It’s not your imagination. Startups and venture capital really are creeping closer and closer to government and commercial contracting shops.
You’ve heard the numbers: Commercial investment in R&D vastly overshadows that of government, flipping the traditional model and leaving federal programs peering hungrily into company windows for innovation.
The model for starting innovative companies that need scale to turn a profit or require large sums to cover initial operating costs is to pitch a venture capital fund to raise early money. VCs make multiple investments in startups in the hope that a small number will succeed fantastically and be sold for vastly more than investors put it. The quest for that massive rate of return keeps VCs in the game, usually employing the funds of limited partners—wealthy individuals and organizations with the stomach for risk in pursuit of the occasional gusher.
Couldn’t be farther from traditional contracting, right? True enough, but many companies and Defense and civilian agencies are desperate for the edgy technology and other products and services startups can supply. To get them, buyers need to entice both VCs and the companies the fund. That means learning, and to the extent possible adopting, the ways of the venture world.
Silicon Valley Safari
The Air Force, for example, is sending groups of about 20 contracting, program, and other professionals, both uniformed and civilian, on Silicon Valley safaris. Under the Air Force Ventures Fellowship program, fellows embed with startups and their VCs for six weeks to learn investment and risk management and technology development.
Meanwhile, the U.S. government is in a race with China to fund promising young American companies.
China participated in 16 percent of all venture investments in U.S. companies in 2015, up from 6 percent in the previous five years and that footprint has been growing. China’s FDI investment in the U.S. in 2016 was $45.6 billion and cumulative FDI in the U.S. since 2000 now exceeds $100 billion. The Pentagon is especially concerned about Chinese investment in early-stage companies whose products have national security uses.
So much so, that in 2019, Ellen Lord, Defense acquisition chief, kicked off the Trusted Capital Marketplace, a public-private partnership to find patriotic investors in innovative companies critical to the department.
Drone Venture Day
Take quadcopter drones, those small ones favored by hobbyists. The Army sees all kinds of uses for them. But a Chinese-based firm, DJI, owns nearly three-quarters of the quadcopter market worldwide and nearly 90 percent for drones in the $1,000-to-$1,900 range. When DJI drones began showing up in the equipment stores of the U.S. military services, the Defense Department called a halt, charging that DJI drones send information back to the Chinese government, a claim the company denies.
“We don’t have much of a small UAS industrial base because [Chinese technology company] DJI dumped so many low-price quadcopters on the markets,” Lord said. “We then became dependent on them, both from the defense point of view and the commercial point of view, and we know that a lot of the information is sent back to China from those. So, it’s not something that we can use.”
So last November, the Trusted Marketplace held a Drone Venture Day with Texas A&M University to build an ecosystem of investors who will crowd out adversarial funding, such as China’s, in the U.S. small drone market that DOD wants to buy from.
Like supply chain management, venture capital investment and risk management are certain to establish footholds in commercial and government contracting shops in the coming years.
Forewarned is forearmed.
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