Industry CEO: Defense Market Should Embrace Startups

As Defense Secretary Ashton Carter continues his outreach to the high-tech industry in Silicon Valley, the Pentagon has to figure out how to channel entrepreneurial talent into the national security arena, Raanan Horowitz, president and chief executive officer of Elbit Systems of America, said Oct. 20.

His company is the U.S. subsidiary of Israel-based Elbit Systems, a billion-dollar military contractor and aerospace supplier that increasingly is investing in startups and changing the traditional approaches to developing defense technologies.

Israel has one of the world’s highest concentrations of tech startups, many of which develop products for the military and homeland defense markets. Defense contractors like Elbit, said Horowitz, are now becoming incubators and investors in an effort to prop up small businesses and accelerate the introduction of new products.

The United States does not face the levels of heightened security that Israel does, but the Pentagon still should convey some sense of urgency to the private sector, and show that it is willing to invest in technology and share both the risks and rewards, he said in a presentation at the Atlantic Council in Washington, D.C.

Horowitz warned that the Pentagon is not going to regain its innovation mojo by “shopping” in Silicon Valley. To draw cutting-edge startups and creative talent to the military market, the Defense

Department will have to make an earnest effort to break out of its comfort zone and take seriously the advice of outsiders, he added.

Carter’s signature initiative to lure tech firms to do business with the Pentagon is having difficulties getting off the ground in part because it is being viewed by incumbent Pentagon contractors as a competitive threat to their business. This undue anxiety is creating barriers, he said. “In Israel, Silicon Wadi [“valley" in Arabic] did not replace the defense industry.”

Startups should be working with the government and the defense industry to “expand the intellectual bandwidth,” he said. To be sure, he noted, this is much easier to do in Israel because it is a small country and almost everyone serves in the military. The engineers who develop technology also are the users and operators of those products, Horowitz said. “They understand the mission and challenges intimately.” In the United States, he said, it would be “hard to duplicate that sense of national urgency.”

Contrary to conventional wisdom, there are people in Silicon Valley who care about national security, he said. “The key is to expose them to the challenges. They will not respond well if we prescribe. We need to find a way to involve them.”

In general, it is difficult for the Pentagon to break down the barriers between the defense and civilian worlds, and bridge the wide cultural gulf between the defense market and the commercial industry. The opening of a military outpost in Silicon Valley office, known as the Defense Innovation Unit Experimental, is a “good start,” said Horowitz. “But is it enough? I don’t know.”

The Pentagon also has to understand that innovation comes at a cost, and it has to show it is willing to invest and take chances that some technologies will fail. “Silicon Valley can’t replace the investment DoD needs to make in its budget,” he said. “Leveraging Silicon Valley is a component of the solution, but it’s not the Promised Land.”

Defense leaders also need to better communicate to Silicon Valley the security threats the nation faces that technology could help solve. The key is to bring “more perspective to the challenge,” he said. The government is used to prescribing solutions that usually become technologically obsolete by the time they are deployed. Instead, the Pentagon should describe its problems, and “unleash creative minds to discover solutions.”

Horowitz also suggested that the Pentagon ought to pay more attention to small and medium-sized firms in the United States, where much of the innovative talent resides. DoD primarily talks to its large prime contractors, he said. “Industrial policy needs to focus on investments in lower tiers.”

Elbit started a program called “Incubit” that invests in startups that develop commercial technologies that also have military applications. The company is currently vetting 350 startups. So far it has funded five firms that have promising technologies in the areas of cyber security, nanotechnology, medical devices and rocket engines. Another initiative called “InnoShare” applies a crowdsourcing model to decide what initiatives the company will fund. “The ideas are selected by crowd wisdom” which tends to be superior to that of senior management, Horowitz said. Elbit invests about 9 percent of its sales in research and development, a rate about three times higher than top U.S. defense contractors.

Another impediment to innovation in the U.S. defense market, Horowitz said, is a cultural and political aversion to outsider ideas. “That’s one of the core issues, the ‘not invented here syndrome.’”

When a smart idea is found in the private sector, the Pentagon should make an effort to partner with innovative firms and “build trust” so companies do not have to fear that the government will seize their intellectual property.

“From the beginning, you have to put together the right commercial agreements. It’s a challenge, but it would reduce the anxiety” that startups tend to have about doing business with the government.

Topics: Business Trends, Defense Contracting, International