, how they’re going to get there, and laid out a plan of attack that we believe in,” Price said. “We want to support, develop, strengthen, and activate."
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