But creating more opportunities for commercial tech companies to secure government contracts is only the beginning. For government agencies to successfully take advantage of innovative tech from the private sector, a few things need to happen — and the sooner, the better.

First, the government needs to look beyond legacy contracts. As has been noted by venture capital leaders, the announced provisions of the coronavirus relief legislation, the CARES Act, “to streamline the Defense Department contracting process” currently apply only to contracts worth $100 million or more. This excludes emerging commercially successful tech companies that could have a significant impact at the government level.

Separate, though related, are needed reforms to the Small Business Innovation Research program. The National Defense Authorization Act for fiscal 2020 provides additional SBIR flexibility for small businesses that are more than 50 percent owned by venture capital, but the DoD has yet to fully promulgate this new flexibility authority. Until eligibility standards are adjusted, the DoD is missing the chance to work with proven, VC-backed companies.

Of course not all commercial tech companies are equipped to support government missions; and to ignore the importance of a rigorous evaluation process is even more harmful than ignoring commercial tech all together.

Finding emerging tech is easy. Evaluating and equipping tech companies for success in government is hard, particularly when national security is a critical concern. The COVID-19 crisis has made it even more apparent that government agencies need to be able to implement tech solutions quickly and trust that they will perform as expected. A tech company with proven success in the private sector may draw the government’s attention and show that it can deliver, but there are other equally important indicators to consider when determining if a company is capable of performing as expected at the government level.

The Pentagon, like any government agency, must rely on data-backed advice and expertise to identify which commercial tech solutions are most likely to succeed in the federal market. Finding technology companies should not be a quantity play, but focus more on fit and quality.

Moving fast requires working with private sector partners who have experience vetting tech companies for government contracts, which we’ve seen leaders do, like Space and Missile Systems Center’s Air Force Col. Russell Teehan and the head of Air Force Program Executive Office Digital Steven Wert. Partners that are federally focused — with deep knowledge of government problem sets and missions — can identify which tech companies are viable technically and will be viable in the federal market.

Assessing tech’s viability requires specific experience evaluating a set of qualitative characteristics unique to this market, in addition to the typical “can they work with government” questions like: “Where is the code compiled?”

Government agencies should also look to VCs and accelerators that can specifically guide tech companies through the government market contracting process and equip them to succeed in the long term. For instance, in 2019, the United States Air Force worked with Dcode to scout technology for the service’s Multi-Domain Operations Challenge, and seven of the 30 finalists were companies that had completed the Dcode accelerator to prepare for success in the federal market.

Supporting these tech companies requires more than just a singular contract award. To get over the “valley of death,” companies have to understand everything from compliance to how to staff, rework operational processes and market effectively, to name a few.

There is no question that working with the right emerging tech companies is imperative for the DoD and other government agencies. But at a moment in history when time is particularly of the essence, there is no room for trial and error when it comes to identifying which tech companies can meet the government’s specific needs.

By working with private sector partners that have extensive government expertise and proven results, the DoD can confidently implement innovative technology that addresses its most critical needs in a time of crises and well into the future.

Meagan Metzger is the founder and CEO of Dcode. She also serves on an advisory board for Booz Allen Hamilton, and another advisory board for the Defense Entrepreneurs Forum. She previously worked as chief operating officer of a mobile and cloud company, as well as chief strategy officer at an IT consultancy.

In the past few weeks, we have had numerous conversations with government officials about our venture and growth equity investments in the defense sector. These discussions have centered on the eligibility rules of the CARES Act’s Paycheck Protection Program and the risk of foreign capital seeking entry into defense technology startups desperate for investment in these trying times.

But these are secondary questions. The primary question is this: How can the Pentagon best preserve its innovation base and develop the most competitive and advanced technologies?

The answer is simple: Buy commercial. New and emerging defense startups — and our men and women in uniform — don’t need symbolic gestures. What they need is concerted action to bring the latest and most advanced technologies — many of which are routinely used in industry — to dangerously antiquated defense weapons systems and internal IT infrastructure. This was true before COVID-19, it is true now and it will be true when the next crisis strikes.

All too often the government has responded to crises by circling wagons around incumbent firms — the large prime contractors, whose political connections afford them bailouts in the name of “ensuring ongoing competition.” This process is already underway. After announcing its hope for a $60 billion relief package for the aerospace manufacturing industry, Boeing successfully lobbied for $17 billion worth of loans for firms “critical to maintaining national security.”

The CARES Act also announced provisions to streamline the Defense Department’s contracting process, which sounds promising, except for the fact that these provisions apply only to contracts worth over $100 million. This discriminates against smaller, more nimble innovators and providers of cutting-edge technology.

This isn’t how things have always been. After complaints about large horse dealers monopolizing military contracts during the Civil War, the government allowed quartermasters to purchase horses and mules from any dealer on the open market. In World War II, Congress created the Smaller War Plants Corporation, which awarded tens of thousands of contracts to small, competitive firms. Today, through innovative use of Small Business Innovation Research money, other transactional authorities, rapid work programs and the like, the Pentagon is certainly signaling interest in emerging technologies.

But let us be clear: We are not advocating continuing to invest larger dollar amounts into never-ending, short-term pilots and prototypes. The key to sustaining the innovation base through this crisis and any future crises is transitioning the best of these companies and products into real production contracts serving the day-to-day needs of the mission. Host tough, but fair competitions for new innovations, and then rapidly scale the winners.

America’s technological supremacy has afforded our country nearly a century of military hegemony, but it is not a law of nature. Sovereign states and peer competitors like Russia and China will quickly outpace us if we take our prowess for granted. We need new entrants into the defense industry more than ever, but without government support through crises like this one, the talent and capital simply won’t be there.

As the Department of Defense readily acknowledges, its mission is fundamentally changing. Breakthroughs in technological fields like artificial intelligence, autonomous systems, robotics, resilient networks and cyberwarfare mean that future conflicts will look nothing like those we have seen before. The DoD of tomorrow needs a fresh wave of technical expertise to understand and respond to these new kinds of threats.

That is not to say that legacy defense contractors are not needed; their expertise in large air and sea vehicles is currently unparalleled. But the expertise to build these new technologies resides in pockets of talent that the big and bureaucratic incumbents, who made their names with 20th century technology, lost access to decades ago.

The DoD has publicly exalted the importance of innovative defense startups for years. That is partly why we are so excited to invest capital into the defense sector at this moment in history. Silicon Valley has a chance to live up to its oft-ridiculed but sincere ambition to make the world a better place by investing in American national security.

However, we as venture capitalists and growth equity investors also have a duty to our limited partners who have entrusted us to invest and grow their capital. If we see the same old story of the government claiming to support small businesses but prioritizing its old incumbents, those investment dollars will disappear.

Times of rapid and unprecedented change, as COVID-19 has precipitated, also provide opportunities. The DoD and Congress can reshape budget priorities to put their money where their mouths have been and support innovative defense technologies. Each dollar awarded to a successful venture capital and growth equity-backed defense startup through a competitively awarded contract attracts several more dollars in private investment, providing the DoD significantly more leverage that if that same dollar was spent on a subsidy or loan to a large legacy contractor. This leverage of private capital means that every contract a startup receives accelerates by up to 10 times their ability to build technology and hire talent to support the DoD’s mission.

The bottom line is this: There’s no reason to let a health crisis today become a national security crisis tomorrow. The DoD has an opportunity to not only sustain but grow its innovation base, and give contracts, not lip service, to innovators. We, the undersigned, hope they do.

The contributors to this commentary are: Steve Blank of Stanford University; Katherine Boyle of General Catalyst; James Cham of Bloomberg Beta; Ross Fubini of XYZ Capital; Antonio Gracias of Valor Equity Partners, who sits on the boards of Tesla and SpaceX; Joe Lonsdale of 8VC, who also co-founded Palantir; Raj Shah of Shield Capital, who is a former director of the U.S. Defense Innovation Unit; Trae Stephens of, Founders Fund; JD Vance of Narya Capital; Albert Wenger of Union Square Ventures; Josh Wolfe of Lux Capital; Hamlet Yousef of IronGate Capital; and Dan Gwak of Point72.

WASHINGTON — In December, Defense News hosted a roundtable of venture capitalists, startups and Pentagon officials to discuss the challenges surrounding defense-focused companies getting funding from either the department or the VC community.

One theme that emerged: that those involved in defense-focused startups believe they are on the cusp of a time that will either make or break the Department of Defense’s chances of working closely with the tech sector for years to come.

In the words of Mike Madsen, director of strategic engagement at the Pentagon’s commercial tech hub, Defense Innovation Unit: “We’re at a significant inflection point right now that will be visible through the lens of history.”

Or as Katherine Boyle, with VC firm General Catalyst, said, “None of us would be here if we weren’t optimistic… I actually think this is an incredible time to be investing in deep tech, particularly deep-tech companies that are selling to the Department of Defense. Because if it doesn’t happen now, it never will.”

Click here for more coverage of the COVID-19 coronavirus pandemic.

Just three months later, those involved are maintaining that optimism in the wake of the COVID-19 coronavirus pandemic which has sent the global economy into a tailspin.

Speaking to reporters on March 25, Ellen Lord, undersecretary of defense for acquisition and sustainment, acknowledged concerns about “uncertainty, especially with small businesses, as to whether their contracts will continue.” Lord indicated some concern that companies may have trouble receiving funds and turn towards other nations, particularly China.

A day later, DIU posted a notice on its website stressing that is remains open for business and contract awards are expected to keep flowing.

“DIU is not slowing down, we are accelerating,” Tom Foldesi, DIU’s commercial engagement director, told Defense News in a statement. “All of our programs are fully funded and continue to execute on schedule. The stability that government can provide in times of crisis is a bright spot for many companies. DIU will continue to execute all of our initiatives aggressively.”

While DoD funds may continue to move, VC funding is the lifeblood for many of the technology firms that the Pentagon is interested in. Given the sharp economic downturn of the past two weeks, will VC firms still look to invest in companies whose payout from the Pentagon may take significantly longer than the normal turnaround sought by venture capital?

Byron Callan of Capital Alpha Partners described the pace of recovery as a gradual curve, particularly if the length of the fallout continues into next year: “If this does not snap back in 2020, or maybe 2021, it looks like a u-shape, not a V,” he said, which could mean a slowdown in R&D funding for innovation. “If that spigot dries up… how will that play through for companies that rely on venture?”

Trae Stephens, a partner in the Founders Fund and a co-founder of Anduril Technologies, said it is “really hard to predict the direction that things will go with venture-backed companies doing business with the DoD given the number of variables at play.”

On the one hand, he said, the government is a stable source of revenue during a recession, and hence could draw interest from companies looking for money. And in theory during a recession, the government should be seeking more efficient ways of “doing traditionally super expensive things. Logically, austerity should incentivize more cost-effective decision-making — buying things ‘off-the-shelf,’ so to speak,” he said.

But “in practice, what typically happens is a ‘wagon-circling’ exercise around existing players,” Stephen continued. “Decision-makers rally to ensure that there are no program failures. Specifically related to the DoD, there will be an interest in making sure that none of the big stakeholders go under, which will lead to bailouts — I’d guess not exclusively to Boeing — and a furthering of the ‘wagon-circling’ exercise.”

Overall, “My intuition is that this is unlikely to be good for the venture-backed tech ecosystem,” he said.

Boyle, for her part, thinks the natural timeline of a VC strategy means there won’t be a lot of funders who deviate dramatically from their plans already in motion.

“This is unprecedented. Everyone is in the point where no one knows what the future holds. The thing about VCs, though, is that you’re expecting to work with companies for ten years,” she said this week. “It’s to be expected there will be downturns, things outside the control of the investors over that time frame. That long-term investor mindset pays off for deep tech companies, particularly companies that are working with the government.”

She also sees benefit for those firms doing business with the government, noting that in times of a recession the government “broadly does pay its bills and can be a reliable customer.”

“The investors who were excited about working with the department, I can’t imagine the level of excitement has waned in this time. The mission that many of us were focused on before is still there, so there is still a lot of opportunity in defense,” Boyle said.

Reminded of her comment that the defense tech sector may be at an inflection point, Boyle said she doesn’t see a risk that the COVID-19 downturn will cause either side to back away from interest in working together.

“What’s really interesting about this moment in time — there is both a tech shift and a government shift that we’re seeing in terms of the DoD’s view of working with startups and emerging tech companies,” Boyle said. “So I think that will continue. I don’t see how it can’t continue or how this will greatly impact the long-term view these technologies are essential.”

Jill Aitoro contributed to this report.

But the service still awarded nearly $1 billion in contracts during a virtual version of its event held March 12, which included keynotes from Air Force Secretary Barbara Barrett, a “Pitch Bowl” where companies delivered short pitches in the hopes of receiving small contracts from the Air Force, and other events meant to deepen the Air Force’s connection to small commercial tech firms.

The largest contracts — worth more than $550 million total — went to 21 companies to develop “big bet” technologies. Those companies are Aerial Applications, Analytical Space, Anduril Industries, Applied Minds, Elroy Air, Enview, Edgybees, Essentium, Falkonry, ICON Technology, Orbital Insight, Orbital Sidekick, Pison, Privoro, Shift.org, Swarm Technologies, Tectus Corp., Virtualitics, Wickr, Wafer and one company that the Air Force has not disclosed.

“For all these awardees, you’re on a four-year, fixed-price contract that we believe, if successful, will disrupt part of our mission in a way that will give a huge advantage for our future airmen,” said Will Roper, the Air Force’s acquisition executive.

The value of the contracts awarded by AFWERX may seem small compared to the multibillion awards for major defense programs. However, these awards go a long way in helping technology firms overcome the “valley of death” between technology development and production, when a lot of companies are vulnerable to failure, said Chris Brose, head of strategy for Anduril Industries, which specializes in developing artificial intelligence technologies.

“For a company like ours or companies of that size, It’s quite significant. It allows us to really kind of do more of the good work that we’re doing, to scale and grow and work with new partners, and it makes a huge difference,” Brose said.

Brose declined to detail the precise nature of Anduril’s contract with the Air Force, but said that the general objective is to prove that an unmanned aerial system can deliver a mass of swarming drones capable of performing complex missions. While a human would still be “in the loop” overseeing the network, certain tasks — such as steering the drones, moving their sensors and processing gathered data — would be automated.

Edited on 3/16/20 at 11:25 with the correct list of companies receiving awards. The Air Force initially published an incorrect list.

“The US government must recognize its proper role in this innovation ecosystem,” Chris Brose of Anduril Industries told Congress on Feb. 5, 2020. “Innovative companies do not need the U.S. government to try to play venture capitalist.”

Katherine Boyle from General Catalyst agreed at a Defense News roundtable: “That’s another core component that I’ve seen from a number of the branches. ‘Oh, we’ll invest alongside of you.’ There’s so much capital — interest rates are so low — we don’t need you to invest. We need contracts.” In other words, government should provide revenue, not equity financing.

The number of government innovation hubs engaging startups has exploded over the last five years. They have used a wide range of vehicles. For example, the Army’s Venture Capital Initiative was chartered to invest in companies alongside venture capitalists. In-Q-Tel represents the venture arm of the intelligence agencies.

But these programs are the exception, not the norm. Most government startup funding comes as revenue. As Air Force acquisition executive William Roper described, the government is an “ideal” investment partner: “Our money is non-dilutive; our company equity requirements, nil.”

The Air Force’s pioneering pitch days seek to organically grow startups into large enterprises. It starts with a $50,000 round one contract that may scale to $1-2 million, which may in turn scale between $3 million and $30 million, or perhaps more. Successful projects are then in line to receive a coveted program of record, likely worth hundreds of millions of dollars over several years.

For years, industry has begged the Pentagon to make big bets on promising startups. Only two firms have reached a $1 billion valuation in the defense market in the last 30 years. If more success stories were available, more venture capitalists would invest in defense startups.

At the same time, if the Pentagon organically grows startups with contracts, then VCs are presented with a problem. Why would startups need them? After all, the Pentagon has long covered all development costs ahead of product launch.

“Can you dissect that a little,” asked Rep. Seth Moulton, D-Mass., “the difference between making big bets but also not ‘playing’ VC?”

“When I talk about making big bets,” Chris Brose responded, “I talk about betting on capabilities that have proven to be effective in the kinds of operational experimentation and real-world scenarios that we’re talking about. … It’s not injecting money into companies in the sense of financing. There’s plenty of money to do that in America.”

Here, Brose hints at the real meaning behind why government shouldn’t play VC. He implies that the Pentagon should have big contract dollars ready for companies that demonstrate a promising product. VCs should make choices about which new technologies or founders get off the ground in the first place.

Implicit in the argument is the idea that private VCs are better at selecting and motivating early-stage companies. As Shield AI founder Ryan Tseng said, “Few people in the world will drive more performance than venture investors … the standards are incredibly high and the work ethic is outrageous.”

John Tenet of 8VC added: “The DoD should just stop funding startups that are not venture-backed. Create some 1-to-1 matching mechanism.”

Indeed, that’s where the Air Force is moving. It requires private matching in its pitch day contracts. That may weed out companies that have depended on small business being set aside for decades. But it may create a few problems.

First, the unique requirements and sales motions of government means that dual-use companies might not be efficient.

Second, VCs will remain skeptical of financing pure defense startups until after a string of unicorns are made, leaving good companies sidelined.

Third, no one is suggesting that VCs finance the entire development process. When does government come in? What does that imply about fair and reasonable pricing?

Fourth, how will venture-backed startups get access to military users? Cooperative research and development agreements as well as innovative uses of “other transactions” will be required to access user feedback in the early stages.

These challenges can be met. But the concept still requires a major feat. Congress must amend the budget process so that relatively big dollars can be reallocated in the year of execution. That would require something like mission-funded accounts, as opposed to the current two-or-more-year programming cycle.

As Trae Stephens of Founder Fund concluded: “If you can’t figure out this out-of-cycle funding for companies, then you’re just going to get stuck in this multiyear budgeting process that — due to its very nature — is biased toward the integrators that have been playing the game long-term.”

Chris Brose concurred. “We have gone too far as a nation tying the hands of the [Defense] Department. I think greater flexibility for experimentation in current fiscal year is vital.”

Eric Lofgren is a research fellow at the Center for Government Contracting at George Mason University. He manages a blog and podcast on weapon systems acquisition. He previously served as a senior analyst at Technomics Inc., supporting the U.S. Defense Department’s Cost Assessment and Program Evaluation office.

WASHINGTON ― Defense innovation experts told U.S. lawmakers on Wednesday that if they truly want the Department of Defense to embrace the leap-ahead technologies needed to compete, Congress must use its funding power to make major players out of small, disruptive tech firms.

The leaders of the U.S. House’s Future of Defense Task Force, which hosted the testimony, said they are willing to challenge the tough politics of displacing older systems that have built-in constituencies with the technologies troops will need. The panel’s co-chairs Reps. Seth Moulton, D-Mass., and Jim Banks, R-Ind., are expected to issue recommendations to that end in the coming weeks.

“We understand that makes some of our colleagues nervous, but that’s the big picture of what we’re trying to accomplish ― publishing a report that will be taken seriously by our colleagues that addresses the type of disruption that’s needed at the Pentagon to foster innovation,” Banks told reporters after the hearing. “If it’s a tit for tat, then we have to address legacy systems, sacred cows that can be compromised for the greater good.”

The task force, launched in October, focuses on maintaining the Pentagon’s technological edge against Russia and China.

Click here for the Defense News special report, Culture Clash, on the Pentagon’s tech outreach efforts.

The hearing Wednesday, titled “Supercharging the Innovation Base,” hosted Aerospace Industries Association CEO Eric Fanning, whose members are largely established prime contractors and major subcontractors; Raj Shah, the former chief of DoD’s Defense Innovation Unit, now with Arceo.ai; and Chris Brose, a former staff director for the Senate Armed Services Committee, now head of strategy for tech startup Anduril Industries.

The hearing came as the Pentagon is working to absorb Congress’ latest round of acquisitions reforms and eyeing advances in artificial intelligence, hypersonic weapons, biotechnology and next-generation networking, known as 5G. Senior Pentagon leaders are themselves fundamentally rethinking DoD’s modernization priorities, but the proof will be in the president’s FY21 budget submission next week and future budgets.

“I think it’s very difficult when the public pronouncements and the follow through on the acquisition side are at odds,” Shah said. “There has been no shortage of senior leaders who come to [Silicon] Valley and say, ‘We want this innovation, we love it.’ But then when it comes time to fund relatively modest contract sizes, they say, ‘Look, we love AI but we can’t find $20 million for this project. The advantage DoD has is scale, and it should use it to maximize its value.”

Asked by Rep. Paul Mitchell, R-Mich., about the Army’s decision to scrap its procurement strategy for the optionally-manned fighting vehicle ― a move that fueled questions about whether the program requirements were unrealistic ― Brose said DoD too often treats requirements as “a one-way street.” DoD asks industry to build exactly what it wants, he said, instead of being open to being surprised by what innovative firms can do.

Along these lines, Brose argued the military needs to inject competition into programs, but also devote resources toward competitive experiments, driven by outcome-oriented metrics, that can in turn drive innovative operational concepts.

“Winning a program of record can’t be like getting tenure at a university, where you have it and forever it’s yours. Every year or so you have to find a way for a new company to come in and take a swing at the incumbent … telling the incumbent, ‘You’ll have another chance in a year or two, bring your A-game,’” Brose said.

Brose and Shah said the Pentagon ought to be investing in what it deems the most promising products and firms instead of spreading around small seed investments that rarely result in a recurring revenue stream for a tech company. Brose also recommended that in helping innovative firms displace “established but less capable programs of record,” the government should, “buy more of what that innovation base is building right now.

The government’s decision-making will drive private-sector investors toward winning companies that need to scale up to meet demand, Shah said. As it stands, DoD’s slow processes create a “valley of death” from experimentation to production that denies small and mid-tier companies the revenue they need to thrive.

“Be willing to make big bets on early indicators of success. There are lots of these trial programs … Pick two or three that are promising. Bet big on them on watch them thrive,” Shah said, adding later: “Venture capitalists are in the business of maximizing return. You don’t need to engage them, you don’t even need to call them. If you make bets on companies that you think will be decisive for national security, they will follow―at least the good ones. That is their job.”

Beyond products, outreach-focused organizations and activities like the Defense Innovation Unit, the Defense Digital Service and Air Force Pitch Day need heftier funding as well, according to Shah. He recommended Congress also fund U.S. military installations in each of the country’s leading innovation centers, including San Francisco and Boston, “to build personal, community relationships between technologists and uniformed members.”

Where should Congress cut and reinvest? Brose argued against investing in robust command and control networks that pipe data from the battlefield to far-away processing centers. Because troops will likely face network-denied environments, they would be better off with distributed, semi-autonomous battlefield systems capable of processing vast amounts of data onsite.

“The model we’ve built our military on is fundamentally going to have to change,” Brose said. “It’s been centralized so information at the edge is brought back to the center, generally in highly manual processes, to make sense of it and push it out. I think we’re going to have to do this in a distributed way, not least because our adversaries have figured out how we fight and they are building weapons to cripple and shatter our ability to command and control our forces.”

Asked what programs ought to be displaced by these innovative technologies, Fanning acknowledged that when those sorts of decisions get made, “the antibodies come out.” He argued that industry, Congress and DoD ought to be making decisions in collaboration with one another.

“If we think, and the existence of this panel makes me think we do, we’re going to make some pivots, we need to find a way to support the department when it’s trying to make some of the hard choices,” Fanning said.