This post was co-written with Matt McKnight and Brett Gibson.
Please note that this post is part two of two in a series that articulates to tech start-ups the value of looking to the military and intelligence community as a client.
The recent operation against Osama bin Laden has consumed much news coverage, and there have been specific and more opaque references to the amount of intelligence collection necessary to move to raid bin Laden's compound. Sophisticated technologies, providing evidence of bin Laden's presence at the compound, helped give proof to Obama to make the decision to authorize the raid. The U.S. military and intelligence community will benefit greatly from young tech companies' products, but we have found few tech start-ups have any idea of what it means to sell to the government.
The following guide aims to make the process at least a bit more clear as tech entrepreneurs begin to look into working with the government. These topics, discussed in detail below, are: 1) know what is happening in the macro defense/intelligence environment and apply those dynamics to your organizational approach; 2) target specific user communities and understand what they need; 3) know what "color" of government money (there are many) you are best positioned to receive; 4) understand how the government thinks about acquisitions; and 5) realize you must dedicate resources to this effort.
The First Five Things to Know When You Start Looking for Government Funding
Know what is happening in the macro defense/intelligence environment and apply those dynamics to your organizational approach: The defense budget is massive and now shifting in favor of innovative companies. While spending may get reduced for multi-billion dollar aircraft carriers, growth areas include cyber security, C4ISR, and "big-data" software management tools. Network security and protection of IT assets will become of paramount concern, and companies in a position to define what "cyber" capabilities truly mean will do well.
Further, it is expected that the intelligence community budget, approximately $80 billion, will stay much more stable than the larger federal or defense budgets over this disruptive period. This dynamic is largely due to the nature of our current conflicts. The continuing fight against Al-Qaeda is more focused on the intelligence community (and Special Operations) than any other target segment of the national security infrastructure. These organizations are also demanding non-tech solutions and services in developing regions prone to conflict. This past Wednesday (February 9, 2011), the Defense Department's senior buyer, Undersecretary Ash Carter, spoke to a group of investors in Washington. One of his key messages -- the Defense Department will look kindly on small companies providing efficient services to the government. Further, "green" technology is catching up very quickly to "cyber" or other IT related products. From the DoD's perspective, renewable energy products save money and lives because we don't have to convoy batteries, fuel and water through enemy territory. Already, there are outposts in theater that are running their entire camps on solar power. Good resources to begin understanding these trends are the Quadrennial Defense Review (QDR) and the Guidance for Development of the Force (GDF).
Target specific user communities and understand what they need: A critical first step to any strategy focused on accessing government capital is the identification of specific user communities within the vast defense and intelligence bureaucracy. We have found that many organizations go wrong because they approach building government business by establishing a generic "public sector" strategy. A successful approach needs to be much more focused in order to understand the unique requirements and operational responsibilities for different Services or agencies. Only by targeting specific users can you can truly identify their needs. Further, different organizations have slightly (or not so slightly) different acquisitions rules. For example, The National Geospatial-Intelligence Agency (NGA), The National Reconnaissance Organization (NRO), the National Security Agency (NSA), and the Defense Intelligence Agency (DIA) follow DoD rules, as do the military services. The Federal Bureau of Investigation (FBI), Department of State, and Department of Energy follow civilian processes. Beyond those large buckets of funding, the CIA follows Title 50 regulations, and thus is itself in another acquisition bucket. Beyond the large categories, it is important to know that you can approach government either by working through the contracting organizations respective Broad Agency Announcements or through un-solicited or out-of-cycle bids. Often, targeting in an off-cycle manner allows you to avoid submitting a formal bid for the initial stages of funding. Like with any commercial market, to execute this process effectively, small businesses need to understand the motivations and restraints for different funding organizations and tailor their arguments to meet client needs.
Know what "color" of money you are best positioned to receive: Whether it is the difference between Research and Development (R&D) dollars, Operations and Maintenance (O&M) money, Combatant Commander's spending, or classifications based on size or status of business, the government has so many different ways of funding projects - so many "colors" of different dollars, that it creates both massive confusion and opportunity. For example, one funding opportunity for small innovative companies comes in the form of Research, Development, Test, and Evaluation (RDT&E) funds. In Fiscal Year 2011 (October 2010-September 2011), the Defense Department will spend approximately $76 billion on RDT&E alone. Broadly, these funds are categorized by branch of service or civilian agency, Major Force Program (MFP), and specific Budget Authority (BA). Each BA is based on funding technologies that are in different Technology Readiness Level (TRL) categories. Do not be intimidated by the jargon, it's surmountable, and it means that there are a lot more targets for funding that is traditionally assumed. A short primer for some of the terms follows:
- Military services are the Army, Navy (includes the Marine Corps), and the Air Force.
- Civilian agencies are organizations like the Defense Advanced Research Projects Agency (DARPA) and the Intelligence Advanced Research Projects Agency (IARPA).
- MFPs are high-level categories like "Intelligence and Communication" or "Special Operations Forces."
- BAs (which loosely relate to TRLs) are based on how far along your technology is on the development chain.
- TRL categories span across nine levels from basic research(1) to proven system(9). Most funding you should focus on understanding is in the TRL 1-5 category. DARPA's money, for example, is classified as Basic Research (TRL-1) and Applied Research (TRL-2). This is loosely categorized as "blue-sky" research.
Without spending the time to explain in exhaustive detail how each organization uses or manages investment within this structure, it is important for entrepreneurs to understand that the government thinks about research and development in very structured ways and it pays to know what type of money you are going after, which organizations are interested in what type of research, and how you are uniquely positioned to take advantage of the nuances of each classification. Understanding the National Defense Authorization Act (NDAA), and the language of Congressional appropriations, will often put you ahead of even the military or intelligence organizations that you're targeting for business.
Understand how the government thinks about acquisitions: One major takeaway from our research is that it is extremely important to put yourself in the shoes of the government when applying for funds. The DoD and intelligence community have fundamentally different criteria than anything that private organizations have likely encountered. The DoD, in particular, tends to make investments in a way only concerned about technology risk and impact to the warfighter. In a qualitative contrast, venture capitalists (the other target for many of your firms) tend to make investments largely on multiple risk factors (tech risk, market risk, team risk, financing risk) and impact to the customer. Few management teams know how to tailor their investor slide decks accordingly when first presenting to the community. Working with the government requires that management teams understand the differences in DoD and VC investment strategies if they hope to raise funds from both. It is not often that this combination is readily available. While DoD may need to move beyond this simple model of risk, it is unlikely to happen in the near future. Further, many commercial firms looking to develop technologies within the DoD or Intelligence community often think about building "dual-use" platforms. It can be particularly attractive to build a strategy around a technology funded by government that can also be used for commercial markets. In fact, through the Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR) programs the government actively funds technology development with stated dual-use applications. With that understood, entrepreneurs should also understand that work with classified programs may be attractive financially, but also limit the ability for their organization to pursue commercial markets.
Realize you must dedicate resources to this effort: It is often a requirement that companies maintain constant contact with potential funding organizations or risk not being aware of proposal procedures, submission processes, and other seemingly straightforward communication. In small companies with people focused on many different tasks, it becomes extremely important to dedicate time and effort to tracking government opportunities. Many entrepreneurs we spoke with had "lucked" into the right introduction that allowed them access to certain portions of funding. With planned initial proposal budgets often growing above $25K, it is important for the teams running small companies to carefully think about the marketing, business development, and sales angles of their public sector approach. We believe that while the government should be improving the tools that make it feasible for small companies to thrive and bring their innovations forward, but focused attention on maintain connection to government opportunities can be a huge differentiator. The effort you put into understanding the contract types, accounting regulations, conflict of interest rules, and potential partnerships with large prime contractors who have access to contract vehicles that best suit your technology solutions will give you a significant advantage over your competitors. The government acquisitions process is purposefully structured to be anti-competitive to support small business, veteran-owned businesses, women-owned businesses, and a host of other categories. Managers, marketers, and salespeople need to understand different methods of pricing, contracts, and proposal writing. Accountants need to get familiar with cost accounting systems and government regulations. To do this right, to competently understand your options as a small business, and to take advantage of the opportunities presented by the government channel you must find resources to dedicate to these challenges. Let the engineers be free to work on the core value proposition, and dedicate other personnel to learn about these topics.
We hope the recent raid on bin Laden's compound, and the technologies that contributed to the mission's success will be a catalyst for entrepreneurs to explore work with defense and intelligence customers. As we wrote in the first posting on the topic, technology start-ups that have traditionally avoided the government as a market are potentially missing a huge opportunity to leverage an important distribution channel that provides both access to funding and an immediate stamp of legitimacy for emerging products.
This post was co-written with Matt McKnight and Brett Gibson. Matt, a former Marine Corps intelligence officer, is currently attending the joint degree program at the Harvard Business School and Kennedy School of Government. Among other pursuits, he consults for the Mayflower Strategy Group. Brett, a former Army officer and second-year student at HBS, will be joining LivingSocial in Washington DC after graduation.