Why The Government is Isn’t a Bigger Version of a Startup

This article previously appeared in War On The Rocks

There was a time when much of U.S. academia was engaged in weapon systems research for the Defense Department and intelligence community. Some of the best and brightest wanted to work for defense contractors or corporate research and development labs. And the best startups spun out of Stanford were building components for weapon systems.

Indeed, Silicon Valley was born as a center for weapon systems development and its software and silicon helped end the Cold War.

During World War II the United States did something its adversaries did not; it enlisted professors and graduate students as civilians in 105 colleges and universities to build advanced weapon systems — nuclear weapons, radar, etc. After World War II, the military-academic relationship that was so effective against Germany and Japan mobilized to face the Soviet threat and almost every research university (Massachusetts Institute of Technology, Stanford, Caltech, Harvard, Columbia, Johns Hopkins, University of Michigan, University of Wisconsin, Cornell, University of Chicago, and many others) continued to engage in weapon systems research during the Cold War.

Unique among them was Stanford, which provost Fred Terman (the father of American electronic warfare and electronic intelligence in World War II)) built as a center of excellence in microwaves and electronics. Rather than focus the university inward on research, Terman took the radical step of encouraging Stanford professors and graduate students to start companies applying engineering to pressing military problems. The companies they started in the 1950s and 60s were based on Stanford’s defense contacts and contracts — microwave components, electronic warfare, and intelligence systems, and then the first wave of semiconductor companies. As there was no venture capital, these early startups were funded by early sales to weapon systems prime contractors and subcontractors.

But this quarter-century relationship between the military and universities ended with a bang in 1969. In the middle of the Vietnam War, student riots protesting military research forced the end of classified work on most college campuses. One of the unintended consequences was that many of the academics went off to found a wave of startups selling their technology to the military. For example, at Stanford after student riots in April 1969 shut down the Applied Electronics Laboratory, James de Broekert ,who was building electronic intelligence satellites, left the university and co-founded three Silicon Valley military intelligence companies: Argo Systems, Signal Science, and Advent Systems.

Within a decade, the rise of venture capital in Silicon Valley enabled startups to find commercial customers rather than military ones. And from then on, innovation in semiconductors, supercomputers, and software would be driven by startups, not the government.

After 9/11, with the memories of the fall of the twin towers, this ecosystem of military, academic, corporate, and startup actors coalesced for the decade as U.S. companies felt a patriotic duty to help their country defeat a common enemy.

But the 2013 Snowden revelations damaged that tenuous relationship yet again. In hindsight the damage wasn’t the result of what the United States was doing, but over the Pentagon’s inability and unwillingness to own up to why it was doing it: After the intelligence failure of 9/11, security agencies overcompensated by widespread, warrantless datamining as well as electronic and telephonic surveillance, including on U.S. persons.

Without a clear explanation of why this had been done, startups, which were already being funded by ever-increasing pools of venture capital, abandoned cooperation with the Defense Department and focused on high returns on social media and commercial applications. The commercial applications of big data, machine learning, artificial intelligence, drones, robotics, cyber, quantum computing, and biotechnology are the core foundations on which the Pentagon needs to build the weapons of the 21st century. Yet the development of these advanced technologies is now being driven by commercial interests, not the Defense Department.

America’s adversaries understand this. China is tightly integrating its defense establishment with startups, companies, and academia in “military-civilian fusion.” Russia, Iran, and North Korea have also fused those activities.

Reconstituting the tightly connected military-academic-commercial ecosystem that the Defense Department once had requires the Pentagon to relearn skills it once had, overcoming decades of avoiding the political and social issues of what it takes to rally the nation against a common threat. Today, every government agency, service branch, and combatant command is adopting innovation activities (hackathons, design thinking classes, innovation workshops, et al.) to tap into the creativity of a new generation of soldier — born into a digital world, comfortable with technology, and willing to improve and enhance America’s ability to fight and win.

The Government Can’t Act Like a Startup
However, those activities are not enough. The government isn’t a bigger version of a startup and can’t act like a startup does. Innovation activities in government agencies most often result in innovation theater. While these activities shape and build culture, they don’t win wars, and rarely deliver shippable or deployable products.

Startups dream in years, plan in months, evaluate in weeks, and ship in days. At times this means startups operate at speeds so fast they appear to be a blur to government agencies. It’s not that these companies are smarter than Defense Department employees, but they operate with different philosophies, different product development methodologies, and with different constraints.

The table below summarizes a few of the salient differences. Some of the most important are the least obvious. Startups can do anything. They can break the law and apologize later (as Uber, Airbnb, and Tesla did), but a government official taking the same type of risks can go to jail.

Urgency and risk-taking in a startup are integral parts of the culture, felt by 100 percent of early-stage employees. The urgency servicemembers feel on the battlefield is felt by few in government agencies, and most often there are negative incentives for risk-taking. In a startup cluster (Silicon Valley, Beijing, Tel Aviv) a failed entrepreneur is known as “experienced.” In a government agency, they’re likely known as being out of a job.

Innovation at speed is a given at a startup but the exception in a government agency. Advances in commercial technologies are occurring at no less than two, and up to ten, times the speed of comparable Pentagon-developed or acquired systems. Some of the speed is simply due to development methodologies. Waterfall development is still used by most defense contractors, resulting in updates of systems measured in years. With Agile development, used by all startups, updates can occur in weeks or sometimes days, or even hours. Some of the speed differences are because commercial companies and academics face Darwinian competitive pressures for revenue or recognition. These force rapid technical advances in fields such as machine learning, artificial intelligence, robotics, big data, and analytics.

The very definition of a contractor implies a contract. And a government contract starts with fixed requirements that only change with contract modifications. That makes sense when the problem and solution are known. But when they are unknown the traditional methods of contracting fail. Startups recognize that when new circumstances arise, they can pivot — make substantive changes to their products without any new contracts.Existing contractors have learned how to master the arcane defense acquisition system and live with the slow decision-making and payment processes. In some agencies, large contractors seem to “own” sections, offices, organizations, or programs. Often former government employees, at the level of GS-15 and below, will leave as staffers and return the next day working for large Beltway contractors, working or managing the same programs they previously worked. This relationship between government agency and contractor further impedes and often rejects innovation or disruption. Officers know they will likely lose their post-retirement future if they seek radical change.

This symbiotic relationship between government agencies and incumbent contractors is also a barrier to new entrants, in particular to startups with the very technologies the Department of Defense now needs. While the Pentagon has made efforts to reform the process (Other Transaction Authorities, TechFAR, mid-tier contracting, accelerators…) there is still a fundamental misunderstanding of what financial incentives would attract the best and brightest investors to guide their companies to work with the Defense Department. There are no incentives for prime contractors to invest in new ventures and none to acquire new ventures. And there is no plan for how to rapidly insert and deploy startup technologies into weapon systems.

So, the question is: What’s next? How do leaders in government think about and organize innovation in a way that makes a difference?

The answer is that, yes, government agencies need to be more agile. And yes, they need to fix the systemic internal issues that hinder their own innovators’ contributions. But, in addition, what they are missing is a comprehensive plan to build a 21st-century defense innovation ecosystem — reintegrating the military, academia, and private enterprise. To harness both their own internal innovators and this new external ecosystem the Defense Department needs what I call an innovation doctrine to organize their efforts to rapidly access and mobilize talent and technology. The Pentagon can build a mindset, culture, and process to fix this. This doctrine would let the country again capture the untapped power and passion of the best and brightest to leapfrog adversaries and win wars.

10 Responses

  1. Steve, a very important article. What is your opinion of the “hybrid” approach that is now emerging in the corporate world. By hybrid, I mean the funding and formation of startups that are under the purview of the enterprise but operating outside the four walls and normal constraints that exist within the four walls. This approach is the hybrid of fully internal R&D and fully external funding of external, independent startups.

  2. Sorry Steve, the government and DoD have zero accountability. Name one Flag Officer who has been fired for failing to deliver since the Korean war. The entire system is designed to offload risk and accountability at the expense of performance.

    As far as startups go, there is something of an ecosystem where the large predator fish land the contracts. They are the only ones with pockets deep enough to deal with the tons of paperwork that must be created for accountability (oh, the irony!). Then the big fish are forced to bring in small “disadvantaged” businesses (little fish) to meet contract requirements. This mess of a system could only be designed by committee and the US Congress could be the architects of this swamp of an ecosystem.

  3. This is great stuff! I was totally unaware of this situation. Thanks much for sharing, and good luck with the inovation you’re suggesting.

    Keith Bates

  4. I had the good fortune to teach with Peter Drucker for 14 years at the Claremont Colleges, the business school which bears his name. Peter revealed at lunch one day two reasons why the government doesn’t work, a much more concise explanation.
    I don’t think Peter ever published his two-factor theory, but I’d be glad to share with anyone who has an interest.

    • @Robert Sweitzer – I’m really interested in what Peter said. Please share. Thank you.

      • Peter felt that government staff were as bright and qualified as those in the private sector but the system remained flawed for two reasons:

        1. They never test anything before they launch it. Consider all the legislature that has unintended side effects, precisely the reason why private sector new products and services get market tests. Or in the lean startup, why customer interviews inform the pivot.

        2. Once launched, they never modify the program, ignoring feedback from those affected. One need only consider the journey from the Massachusetts healthcare legislation lead by Mitt Romney to Obama’s Affordable Care Act to the current political rancor over repeal and replace. An all too familiar tribal path where effective aspects of legislation get lost in partisan rhetoric and the parts that don’t work as intended never get fixed.

        An exception to this was Social Security which began as a state program in Wisconsin and morphed into Roosevelt’s ground breaking federal legislation. In all the ensuing years there is no other example of a trial period for new legislation in a targeted state or cluster of counties, where the data and feedback led to necessary pivots in constructing a new federal program.

        Don’t test, don’t modify. What an incredibly woeful system.

  5. Bravo Steve! You’ve done it again … and put it out there in the most concise, single liner for the world to see. Thank you! Firstly, you made it perfectly clear to all that “startup is not just a smaller version of a large corporation”. Secondly, you made it abundantly obvious that corporate innovation is an “end-to-end pipeline”. Skip few stages, and all you do is “Innovation theater”

    Now, … it’s the Innovation Doctrine “To harness both their own internal innovators and this new external ecosystem the Defense Department needs what I call an innovation doctrine to organize their efforts to rapidly access and mobilize talent and technology. The Pentagon can build a mindset, culture, and process to fix this. This doctrine would let the country again capture the untapped power and passion of the best and brightest to leapfrog adversaries and win wars”

    So, here is what I think: Venture Capital is alive and well – thank you very much. CVC is growing, but unless it stops imitating VCs and begins to realize how huge its Factor Endowment really is – no radical improvement is going to happen. I’ve said it many times before: imitation works great for karaoke bars, not so much for CVCs!
    So, my message to CVCs is quite simple: stop tagging-along with other VCs. Instead, go back to your roots and think about how to deliver and deploy innovative products – solving real problems of customers you already have! And DOD is a GREAT customer to have! After all, CVC’a parent companies already know customers’ pains and gains – so it’s time to start acting on such knowledge …

    But wait, IMHO, we are facing a real opportunity to turn the venture capital into a three-legged stool. Welcome to the down of UVC – University Venture Capital. UVC can deliver a healthy cross between cutting innovation theories stemming from academic research of entrepreneurship, technology transfer activities, and hard-knuckled incubators. Well-funded UVCs can significantly rival existing VCs, and also elevate the profile of its hands-on accelerator centers.

    If UVCs sit on a significant pile of dough financed by DOD and its University Pension Funds – they might insist on bringing successful and experienced alumni entrepreneurs to serve as startup advisors on all its ventures. Not just volunteering occasional advisory sessions – but doing it full-time, or part-time, under a well-structured and well-funded framework. It’s a solid boost to UVC-backed startups and a great way for universities to foster closer ties with its alumni – not just academics!

    Want an EXTRA bonus? Nobody can push Women in STEM agenda better than … UVCs! This opportunity can turn into the biggest Blue Ocean of the next century and Richard Branson said it the best: “Always shoot for the moon, even if you miss, you’ll end up among the stars!”

    In my recent linkedin post: LeanCVC™ – A Match Made In Heaven I emphasized that instead of spending hundreds of millions of dollars on acquisitions, CVCs can simply focus on “grooming” the startups for Private Equity investment! And both DOD and UVC investments fit the bill, too! My LeanCVC™ Value Innovation addresses the two basic requirements of Blue Ocean Strategy (BOS) framework: reduce costs and increase value – SIMULTANEOUSLY!

    In essence: CVCs could acquire more strategically positioned but early-stage companies – with “Other People’s Money” (OPM); PE industry and DOD/UVC could significantly increase its Investment Pools and consider many more acquisitions than ever before. All this, by dealing with a larger number of entrepreneurial companies with a REAL revenue in place expressed as Purchase Orders – and not just a few flashy Letters of Intent …

    Yes, we need to innovate our capitalism and make it smarter – or face a real challenge from a “fake” capitalism of China, or a “crony” capitalism of Putin.

    Oleg Feldgajer – BASC, MASC, MBA & EMBA
    President & CEO
    Canada Green ESCO Inc.
    Cell: 519-574-4161
    Author of: “AI Boogeymen – Dispelling Fake News About Job Losses”

  6. Why do you promote weapons and war making which tend to be win / lose, rather than peace and wellness which tends to be win win?

  7. Major difference between startup and government is not being profit focused. Government should be more like an NGO which works for the welfare and developmentof its society instead of just being profit oriented.

  8. Great article Steve, I can’t tell you how much I agree with your points re: contracts. I think one of the biggest barriers to innovation within government departments is their approach to procurement, funding and governance of IT projects. Expecting solutions to be rigidly defined before the opportunities available is a recipe for disaster.

Leave a Reply

%d bloggers like this: