Inability of investors to access contracts deters new entrants into the market- this undermines the DIB and risks collapse of US power projection

Jeff Decker, Ph.D. is managing director of Tech Transfer for Defense at Stanford University’s Doerr School of Sustainability and is a co-instructor of the graduate-level Hacking for Defense course. Follow his work at Stanford’s Hacking for Defense blog.; Noah Sheinbaum is the founder of Frontdoor Defense, a platform to simplify the defense industry for mission-aligned builders and operators. He also co-founded Defense Tech Jobs, a jobs board for defense technology companies, and consults for various purpose-driven companies.

Shining a Light on the Defense Department’s Industrial Base Problems; The Strategist Vol 7, Iss 1 Winter 2023/2024 | 75-88 Stable URL: https://doi.org/10.26153/tsw/50673

From bands to chiefdoms to states, political structures historically evolved to provide more resources (e.g., land, labor, and capital goods), which led to more effective militaries and, subsequently, better security and prospects for survival.1 These efficiencies of scale, both in terms of manpower and resources, established an irreducible relationship between a state’s industrial base, military power, and security. A state incapable of leveraging industry for its own defense may struggle to project power and establish security. In 2014, the Defense Department began to acknowledge that declining government-led research and development activity meant it needed to seek access to defense-relevant technologies developed and brought to market by commercial partners. Over the past decade, the department increased its ability to partner with commercial companies by establishing new organizations (e.g., Defense Innovation Unit, AFWERX, Army Applications Lab, and NavalX) and programs (e.g., Rapid Defense Experimentation Reserve, Accelerate the Procurement and Fielding of Innovative Technologies) to help defense personnel access the technologies they need. These new organizations and programs resulted in significant progress in attracting commercial companies and funding to the defense market. It is now easier than ever for companies to work with the Defense Department and raise capital while doing so. Yet, significant challenges remain. On Jan. 11, the Defense Department released its first National Defense Industrial Strategy, laying out four strategic priorities to modernize and expand the U.S. defense industrial ecosystem.2 The strategy is an acknowledgement that despite numerous acquisition improvements and record levels of private investment into the defense tech industry, companies struggle to move from the government’s pilot stage to widespread adoption, the process known as crossing the “valley of death.”3 The valley of death causes thousands of companies to leave the defense market annually and has resulted in a 43 percent decline in small businesses in the defense industrial base over the last decade.4 Overcoming the valley of death has been a primary concern of policymakers and defense personnel to ensure warfighters have access to rapid technological advancements that can change the conduct of warfare.5 The National Defense Industrial Strategy highlights a variety of issues in the industrial base and the Defense Department’s inability to sufficiently leverage all aspects of it. Two of the four National Defense Industrial Strategy pillars — resilient supply chains and flexible acquisition — are directly tied to the U.S. government’s desire to woo commercial companies to bring their capabilities to the defense market.6 Yet, industrial strategy does not exist in a vacuum. The National Defense Industrial Strategy comes on the heels of the release of the Defense Department’s 2023 Small Business Strategy7 and the establishment of the Defense Innovation Board’s task force focused on “Terraforming the Valley of Death.”8 These initiatives view the issue primarily from the government’s perspective and lack sufficient quantitative data from the perspectives of companies that can illuminate the scale of the challenges they face in entering and growing in the federal market. We aim to fill that gap here, using survey data as well as our backgrounds in the defense industry, management consulting, university-based research, and military service. Without rapid progress to improve the transition of novel commercial capabilities to widescale defense capabilities, the United States faces the bleak prospect of competing against an adversary with a superior modernized military. Neglecting the needs of the defense industrial base may cause companies to lose interest and instead choose to pursue commercial opportunities elsewhere. It may also cause investors to lose patience, resulting in fewer founders entering the national security space. This would result in the Defense Department facing a technology shortfall when it can least afford to do so.