Even with more startup funding, big tech is still key

The immense size of big tech firms has made it relatively easy for them to bid for defense and intelligence agency contracts, and some have been doing so for decades. The same cannot be said for small startup companies that are often starved for cash and need revenue streams to stay alive. According to some analysts, pilot projects launched by defense tech startups may succeed in creating prototypes, but frequently fail to cross the so-called “valley of death” lying between early prototype production and multi-year Pentagon contracts. Historically, the overhead costs associated with U.S. government procurement processes have made it difficult for smaller firms to compete.47 This began to change in 2015, when then Defense Secretary Ash Carter established DIUx. It was headquartered in Silicon Valley and designed as a venture capital fund: the goal was to quickly identify and invest in startups developing cutting-edge technologies that might have military applications.48 With DIUx, the Pentagon built its own startup accelerator to fund firms specializing in AI, robotics, data analytics, cybersecurity, and biotechnology. DIUx was intentionally located in the heart of Silicon Valley, near Amazon’s Lab126, Microsoft’s Silicon Valley campus, and Apple’s corporate offices. Carter, who had spent several years at Stanford University prior to his appointment as Defense Secretary, had reportedly been impressed with the Bay Area’s innovative entrepreneurial spirit.49 In 2018, DIUx was renamed Defense Innovation Unit (DIU), indicating that it was no longer experimental. Between June 2016 and September 2022, DIU awarded contracts worth a total of $1.2 billion to more than 320 companies.50 Carter modeled DIU after In-Q-Tel, a firm established by the CIA in the late 1990s to capitalize on innovations being developed in the private sector, particularly in Silicon Valley.51 By channeling CIA funds to nascent companies building surveillance, intelligence gathering, data analysis, and cyberwar technologies, the agency hoped to outdo global rivals by funding firms with creative engineers, hackers, scientists, and programmers. In-QTel has made more than 500 investments across an extraordinary range of startups.52 In-QTel’s portfolio includes firms with futuristic projects such as Cyphy, which manufactures tethered drones that can fly reconnaissance missions for extended periods using a continuous power source; Atlas Wearables, which produces fitness trackers that closely monitor body movements and vital signs; Fuel3d, which sells a handheld device that produces detailed three-dimensional scans of structures or objects; Sonitus, which has developed a wireless communications system, part of which fits inside the user’s mouth; and Saildrone, which produces autonomous maritime surveillance drones enabled by AI.53 In-Q-Tel has also invested in data-mining firms like Geofeedia, TransVoyant, and PATHAR.54 Once again, it’s worth reflecting on how funding for these new companies could have come from taxpayer-funded civilian agencies, rather than from the CIA or Pentagon. For example, financing for Cyphy’s tethered drones could have come from FEMA (Federal Emergency Management Agency), the USDA (the Department of Agriculture), or the Department of the Interior, since these agencies could presumably use new drone technologies to help survey disaster zones, farms, or federal lands. Since the tools being developed by Atlas Wearables clearly have medical applications, research and development for the company’s devices could have been supported by the NIH (National Institutes of Health). And Saildrone’s nautical vessels potentially have a ride range of oceanographic applications, and under different circumstances, could have been funded exclusively by NOAA (National Oceanographic and Atmospheric Administration) or the EPA (Environmental Protection Agency). Instead, all of these startups were partly supported by military agencies that presumably had a vital role in influencing the development of the new technologies. As noted by Hugh Gusterson: “When research that could be funded by neutral civilian agencies is instead funded by the military, knowledge is subtly militarized and bent in the way a tree is bent by a prevailing wind.”55 The public comes to accept that military institutions should rightfully dominate the direction of research and development work, and loses sight of long term consequences—namely, the ways in which this process binds the American economy ever more tightly to endless wars abroad and greater surveillance at home. DIU and In-Q-Tel are parts of an investment infrastructure that has expanded quickly over time. As noted above, the Defense Department created MD5—now called the National Security Innovation Network—shortly after DIUx was founded, and last year, it established the Office of Strategic Capital as a means of connecting defense tech startups to sources of venture capital and private equity. In addition, the DoD has rapidly developed a range of “accelerators,” “incubators,” and “hubs” to cultivate “innovation ecosystems” that bring small entrepreneurs and startup firms into contact with potential customers from U.S. defense and intelligence agencies. 56 Startups typically follow one of three paths. By far, the most common is failure. According to conservative estimates, 75 percent of startups do not succeed in bringing a commercially viable product to market, or its early investors fail to make a profit.57 Other estimates place the failure rate at approximately 90 percent. The few startups that do manage to survive either “go public”—that is, they emerge as publicly traded corporations—or they are purchased and merged with (or acquired by) a larger company. As they develop and incur expenses, successful startups generally organize several fundraising stages or “funding rounds” (Seed, Series A, Series B, Series C, Series D, etc.) to keep afloat. To illustrate how U.S. military and intelligence agencies have supported tech startups, consider the case of Keyhole, a small San Francisco-based company that developed software for creating three-dimensional models of the earth’s surface. By patching together satellite images and aerial photos, the program could essentially produce a high-resolution map of the entire planet. In-Q-Tel provided seed funding in 2003, and within two weeks, military and intelligence agencies were reportedly using Keyhole’s software to support the U.S. war in Iraq.58 The following year, Google acquired Keyhole for an undisclosed sum.59 It was renamed Google Earth and today, it is worth approximately $4 billion.60 In this case, In-Q-Tel’s investment paid off in monetary terms, but the bigger jackpot was the Keyhole program itself, which the CIA and Pentagon immediately deployed in support of military operations. Like many DIU and In-Q-Tel investments, Keyhole-Google Earth is a dual-use technology that can be adapted for both military and civilian applications. The vast majority of In-Q-Tel funded startups acquired by large tech companies have created dualuse products, such as AppThwack and Elemental Technologies (acquired by Amazon); Acompli and Perceptive Pixel (acquired by Microsoft); Tacit Software (acquired by Oracle); Cleversafe (acquired by IBM); MindMeld (acquired by Cisco); QD Vision (acquired by Samsung); and Pixim (acquired by Sony).61 But In-Q-Tel does not just provide promising startups with cash—it typically invests in companies at an early stage of development, when companies tend to be amenable to shaping their technologies to meet the CIA’s needs. Presumably DIU is taking the same approach. Tech startups are often open to suggestions and recommendations from military and intelligence agencies, since federal agencies are potentially a large customer base.62 Consequently, In-Q-Tel and DIU are able to play an influential role in steering the development of new technology for their own purposes. As mentioned above, these processes have the effect of “bending” innovation toward the needs of the CIA and Pentagon, respectively. One can only imagine the scientific opportunities that have been lost or delayed because they are not aligned with military priorities: for example, increased research to better understand and develop mitigation plans for accelerating climate change and its effects; better tools for forecasting epidemic diseases; and improved methods for sustainable agriculture and resource management. For small companies, In-Q-Tel and DIU funding can lead to two long-term benefits. First, In-Q-Tel and DIU offer an important advantage to defense tech startups: they typically have a “halo effect” that results in an ability to leverage much greater amounts of private investment—particularly VC funding—than would otherwise be the case.63 According to InQ-Tel, on average every dollar it invests in a company is leveraged into $28 of private VC funding.64 Another important benefit is that early funding from In-Q-Tel and DIU, which is typically granted for prototype development using an expedited “OT [other transaction] agreement,” often leads to high-value multiyear production contracts.65