By Jeff Decker, Program Director with Hacking for Defense Stanford University*

The U.S. Defense Department (DoD) has one of the largest budgets in the world, awarding $445 billion in contracts in 2020. Compare that to the private sector where start-up creation and investment was estimated at $105 billion in the same time frame.

The DoD, therefore, represents an opportunity for startups. The defense marketplace is also one of the most complex and bureaucratic landscapes that make navigating it extremely challenging.

So how do emerging startups with a great idea/product open the door to the DoD and then scale growth?

The Hacking for Defense Initiative at Stanford University has helped more than a dozen researchers and students transition their technology to land lucrative defense contracts.

Early-stage non-dilutive defense funding has proved pivotal to full-scale defense and commercial market success.

Dollars and Cents

First off, startups and established companies need to determine if the effort to land government funding is worthwhile. Because let’s be honest — getting DoD funding can be a difficult process but the long-term payout of getting in with the DoD can be worth the effort.

Defense funding is particularly attractive to early- and late-stage companies. The size of DoD awards for early-stage companies is competitive with private investment.

Typical check sizes from early-stage private investors range from $25k-$1M, whereas DoD awards are between $25k-500k. Defense funding is far less attractive for mid-stage companies as defense awards are less than $2M compared to private investments of $7-15M.

However, late-stage companies that work with the DoD can expect contracts to be over $2M which corresponds to late-stage investments in the private sector of $26-44M. 

Numerous DoD Funding Opportunities – Where to Start First

There are numerous funding sources within the Department of Defense. Each branch of the DoD has its own programs. There are also Pitch Day competitions that help fast-track innovative companies into the defense marketplace.

The trick for most startups is knowing where to begin.

There are three funding sources that serve as on-ramps to emerging startups:

SBIR/STTR

• The Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR) programs are highly competitive programs that encourage U.S.-based small businesses to engage in Federal Research/Research and Development (R/R&D) with the potential for commercialization.

• Through a competitive awards-based program, SBIR and STTR enables small businesses to explore their technological potential and provide an incentive to profit from going to market.

• The Department of Defense’s SBIR/STTR program is the largest in the government.

• STTR differs from SBIR in that it bridges the gap between basic science and the commercialization of new technologies.

• Companies must also partner with a college or university, a U.S.-based nonprofit research organization or a federally funded R&D center (FFRDC).

• Here are the eligibility requirements.

• There are three phases of SBIR/STTR:

  • Phase I establishes the technical merit, feasibility, and commercial potential of the proposed technology or R/R&D effort;

  • Phase II is to show results based off Phase I; and

  • Phase III is to pursue commercialization objectives resulting from Phase I/II R/R&D activities.

  • Click through the following links for Defense Department-wide SBIR/STTR opportunities as well as Air Force, Army, Navy.

(AFWERX transitions agile, affordable, and accelerated capabilities by teaming innovative technology developers with Airmen and Guardian talent. Courtesy of Air Force SBIR/STTR and YouTube. Posted on Jan 27, 2022.)

STRATFI & TACFI

• In 2020, the Air Force created the Strategic Financing and Tactical Financing (STRATFI/TACFI) program, which provides the Air Force’s most promising commercial innovators with the ability to secure matching funds from the Air Force for private investments.

• STRATFI/TACFI offers companies a way to double their private investment dollars without losing additional equity. TACFI provides matching amounts from $500k to $2M, while STRATFI matches private investments between $5-15 million.

• STRATFI/TACFI funding is secured between current SBIR/STTR Phase II and Phase III efforts, showcasing capabilities for the Department of the Air Force. Eligibility requirements are more complicated than SBIR/STTR, but awards can be generous and help put a company’s product in front of real end-users.

• In 2020 STRATFI/TACFI awarded approximately $550 million to 21 small businesses including ICON Technology, which makes 3D printing homes and is creating a space-based construction system that could support future exploration of the Moon.

• The downside to STRATFI/TACFI is that funding can take several months to be awarded.

(Air Force senior leadership highlighted some of the companies in the running to receive a portion of a combined $1 billion in Air Force Strategic Financing (STRATFI) commitments, thus providing a way for SBIR Phase II companies that may require greater investment to deliver and scale promising and nationally strategic solutions. Courtesy of AFWERX and YouTube. Posted on Apr 20, 2020.)

NSIC

• The National Security Innovation Capital (NSIC) funds the development of hardware critical to national security and focuses on five categories of technology: power/advanced energy, space, autonomy, sensors, and communications.

• U.S.-based startups with hardware products that have both commercial and defense applications can apply.

• Startups can be at an early stage, with proof of concept, or all the way to late-stage (pre-production). Those already manufacturing a product at scale are too late. 

• Eligibility and pitch requirements are straightforward.

While these three funding options are a good place to start, before committing to work with the military, startups should carefully consider whether the defense marketplace is right for them by asking three questions:

1. Does the product offer a solution to a high-priority national security problem or need? Is the startup clear on who will buy, use, and pay for their product?

2. Is the company prepared to endure revenue gaps while validating R&D and customer targets? Some companies may go years without defense revenue while performing R&D or bridging defense contracts.

3. Can the founders balance the needs of both defense and commercial customers? Does the defense product fit a commercial market? The best-positioned startups solve fundamentally similar problems for both military and commercial users. Satellite imagery firm Orbital Insight‘s Go platform, for example, automates imagery analysis for defense analysts, investors, and agribusiness alike. Some amount of customization is inevitable given that military users often have specific mission requirements or technical constraints. However, companies that can serve military customers without fundamentally altering their existing product roadmap are likely to be most successful.

In conclusion, DoD funding is non-dilutive and can enable startups to get paid to develop their commercial product.

SBIR/STTR, STRATFI/TACFI, and NSIC awards are valuable opportunities that can help early-stage companies begin doing business with the government.

About the Author

Jeff Decker is program director and co-instructor of Hacking for Defense at Stanford University. Hacking for Defense uses the Lean Startup technique to tackle complex problems critical to the government around national security, energy networks, cyber security, and AI, and develop new technologies with teams of engineers, scientists, MBA’s, and policy experts.

With the program, Jeff has taught more than 250 students, faculty, and government personnel user-centered design from over 2 dozen colleges and universities, helping them solve more than 40 unique national security challenges for the Defense Department and related industries.

Several student teams have gone on to form companies winning Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR) programs, gaining venture capital funding, and one team even became a program of record.

Jeff’s work and research focuses generally on defense innovation and dual-use technologies, with a focus on developing go-to-defense market strategies for technology startups and fostering defense-industry partnerships.

With his Lean Startup experience and expertise with Hacking for Defense, plus his military service, Jeff is a sought-after expert when it comes to national security and solving Defense Department challenges.

Jeff served in the U.S. Army as a 2nd Ranger Battalion light infantry squad leader in Iraq and Afghanistan. Following his service, he earned a MS in International Relations (Laws), and a doctorate in International Relations before conducting national security and international affairs research at the RAND Corporation.

*Republished with permission.

Editors Note: Thank you Jeff for your service to our nation!

(Learn More. Stanford University students learn the “Lean Launchpad” approach to entrepreneurship while working on technological solutions for highly complex challenges facing the national defense and intelligence sectors. The course, MS&E 297, is taught by Steve Blank and other faculty affiliated with the Stanford Technology Ventures Program, the entrepreneurship center in the School of Engineering’s Department of Management Science & Engineering. Courtesy of Stanford Tech Ventures Program and Vimeo.)

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American Security Today’s Annual ‘ASTORS’ Awards is the preeminent U.S. Homeland Security Awards Program, and now entering it’s Seventh Year, continues to recognize industry leaders of Physical and Border Security, Cybersecurity, Emergency Preparedness – Management and Response, Law Enforcement, First Responders, as well as federal, state and municipal government agencies in the acknowledgment of their outstanding efforts to Keep our Nation Secure.

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