Dan Berkenstock is a distinguished research fellow at the Hoover Institution and teaches aerospace entrepreneurship at Stanford University’s School of Engineering. He provides space-related scholarship and policy recommendations through Hoover’s Technology Policy Accelerator.
Martin Giles: Dan, how has the defense procurement landscape changed over the past couple of decades?
Dan Berkenstock: For a very long time, the pace of advancement in military and defense technology was slow enough that a small group of military planners in the US government could debate the future of warfare in private and settle on a roadmap of capabilities they needed for the future. This was then translated over time into a set of requirements, and then a set of contracts. Ultimately, private companies would bid on those contracts and build the capabilities needed. This whole process took years and sometimes a decade or more.
But over the past twenty years, things have changed. Emerging technologies are evolving so quickly—and access to them has become so widespread—that other countries are taking advantage of innovations faster than ever. So, while tapping into commercial innovations used to be a “nice to have” for the Department of Defense (DoD), it’s now become a must-have.
Martin Giles: Can you share some examples of how this strategic change has affected warfighting?
Dan Berkenstock: The largest and most visible example of this change has been the conflict in Ukraine and the Ukrainians’ ability to take parts and products from the commercial market and build new, highly capable and highly lethal drone technologies. Another broad example is the domain of space-based observation. We’ve seen the launch of a growing number of optical-imaging satellites, synthetic aperture radar satellites, signals-collection satellites and other vehicles by startup companies operating outside the traditional defense industrial base.
Martin Giles: Will getting more startups involved in defense procurement help keep costs down?
Dan Berkenstock: I don’t think this is a cost reduction story; it’s more a capability enhancing story. For a while, there was a debate about whether it would be cheaper to push some of this work onto new and emerging commercial operators rather than the big, traditional defense companies, known as prime contractors, or “primes.” However, the reality is that the wavefront of new technologies is moving so quickly now that the only people who can be exploring new designs at the leading edge of it are entrepreneurs working in places like Silicon Valley.
I think in the future the traditional defense industrial base will continue to do the things it’s very good at: building aircraft carriers, next-generation fighter jets, and other large capabilities that require a lot of institutional knowledge and very expensive facilities, and that have to be built to exquisite standards. What I hope emerges alongside that is a new defense industrial base that comprises a continuously evolving set of new companies that explore different areas of that advancing tech wavefront. We want a flywheel effect where there’s always a new set of companies out there trying to determine what’s the design point that’s achievable today that wasn’t possible even a year or two or three ago.
Martin Giles: How is your work at the Hoover Technology Policy Accelerator related to that flywheel effect?
Dan Berkenstock: My topline goal at the Accelerator is to work out the model for how these young companies can go from zero to fielded operational capability for warfighters. Then it’s to recommend changes in law and policy to address gaps between that model and how things work in practice today. The model’s building blocks already exist. We have a set of really capable young companies run by folks who are on their second- or third-generation startup delivering dual-use capabilities for both commercial applications and warfighting. Each startup invests an average of around a million hours of engineering labor between starting out and providing an operational capability—and there are a couple of hundred of these companies around now. So, we’ve got a resource within the United States of a couple of hundred million engineering hours that can be leveraged for more ideas.
On top of this we have a very significant pool of private capital, especially in venture capital firms. Venture investors have become increasingly willing to support entrepreneurs as they’ve seen the impact their work has had in Ukraine and other places, and the amount of money venture firms manage has increased something like ten times over the last fifteen years. This has created a perfect combination where you have capabilities that have grown significantly, you have a capital pool that’s grown significantly, and you have investors who are more and more willing to put their money to work here.
Martin Giles: What are the opportunities and challenges here?
Dan Berkenstock: What all of this means is that from a government buyer’s perspective, the pump is primed. You have an opportunity to really change how you drive research and investment that ultimately results in warfighter capabilities. In the past, you had to come up with all the ideas, you had to design all the requirements, and you had to own the risk and own the funding of a project from day one. Today, you no longer need to own 100 percent of the risk and 100 percent of the cost from day one. You may only need to own, say, 5 percent of both for the first 50 percent of the design cycle. This is an extraordinary opportunity for the government and for the taxpayer. The DoD, in particular, can tap into private dollars and a private brain trust that’s constantly generating and testing new ideas.
The question becomes, what building blocks do we need to advance this model even further? One issue is that investors need to see some early signals of validation from defense buyers for the innovative work startups are doing. The Small Business Innovation Research (SBIR) program has been an incredible asset here since it was set up in the 1980s. We’re talking about a significant amount of money: around $35 billion of DoD-focused SBIR funding has been invested since its inception, and today it’s providing around $1.6 billion to $1.7 billion annually. The idea was that in the early years of a startup’s life, SBIR funding from the DoD can help to de-risk a contract to the point where a program executive officer can get comfortable with the potential of a private company’s tech and start putting significant money behind it.
Martin Giles: How has the SBIR program evolved over time?
Dan Berkenstock: The program has to be reauthorized every several years or it sunsets automatically. A significant change to the program was made in 2011 that introduced an extra phase that meant more SBIR money could be available if it was matched by non-SBIR government dollars or by private investment. In 2017–18, the Air Force launched a specific program known as the Strategic Funding Increase, or STRATFI, program that really took advantage of these new authorities by allowing companies to raise up to $30 million, which is fifteen times more than what had previously been available. The program itself delivers up to $15 million providing a business can convince another part of government to match that money dollar-for-dollar. About sixty companies have gone through this program now, which includes Space Force as well as the Air Force, and some have been able to raise $60 million by using the $30 million from government and getting that same amount in private investment. It’s a significant program.
Martin Giles: It certainly sounds like it. Isn’t this just the model we need for the future?
Dan Berkenstock: In practice, there are some details of the STRATFI program that mean it still hasn’t reached its full potential. This year SBIR is up for reauthorization, and it’s a great opportunity to address some of them. We need an evolved form of the STRATFI program that lines up more closely with how venture capitalists think as they make their investments. This will encourage even more private money to be committed to defense-related startups.
The current program allows for one four-year award at a maximum of $30 million. This means a business gets an average of $7.5 million a year in revenue. The hardest venture financing rounds for entrepreneurs to get through once they’ve had initial seed funding are the Series A, B, and C rounds. Each round supports a company for about two years. At every new round, investors expect to see growth in annual revenue and multiple contracts being awarded within a round’s timeframe, not just one. So, ideally the STRATFI program would make multiple, phased contract awards—with each one being around twice the size of the previous contract—rather than a single lump sum up front. This would show a business is gaining credibility within the DoD, clearly demonstrating to investors it’s achieving market traction.
The current SBIR authorization expires in September and Senator Joni Ernst, the chair of the Senate committee on Small Business and Entrepreneurship, has issued draft legislation called the Innovate Act that has an important component referred to as Strategic Breakthrough Funding that is essentially the model we’re proposing above, with a few modifications. Most importantly, this would apply across the entire DoD, not just the Department of the Air Force and Space Force. The Strategic Breakthrough Funding model is a great opportunity to ensure all this cutting-edge research and development by private companies makes it out of the pipeline and into fielded capabilities for our warfighters.
