How The Pentagon Is Reaching Small Suppliers

On the same subject

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  January 25, 2022

  LANCEMENT DU PROJET INORTH

  Le CRIAQ a récemment lancé le projet iNorth, financé par le Ministère de l'Économie et de l'Innovation et CRSNG, et dont l'objectif est de supporter le développement d'un nouveau système de surveillance et de contrôle de température de batteries au lithium-ion pour l'aérospatiale. Félicitations aux partenaires impliqués dans ce projet : CAE, Calogy Solutions, Université de Sherbrooke et ÉTS.

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  January 31, 2020

  ‘The math doesn’t make sense’: Why venture capital firms are wary of defense-focused investments

  By: Aaron Mehta WASHINGTON — In American's technology marketplace, venture capital funds are crucial for pumping capital into small companies in need of cash infusions to keep operating. Part of the venture capital model is acknowledging that many of those businesses will fail, but if a few are successful, venture capitalists can make huge returns on their investments. At a time when the Pentagon is working hard to entice small technology companies to work on defense projects, venture capital, or VC, funding could further mature technology and give entrepreneurs a chance to keep projects going. And yet, investors seem wary of putting forth cash to support companies with a defense focus. Why? In the wake of the very public fight inside Google over working with the Pentagon — which ended with the company pulling the plug on its Project Maven participation — there was a consensus from the defense establishment that there may be a culture gap that is simply too large to overcome. But according to a trio of venture capitalists who spoke to Defense News in December, the reasons are simpler. Katherine Boyle, with VC firm General Catalyst, said the culture issue is overblown for the VC community. The reluctance to work on defense programs comes down to a mix of “math and history," she said. "The math is the reason why investors are hesitant to put a third of their fund into these types of technologies because history shows us that they haven't worked out well,” Boyle explained. She said the math can be broken down into three factors: mergers, margins and interest rates. On the first, she pointed to the fact that the defense sector has seen thousands of firms exit the market, sometimes because of acquisitions by primes. But, she argued, where mergers and acquisitions tend to occur in other parts of the world to acquire new technology or capability, in the defense realm it's all about contracting value. That makes it “very difficult for new technologies to enter the market and ultimately be acquired at the valuations that venture investors would need to see in order to have a return for their fund.” In terms of margins, Boyle pointed out that defense firms are very focused on hardware, which requires a lot of investment upfront. That makes it “very difficult to invest in for venture capital firms because software has 80 percent margins, and it's much easier to build a company that can scale very quickly if it's software-based versus needing a lot of capital,” she said. The third factor, interest rates, ties into the last two. For decades interest rates have allowed VC firms to expand dramatically — something that requires a constant flow of return from investments in order to turn around funds and quickly invest in another opportunity. In the world of defense, investors with $3 billion to $5 billion under management by the VC community will find it difficult to get the kind of returns investors are accustomed to from other markets. All three of those factors come together in a mix that means there are very few chances for VC firms to invest in defense-related companies that match up with what a VC traditionally wants to see, said John Tenet, a partner with investment firm 8VC and vice chairman of the defense company Epirus. “VC investors invest based on speed and scale and probability of a 10 to 20 times return. And so I think that's where you've seen a little bit of apprehension, at least in [Silicon] Valley,” Tenet said. “The exits haven't been that fast, and you sort of have these five big players on one side [that] sort of monopolize the market.” From a pure numbers standpoint, a good benchmark for performance is to look at the S&P 500, according to Trae Stephens, co-founder and chairman of Anduril Industries and partner at Founders Fund. Over a 10-year period, an investor in the S&P can expect to get roughly 3 times their investment back. VC firms want to be able to beat that for an investment to be worth it. To highlight the challenge of attracting VC funding to defense firms with potentially limited return, Stephens pointed to the case of Blackbird Technologies. A venture-backed player in specialized communications tech aimed at the defense market, Blackbird was bought in 2014 by Raytheon for about $420 million. That looks good on paper, but the reality is the churn isn't strong enough for a big, Silicon Valley-based venture capital group. “A lot of times in the government, people say: ‘Oh, Blackbird is this, like, great example of a success story that was like a boost for venture.' It's actually not. It's not a venture scale of return for most funds,” he said. “There are some funds where the economics of [an exit that size] is really good, but for large, Silicon Valley tier-one funds, it doesn't move the needle. And so you have to have these multibillion-dollar opportunities in order for it to really make economic sense.” Another issue raised by Stephens will be familiar to defense primes as well: concerns over sharing intellectual property with the Defense Department. The department is essentially saying “you are the right product for us, now turn over your source code,” Stephens said. “It's crazy. We're literally doing to our companies in America what we're criticizing the Chinese for doing to their companies and to our companies when we enter that market. And so there has to be a better commercial practice for enabling companies to retain their IP and do business with the government without having to fight a legal battle every time they go through a contract.” ‘Knock down the doors' Despite those concerns, all three venture capitalists that spoke to Defense News are involved in investments in defense-focused firms. So why are they spending their money in the sector? Mission is part of it — the belief that, as Americans, a stronger Defense Department benefits their firms. But that only goes so far if dollars don't follow. Once again, it comes down to math. Investing in a company focused on defense technologies, which may have to wait years to secure a contract with the Pentagon, isn't a great strategy for a VC firm looking for quick returns. But if a company is able to get government funding early on, the business suddenly becomes more worthy of investment, said Boyle. “If the government is allocating capital in the right way, it will get VC dollars immediately. Like, it will follow so quickly,” Boyle said. “I see so many people come in to our office and they have an OTA [other transaction authority contract], and they're excited. It's a small, $1 million contract, and that is great for a seed company. But if that same company came in 18 months later and said, ‘Oh, by the way, the OTA has turned into a $10 million contract,' that would meet every milestone that I usually see to series A.” (An OTA is a type of contract that enables rapid prototyping; series A financing is the investment that follows growth from initial seed capital used to launch operations.) “$10 million to the US government is nothing, but to [a] startup — $10 million is the best startup I've seen all year, if they're an 18-month-old startup and they're getting that kind of capital early on,” she said. Added Stephens: “It means they're doing something right.” That creates a chicken and egg scenario: Venture capitalists only want to invest in companies that already have a Pentagon contract, but small firms often can't keep the doors open long enough without external funding while waiting for the department's contracting processes to progress. While groups such as the Defense Innovation Unit — the Pentagon's technology hub — are helping speed along that process, it remains a problem with no easy solution, at a time when the Pentagon needs the nondefense technology community in ways it hasn't for decades. Boyle believes there is a “growing group” of investors who see the strong success of a handful of companies like goTenna, Anduril or Shield AI that have managed to break through and become successful defense-focused investment vehicles. That means the next few years are going to be critical for everyone involved. “None of us would be here if we weren't optimistic,” she said. “I actually think this is an incredible time to be investing in deep tech, particularly deep-tech companies that are selling to the Department of Defense because if it doesn't happen now, it never will.” https://www.defensenews.com/smr/cultural-clash/2020/01/30/the-math-doesnt-make-sense-why-venture-capital-firms-are-wary-of-defense-focused-investments/

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  December 1, 2020

  How the Biden administration is expected to approach tech research and development

  Andrew Eversden WASHINGTON — Experts expect President-elect Joe Biden's administration to build on the Trump administration's investments in emerging technologies, while adding to research and development budgets in the Defense Department and across the federal government. The incoming Biden administration signaled throughout the campaign that basic research and development funding would be a priority. Biden wrote in Foreign Affairs he would make research and development a “cornerstone” of his presidency and pointed to the United States having the “greatest research universities in the world.” “It's basic research that's the area where you get the breakthroughs, and you need long-term, sustained investments to build up a strong S&T base,” said Martijn Rasser, a senior fellow at the Center for a New American Security's technology and national security program. Biden's R&D investment is an expected change from the Trump administration's approach, which experts have noted is narrower in scope and focused on harnessing private sector innovation. “The reality is the U.S. private sector has eclipsed the government, which in some ways that can be good,” said Rep. Jim Langevin, D-R.I., chairman of the House Armed Services Committee's Subcommittee on Intelligence and Emerging Threats and Capabilities. “The private sector can move with greater agility than the government, but the private sector may not be focusing on developing those exquisite technologies that we need for the war fighter.” Experts told C4ISRNET they expect the Biden administration to invest more money in basic research areas and to reform immigration laws that slowed the innovation pipeline from abroad to the United States. “China is closing in. They are spending every year more and more on R&D. They will soon, if not already, be spending as much as we are, if not more on R&D,” Langevin said told C4ISRNET. “Congress has woken up to this problem.” Basic research Perhaps the most likely area the Biden administration is poised to change is basic research and development funding. According to annual reports from the Congressional Research Service, the Trump administration consistently proposed top-line cuts to federal research and development in yearly budget proposals. This included the fiscal 2021 budget proposal's $13.8 billion decrease in defense R&D over the fiscal 2020 funding enacted by Congress. While the Pentagon has often been spared from such cuts, the Trump administration has also suggested trimming the defense-related basic research budget line — money that is a “substantial source of federal funds for university R&D,” according to the Congressional Research Service. The White House's FY21 defense-related basic research budget line asked for a reduction of about 11 percent from FY20 enacted, or a $284.2 million decrease. Biden's campaign platform calls for a four-year investment of $300 billion in R&D for new technology such as 5G, artificial intelligence, advanced materials and electric cars. “A nation speaks to and identifies its priorities by where it puts its research dollars, where it puts its money,” Langevin said. “Basic research has to be more of a priority, and that's something I'm going to encourage the Biden administration to focus on.” Michèle Flournoy, thought to be a leading contender to become the next secretary of defense, has also written about the need to increase investment in emerging technologies to counter China. In Foreign Affairs in June, Flournoy wrote that “resilient battlefield networks, artificial intelligence to support faster decision-making, fleets of unmanned systems, and hypersonic and long-range precision missiles” will “ultimately determine military success.” “Continuing to underinvest in these emerging capabilities will ultimately have dire costs for U.S. deterrence,” she wrote. Congressional and think tank reports published during the Trump administration's tenure called for an increase in basic research funding. A report from the House Permanent Select Committee on Intelligence's strategic tech and advanced research subpanel, led by Rep. Jim Himes, D-Conn., recommended bumping up federal research and development funding from 0.7 percent to 1.1 percent of gross domestic product, or an increase of $146 billion to $230 billion. A report by the Council on Foreign Relations from 2019 applauded the Trump administration's requested increases in funding for the Defense Advanced Research Projects Agency, now funded at $3.46 billion, and the Defense Innovation Unit, for which the Trump administration requested $164 million. Laying the groundwork Initiatives started under the Trump administration did provide a groundwork on which the Biden administration can build. Under the Trump administration, DARPA kicked off a $1.5 billion microelectronics effort. In artificial intelligence, the administration launched the American AI Initiative. However, the Council on Foreign Relations criticized that effort because it had no funding and left agencies to prioritize artificial intelligence R&D spending without metrics, while also drawing funds from other research areas. The administration also made an $1.2 billion investment in quantum information science. “The Trump administration started bringing national attention and federal focus to many of these technologies,” said Lindsey Sheppard, a fellow at the Center for Strategic and International Studies. “I hope to see from the Biden administration perhaps a more cohesive guiding strategy for all of these pieces.” While the Trump administration has started many initiatives, the Council on Foreign Relations report also criticized the Trump administration's innovation strategy as an “incremental and limited approach,” writing that “action does not match the language officials use to describe the importance of AI to U.S. economic and national security.” While investment in future technology is important, defense budgets are expected to stay flat or decrease in the coming years. In her Foreign Affairs article, Flournoy acknowledge that the budgetary reality will require “tough tradeoffs.” Experts agree. “R&D programs are going to have to start being able to consistently, clearly articulate justifications for their budgets and the returns on investment,” Sheppard said. But the coronavirus pandemic has highlighted the need for increased investments in research and development, Himes and Langevin argued. Both lawmakers identified biothreats as something they fear for the future. Biological threats are one area that DARPA — an organization Langevin pointed to as a major federal R&D success story — has triumphantly address. Commercial partners from DARPA's 3-year-old pandemic prevention platform program announced they developed a COVID-19 therapeutic using new techniques. “There's absolutely going to be a rethink,” Himes told C4ISRNET in an interview. “Are we correctly allocating money between the possibility that there could be a pandemic that kills a million Americans, versus the possibility that we're going to have to fight the Russians in the Fulda Gap? I think there's going be a lot of thinking about that. And there should be thinking about that because our money should go to those areas where there's the highest probability of dead Americans.” Immigration innovation Another way to improve American innovation in critical future technologies is by allowing highly skilled foreigners to work in the United States. Biden has hinted at changes that will affect American innovation through the expected reversals of President Donald Trump's immigration policies, which limited high-skilled workers from legally working in the country. The Biden administration's platform states it wants to reform the H-1B visa process that the Trump administration restricted, much to the chagrin of American tech companies, which use the program to hire top talent from abroad. Think tanks have recommended reforming the current U.S. immigration policy to attract international students, entrepreneurs and high-skilled workers because of the innovative ideas they provide. For example, an analysis by Georgetown University's Center for Security and Technology found that 68 percent of the United States' top 50 artificial intelligence companies were co-founded by immigrants, most of whom came the U.S. as students. “A lot of the Trump administration's policies — we're shooting ourselves in the foot making it so much harder for people to come here,” said Rasser, who wrote a report for CNAS last year calling for H1-B caps to be increased. “Because of the fact that people want to come to the United States to live and work, that's one of our greatest competitive advantages. It's something I expect the Biden administration to reverse.” https://www.c4isrnet.com/smr/transition/2020/11/29/how-the-biden-administration-is-expected-to-approach-tech-research-and-development/