Pentagon Silicon Valley Experiment Thrust Into Spotlight

SAN FRANCISCO — On any given day, groups of visitors from federal agencies, Washington think tanks and defense industry arrive in Silicon Valley hoping to harness the creative energy that has fueled the area’s technology boom.

A required stop on the tour is the Pentagon’s newly created outpost at Moffett Field, in Mountain View, California, where a cadre of uniformed officers and reservists have been assigned as the ambassadors whose mission is to bridge the cultural divide between innovators and military technology buyers.

Since its opening in August, the Defense Innovation Unit Experimental, or DIUX, has become the focus of much industry and media chatter. The Pentagon’s presence in Silicon Valley and what it means for the defense business will be a central topic Nov. 7 when senior leaders and industry CEOs congregate at the Ronald Reagan Presidential Library for a major symposium focused on defense policy and strategy.

Defense officials acknowledge that they face a steep climb in trying to convert skeptics who see the DIUX and other initiatives as passing fads that will do little to change the minds of tech entrepreneurs who want nothing to do with the government.

“The Snowden hangover of fear and mistrust has reached a pinnacle in Silicon Valley,” said Raj Shah, an Air Force reservist and senior director of strategy at Palo Alto Networks who is now on assignment at DIUX.

Speaking to an audience of Washington insiders last week at the Heritage Foundation, Shah outlined DIUX’s ambitious agenda: Strengthen existing relationships with the tech sector, build new ties with entrepreneurs, scout for hot technologies and serve as a “point of presence” for the Pentagon.

The cultural gap between the defense and commercial worlds is real, he said. Defense Secretary Ashton Carter has cast DIUX as the facilitator that will help to attract fresh talent to the defense market. In that vein, “it is incumbent on DoD to show value to the entrepreneur community,” Shah said. Reservists like himself who understand how the military operates and also have private-sector experience are the “connective tissue.”

DIUX plans to host events like “pitch nights” and “hackathons” to drum up excitement among small businesses and startups that develop products for cyber security, big data analysis, surveillance, cloud computing, virtual gaming and other disciplines where the Pentagon has fallen behind the technology curve.

The area is bursting with tech talent, Shah said. About $20 billion in venture capital investments was poured into Silicon Valley companies last year. In the cyber sector alone, 450 startups were funded.

The Defense Department needs to tap into this innovation, he said, but acknowledged that it will be an uphill climb. “We have to be humble. This is not going to get solved in months. We need time to understand what the roadblocks are” that keep commercial companies from wanting to sell to the government.

The roadblocks are patently obvious to private sector executives. While many entrepreneurs might regard government work as prestigious and potentially meaningful, the procurement process and red tape can be deal breakers. They also find it contradictory that while the Pentagon touts its outreach to Silicon Valley, it has shown no interest in reversing contracting rules that do not allow for timely acquisitions of commercial products. Shah said he is aware of these issues but DIUX has no power to rewrite the federal procurement rulebook. “It’s unlikely that we are going to transform the acquisition process,” he said. “That’s not our mandate. Although in certain areas, we can make a difference.”

The Pentagon’s difficulties in acquiring commercial technology are now being investigated by the Government Accountability Office. GAO analysts have spent months interviewing contractors and commercial firms to understand the difference between the way the government and a commercial company buys products. As part of this study, GAO also will visit DIUX.

Geoff Orazem, a retired Marine Corps officer and now CEO of startup incubator Eastern Foundry, said the barriers to entering the defense market are “significant, but once you get over it, the government offers great opportunities.” For the Defense Department to succeed in its innovation push, it has to better articulate its needs in language that civilians can understand, he said. “A 150-page request for proposals is a non-starter. Startups won’t read it.”

The Pentagon’s outreach will not work if it’s limited to top officials making speeches and touring the Valley, many experts said. The contracting officers in the field who actually negotiate deals need to be part of the effort, Orazem said. “The current generation of contracting officers was brought up with a risk averse mindset,” he added. “That puts a lot of sand into the gears of procurements.”

“DIUX will fall flat on its face if it doesn’t get the working level people involved,” said Yanev Suissa, founder of Sinewave Ventures, a tech venture financing firm. Many executives have traveled to Washington, met with Pentagon and White House officials and thought that would immediately lead to government contracts. That’s a huge misconception, he said. “There is a pretty big disconnect between startups and government,” Suissa said. Aside from rare exceptions, most venture capitalists are focused on commercial companies. “They want nothing to do with companies that sell to the government,” he said. “The public sector has to figure out how to be a better customer.”

Adam Tarsi, chief of staff of the Pentagon’s office that oversees the procurement of counterterrorism technology, said one of the obstacles for startups is the lack of vehicles to market their products to the government. “The main acquisition challenge for the U.S. government is that we make it difficult for people that have developed a product to introduce it to the government market,” he said at an industry conference last week in Arlington, Virginia. “We are planting flags all over the place” but the roadblocks remain.

The government also ought to ease startups’ fears that it will seize their intellectual property, noted Jonathan Aberman, managing director and founder of TandemNSI, a company that connects entrepreneurs with government agencies. “Sadly, government contracting communities are feared by innovators because they are concerned about losing their IP.” Those concerns can be overblown, he added. “The problem is a lack of information, no more than that.”

The CIA’s venture capital arm, In-Q-Tel, often is hailed as a success story in working with startups. “Over 70 percent of the companies we invest in have never done business with the government,” said Chief Operating Officer Matthew Strottman. There is growing interest in parts of the tech industry in working with the intelligence community, he said. Silicon Valley firms, particularly, churn out products for which intelligence agencies have a large appetite, such as big data tools. The key is for the government to show that it will play fair, “so it doesn’t look like the system is rigged for an inside community.” The outreach has to be seen as legitimate, he added. “It needs to be more of an institutionalized, long lasting presence.”

It has been just over a year since the Pentagon kicked off its innovation campaign. Acquisitions chief Frank Kendall signed a memo in October 2014 directing the launch of a “long range research-and-development plan” with specific instructions to reach out to “nontraditional players.” Kendall said the Defense Department should “identify high-payoff enabling technology investments” and focus on technology that can be adopted into military programs within the next five years. “This effort is of the highest priority and requires full and immediate support from across the department,” Kendall wrote.

A follow-up action in January was the release of a “request for information” that sought ideas from the outside world and was specifically aimed at innovative small businesses and Silicon Valley startups.

Pentagon officials said the RFI generated hundreds of responses. But it is unlikely that many of those came from the Silicon Valley firms that Carter and Kendall would like to see at the table.

The companies that have cutting-edge technology, especially small businesses, insist they could not survive as government contractors because the sales cycles are so long. The process of setting requirements, securing funding and seeking industry bids takes years, and businesses have to generate revenue constantly to stay alive. The Pentagon’s business model is acceptable for established defense contractors but not for privately funded startups, said Sean Varah, CEO of MotionDSP, a Silicon Valley-based company that develops advanced image processing, computer vision and video analytics software. “Commercial buyers have discretionary budgets to do things. They go out and find the best solution and buy it,” he told National Defense. Varah said he has tried to contact DIUX to pitch ideas but has not heard back from anyone. “I’m cynical that it will have any impact.”

Varah frequently experiences the frustrations of doing business with the government, and he knows other peers in the industry are in the same boat. One of his special operations customers, for instance, wanted to buy MotionDSP video-enhancement software a year ago, but the purchase was held up in red tape because there was no written requirement for that particular product.

“They were working with a requirements document written five years ago and advanced video processing was not specified. Now they’re having to rewrite the document. It has taken more than nine months, and it’s still not done,” Varah said. By the time they receive the product, the operators will have waited for nearly two years. “That’s going to happen to the government again and again.

Disruptive technology will come out that the government didn’t know existed. They are going to want it and need it, but will have no way to buy it.”

Topics: Business Trends, Doing Business with the Government, Defense Contracting, Procurement, Acquisition Reform, Defense Department