Tim Reed is the CEO of Lynx Software Technologies, a leading mission-critical edge software company.
A growing number of technology firms are setting their sights on the U.S. Department of Defense (DoD), hoping to leverage cutting-edge innovations to support future battlefield needs.
Several factors drive this new focus on the DoD and defense contractors. The war in Ukraine has underscored the need for advanced 21st-century military technologies, providing an added incentive (paywall) for commercial tech companies to work with the Pentagon. Startups like Parry Labs, Skayl and Vannevar Labs seem eager to bring new capabilities to the fight, whether AI-enabled analytics, autonomous drones, secure communications or advanced satellite imagery.
Three main enablers are presenting opportunities for startups.
1. Changing Battlefield Dynamics: We’re moving away from a world of expensive fleets of jet fighters toward one of connected heterogeneous platforms, augmenting traditional craft with autonomous vehicles and satellites. These systems represent opportunities for startups to compete on a more level playing field, as the barriers to entry are somewhat lower.
2. Increasing Importance Of Partnerships: The incorporation of technologies such as artificial intelligence (AI), cybersecurity and autonomous weaponry means traditional suppliers must partner in order to deliver technology cost- and time-efficiency.
3. Open Standards Leading To Innovation: The shift across DoD use cases toward embracing open standards addresses some of the timescale challenges that exist across DoD programs. As we’ve seen across other industries, multiple companies delivering technology based on open standards can spur innovation.
Ukraine is just one of many motivators. President Biden’s proposed 2024 defense budget calls for a record $842 billion in spending, signaling ample funding opportunities for enterprising startups. The DoD is also modernizing its approach to weapons development and acquisition, emphasizing software, information warfare, AI, big data and automation. These are all areas in which nimble tech startups excel and align well with Silicon Valley’s tendency to “move fast and break things.”
An Increase In Targeted Investment
Other numbers reflect this increased startup interest as well. According to PitchBook data, 2022 saw “$7 billion invested in VC-backed U.S. aerospace and defense companies through October 13,” putting the sector on pace to overtake the previous record of $7.6 billion. Programs like NATO’s $1 billion innovation fund, which provides early-stage capital for defense-oriented startups and venture firms, are also boosting investment in startups. In the U.S., initiatives such as the Defense Innovation Unit and AFWERX are designed to spur growth in advanced technology.
Overcoming Sector-Specific Challenges
But the road to securing defense contracts isn’t always smooth. The pace of the traditional DoD acquisition system is notoriously glacial compared to the hustle of Silicon Valley. Startups must navigate complex regulations, certifications and procurement processes geared toward large, established contractors. Obtaining the security clearances that are essential for defense work can be challenging for small firms with limited resources.
The defense industry’s risk-averse culture is another potential hurdle. Its acquisition system focuses on structured program execution with minimal risk. This incentivizes a cautious culture, which can limit the Pentagon’s desire for innovation. In contrast, commercial markets often engage in speculative development in which companies undertake a project without any strict pledges regarding what they’ll do with it. This allows for more flexibility and risk-taking in the development of new products. In July, Harvard Business Review published an article backing this up, highlighting the challenges and proposals for addressing them.
We’ve seen many companies focus on technology but deprioritize their business strategy. Given the aerospace and defense (A&D) industry’s long procurement cycles, it’s hard to launch a product in that market without already having a toehold. But it seems like a great way to gain incremental revenue and launch vertically focused solutions from a base of existing business so that you have cashflows while trying to grow in A&D.
Entering the A&D market is also a good counter-cyclical company strategy in the global macroeconomy. A company exposed to China’s financial woes and impact on the supply chain can see A&D as a good counterbalance. But being in the A&D market (at least the defense part) means believing in and being committed to the mission. It will eventually become problematic to be a firm that’s supplying valuable and key technologies to the DoD while also selling the same solutions or sourcing its labor and tech from countries the DoD sees as adversaries.
Despite the challenges, the momentum favors more commercial startup participation in the defense space. Many in Silicon Valley see the DoD and Pentagon as representing a vast, untapped market for cutting-edge technologies that can strengthen national security interests while providing revenue opportunities.
Similarly, the defense market stands to be transformed by its engagements with innovative technology firms. And the agents of this transformation need not be limited to tech startups or large defense contractors. With the right strategy and patience, the uncertainties of defense work can give way to outcomes that benefit innovative startups and the country alike.
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