Joshua Marcuse (00:15):
Alright guys, we're going to rock and roll. I'll give you a little backstory here. I think you'll appreciate this. We're all about Agile, and iterating, and pivoting. I'll tell you, if anyone looked at the program or the really cool app from Rise8, originally this was supposed to be a conversation with my friend Joy Schoenberger about Replicator. She works for the Deputy Secretary of Defense. Many of you have also worked for bosses like that. And you know that we are at the whim of the global circumstances and the weather in the Pentagon shifted, and as you could see, Joy is not on stage. So I huddled with Bryon when this happened and I was like, "Man, this is a bummer, but not going to happen." But then I thought, "You know what? Is that the Rise8 spirit? Is that the attitude that we bring? Is that the vibe that Bryon gives out?" I was like, "$%@! no." So we are going to overcome. And I started texting the smartest people that I knew about this, and they were awesome that they showed up.
(01:13):
So we put this panel together in the last four hours for you guys and [Applause] Yeah, that's right, that's right! I'm pretty proud of that. In fact, I'm so proud that I might just end the panel here, because the fact that we even showed up could be the high point for me, but then you wouldn't get to hear from three of the smartest people in this town on the issue of the defense industry. And so we're going to broaden out a little bit from Replicator and talk more about the defense industrial base.
(01:41):
Today's theme, as you know, is hacking. And so we're going to talk about how to hack the defense industrial base because as each of you knows, it doesn't matter how amazing your product is, it doesn't matter how incredible your code is, you need a contract to actually deliver it and get it in the hands of a Warfighter. And so understanding how to make money in this industry and how this industry works is as important as everything else we're going to talk about today, and tomorrow, and you guys talked about yesterday. So I brought with me some incredible people. My colleague Thom Kenney at Google, he's head of AI and Digital Transformation. He's also a Reserve Army General. He sent me a video of him jumping out of a plane this past weekend-
Thom Kenney (02:21):
Not a General, Colonel.
Joshua Marcuse (02:23):
Colonel. He is going to be a General very soon. He still gets to jump out of planes. Probably better to be a Colonel than a General. Anyway, so Thom is going to be talking about that. We have my dear friend, Lauren Bedula, you probably all have heard her before. She runs the Building The Base podcast with Hondo Geurts. She is Managing Director, I believe, at Beacon Global Strategies. She's also on the board of Silicon Valley Defense Group with me. Incredible perspective to bring on the startup space, the private equity space, the big primes, the subs, the whole business. And then we have my friend Kelleigh Bilms, who is from Oliver Wyman. Also supporting the full range of all the industry players, everything from M&A and corp dev, to go-to-market strategy, and everything else. And so the four of us up here are going to talk a little bit about the way the defense industrial base is evolving to meet the challenge and opportunity of all of the new software capability that we talk about here at Prodacity.
(03:18):
And I would say that there's been so much excitement in the last few years about how this industry is evolving, but we also have had an equal amount of ink spilled on all of the agonizing ways in which this industry is failing to evolve. So that's where we're going to start. We're going to go down the line starting with you, Kelleigh. Would you say, last five years, are we trending in the right direction, fixing all the problems, closing all the gaps? Or would you say we are more still stuck in our old ways, not changing fast enough to meet the need? What do you think, we're trending up, trending down?
Kelleigh Cosentino Bilms (03:47):
Totally solved, it's all fixed. Yeah, 100%. No, I think we're trending the right way. And I think Replicator not being the sole focus, but autonomy is a really good example of the customer and industry coming together to really try to use as many tools in the toolkit as possible. Everything from customer-driven tools like software acquisition strategy, to the primes getting behind transforming their franchises to work with startups and small businesses to bring software on board. So I think there's a lot of creativity around the tools. I don't think we've seen perfect case studies of super rapid transition and as agilely as we'd like. But I think yeah, overall there's a lot more flexibility that we're starting to see.
Joshua Marcuse (04:30):
Okay.
Lauren Bedula (04:31):
When I think the past five-year benchmark as your question, I think about just the changes we saw in a post-Snowden world where you had to try to convince the tech community to do work with the national security community. There really wasn't this trust and transparency between the two. I'd say we have just totally overcome that issue. Companies are signing up very eager to support the Warfighter, support the national security community. But I'm not as positive when it comes to "are we actually there yet in terms of making it work for both parties? Is it a productive relationship between the two?" I think we have work to overcome there, and I think partnerships within the DIB will be an important way to do that, teaming, working together.
(05:16):
So that's why I'm particularly excited about this topic today. But I can't help to, when I did the five years, 2018, which was when Maven and Google pulled out, and we've since seen the rollout of Google Public Sector. So I think that's a significant benchmark too, to that changing appetite or eagerness to serve and partner within the Department of Defense, that's what it could take.
Joshua Marcuse (05:39):
What a difference five years makes.
Lauren Bedula (05:40):
Yes. Yeah, it's pretty incredible. Not to mention COVID and all the challenges that presented within those five years, but certainly progress but more to be made.
Joshua Marcuse (05:49):
Sure.
Thom Kenney (05:50):
I'd agree with progress and I'd agree with acceleration, but acceleration like anything is a mathematical measurement at the speed at which you're traversing across a distance. And there's a difference between accelerating with a McLaren and accelerating with a Mini Countryman. And I think we're still accelerating at a Mini Countryman's pace. There's definite forward momentum. But where we really need to go is we need to get to that exponential level of growth, because we're spending so much time catching up, especially when you consider our ability to build and to develop in the US compared to some of our adversaries, and how they're not beholden to as many of the policies, and the regulations, and the overhead, and the oversight that we are here. And that's where there's a huge opportunity for hacking. The industrial base is not necessarily just hacking "how do we do better digital twinning so that we can develop hardware faster? How do we do better RT&E on software with artificial intelligence?" But it's to your point earlier, how do we connect the dots between industry and government so that we speak the same language and we're both incentivized to accelerate faster?
Lauren Bedula (06:54):
And Thom's comments make me want to make one more point here, which is within the past five years, I think we've seen that ramp up in interest, but we've also in the past year seen a lot of companies pull out. There's not the business case to be made that it's working too. So I think that's significant for this conversation where Improbable, for example, is a company that dissolved their defense focused business. I've seen a lot of commercial tech companies pull out of the federal market. So that, I think, is a red flag for this issue.
Joshua Marcuse (07:23):
It is. And one that gets a lot less of the sort of triumphalist attention about how are things blowing up. So when you are consulting with companies like Improbable or others, and they're contemplating pulling out of the business, what are some of the things that their executives are talking about with you, and what's the advice that you're giving them?
Lauren Bedula (07:41):
The business model that these venture-backed companies face just does not align with the way we do business in the defense industrial base or the DOD. I see investors in the audience, I see a lot of tech companies. These are businesses that have to meet numbers, that have to show their investors value. And I think they're stretching as far as they can in many cases, but have to be really smart about where they're spending their time.
(08:10):
In terms of advice given to companies, I think that there has been this push on "just meet with as many people as possible," and it's really not meetings that are going to move the needle or just engagement. It's knowing budgets, knowing your customer, understanding those use cases, and being really smart about where you're spending your time. So as a consultant, my job is not just to set up meetings with you, but it's to use your time really wisely. So there's that impact on burn rate that you can be proud to show your investors. And also, just an unapologetic focus on revenue. The partnerships are key here, but these are still businesses. And to survive, you have to focus on real growth and revenue and so, to measure success in that way.
Thom Kenney (08:53):
And there's a really important part of the revenue piece, but there is a lot of enamorment about dual-use technology. We can sell this in the commercial space, we can sell it in the defense space. Anyone who's built a dual-use technology company realizes how difficult that is to manage almost two completely different workforces to be able to develop that technology. And when you're talking about revenue, when you think about dual-use technology, and you think about venture capital investment, private equity investment, revenue is not a SBIR contract, because that is not ongoing revenue. When you talk about MRR and ARR, monthly recurring revenue and annual recurring revenue, a SBIR is not annual recurring revenue.
(09:30):
The contracts with a government that are either embedded in a PDO's FIDEP, or that are some sort of recurring licensing agreement, that's what helps a company who's young, who's building some great technology scale, not these individual one-off contracts that are there. And that becomes, in my mind, one of the things I hear a lot from companies that also want to work with Google, who are the smaller companies that are like, "We're looking to find ways to ease traction into the federal government, because we're spending all this time and all this energy with all these different PEOs, all these different meetings they're having, all these different CIOs, CTO level folks," and it's really expensive for them to drive that market penetration into all of the federal sector, the big states, global governments around the world.
Joshua Marcuse (10:15):
So one of the things I'm hearing is this idea that for a while there was this casting a wide net approach, and now it seems like you're evolving more into, companies have to focus, and we have more of a spear-fishing approach, saying we're going to go after product-market fit with this specific idea PEO, and really being able to drive that. But to your point, Thom, the threshold of knowledge and awareness of the market is way higher than if you're pursuing this generic dual-use thesis. And so that raises this question of "what is the barrier to entry for a company that wants to be dual use?" What we've advised companies is, which is one of the hats I wear is same go-to-market advising for Capital G which is one of Google's venture capital arms, is, you got to expect that it's going to be between three and $4 million, in two years, to break into the defense market before you have the accreditations, the authority to operate, you've hired the BD leaders...
(11:11):
And when I'm talking to the CEO and the CFO, and they're like, "that's the price of admission, that's not the price of victory, that's just to get on the field." Then they're really asking themselves, "well, what exactly is... Is the juice worth the squeeze? What exactly is the benefit of being in that market?" On the flip side, it's a $40 billion TAM, and it's a stable market. So we're seeing all of these shocks and ups and downs, and they're thinking to themselves, "well actually, for a dual-use company, it could be an incredible hedge, but you're just not going to see the same market leverage, and you're not going to have the multiples that the VCs are looking for."
(11:45):
So a question from you, Kelleigh, is again, you specifically do go-to-market strategy for some of these players. And I'd like to ask you the counterintuitive question everyone expects me to ask you - "what should the go-to-market strategy for the startups be?" But I want to ask you the opposite. If you're a prime or an SI, and you're looking at all the technology goodness, and all the original IP, and all that entrepreneurial energy in the room today, what advice do you give them about how they should go-to-market in this new landscape?
Kelleigh Cosentino Bilms (12:12):
Yeah, I think we're starting to see a world in which the primes and the traditional defense industrial base are realizing that the value of commercial software can be instrumental to keeping their franchises sold. And I think this is a super productive and valuable realization. And so, I think about Boeing touting its fighters and its tanker aircraft as key test beds for ABMS, C2 software, and edge nodes - this is great value for Boeing. They get to extend their franchises, help keep their platform sold, add value, create upgrade opportunities, highly valuable for the startups and the other players who want to bring that software to market.
(12:51):
So I think, thinking about this as not a zero-sum game, which is a typical tagline, but how can you use this energy, this innovation, to extend your franchises? We look at the Lockheed Palantir DevSecOps model for Aegis and bringing modern software to naval combat systems. I think we're starting to see this play out not just in the typical commercial dual-use software place, but the really hardcore defense missions at the edge. If we can get the primes to really focus our energy on frankly, what's in it for their franchises which absorb the vast majority of the DOD budget, and until we have those incentives aligned, I don't think we're going to see a lot of commercial software penetration.
Joshua Marcuse (13:36):
So let me pull that thread a little bit more. So I think there's always a lot of jokes to be made about the frenemies of the big primes and the new entrants, but I think we've really seen a bifurcation of two different schools of thought. One is, we definitely see that there is a new class of, I would say not dual-use, but defense tech committed to the market and they want to be insurgents, upstarts, unicorns. We're talking about Anduril and similar to Anduril. And they look at the primes that you just mentioned as the dinosaurs they want to slay. They want to go after them, disrupt their business, put them out of business. And then on the flip side, we also see a bunch of companies that are saying, our best path to get into a program of record is through an integrator, and we would love to be on the bill of materials with these partners, and that's good money and contracts.
(14:31):
And those companies are saying, "hey, you don't want to deal with the complexity of selling to DOD. Let me do that for you. Let me make that easy for you. Let me be the [inaudible 00:14:39] mismatch solution for you." And I think you go back to that, pre five years ago, the primes would just look at these companies like, "we just want to acqui-hire or acquire them." Or worse, "buy them out because competitive with us, and just mothball their IP so we don't have to deal with that." So do you believe the primes, the CEOs, you take them at their word, that this is a whole new world for them, and that they want to bring this technology in and be a good partner, and let them share the profits and the revenue and those things you're saying? Or do you think that actually it's justified to be as cynical as we always have been?
Kelleigh Cosentino Bilms (15:14):
I think if it hits evaluation criteria, and if it creates recurring upgrades and spiral opportunities where the primes get a slice of the pie, we're starting to see it. I also think the customer has a real role here. So we're starting to see more and more superseded work within the Navy and the Air Force being mandated as software inserted onto prime platforms. And I think that's really a tool in the toolkit that we need to see more of that creates that forced transition path. Where still the prime is the integrator, again, it benefits their franchises, but the customer creates a clear transition outlet.
Joshua Marcuse (15:52):
Let me pivot to you, Thom, because you used to be the Chief Digital AI Officer of SOCOM. So you've been a customer.
Thom Kenney (15:58):
I have.
Joshua Marcuse (15:59):
So let me ask you that customer-facing question. So you want to get the best stuff for your teams, and you've got to be asking yourselves, what is the design of the right contract or the right competition to try to get to that? It's actually very difficult. I experienced this when I was in government. It's actually very difficult sometimes to get to the kinds of startups that we want to be able to get to. It's just a lot easier to get to an Accenture, a Deloitte, a Booz Allen or easier - SAIC - or go to the ones you always know. So what are the things that you learned about, as a customer, how to get the outcomes that you want?
Thom Kenney (16:39):
That's a great segue because when you said, "I was going to ask you the opposite of that question," I thought you were going to ask "how do you as a leader inside of government, market yourself to the industrial base?" Because that's my answer to you for this question, which was we knew some of the things we really wanted to target, and we wanted to find those companies that really, really wanted to work with us. And contextually, and maybe this is a little bit of an oversimplification, but we ended up finding two different areas when we would look at some of the requirements that we would put out - little "r" - requirements, they were very straightforward.
(17:17):
They were like a product roadmap that you'd see in a SaaS company. And that's where I did my bread and butter long before SOCOM was in SaaS companies, building them, growing them, and selling them. And by doing it that way, you're not creating this overhead of "I want to make sure that this particular technology is for HEO because I'm going to do RRBLE and my PPBE for my DOS that I need for Jinx." Nobody understands any of that. And how many of those are coming out.
(17:45):
So for us, the opportunity that we took, and General Richard Clark was the commander at the time and bought all in on it, was simplify the message of the problem you're trying to solve. Don't tell me the solution that you want to bring. I'm going to tell you the problem I want to solve. And that was really, really helpful because for me inside of government, it was easier when I had a team of folks like the Deputy Commander and the Vice Commander, these are three-star Admirals and Generals who've cut their teeth in special operations. They don't know their elbow from their pinky inside of SaaS technology.
(18:19):
But when you had folks that could talk in a way that they were addressing the problem, it was a better communication piece. And the reason I think this is important is because in the industrial base, too often you get the one-stars, the two-stars, they make the transition out of DOD. They were a senior executive in government and that's the language. They know how to speak and that's the language that they speak, but they don't necessarily understand the side of technology and the problem that it solves. They know how to make the introduction to the door and say the right acronyms.
(18:50):
So as we think about this, the marketing aspect to simplify to what the problem is we're trying to solve, to eradicate all of the government lingo speak inside of documentation and emails that you're sending, you're going to open up to a whole new world of people that are going to be looking at this and saying, "I recognize this problem. I can help solve this problem. I don't understand all the nuance, but I can help solve this problem." And you create an entirely new field of players that want to come in to support the problems you're trying to solve.
Joshua Marcuse (19:20):
Are there any things that you have seen, or any of you have seen, about an example of a government office putting out a contract that was designed to incentivize teaming? The only thing I see, it is analogous, is in the world of small business, they have the mentor-protégé program. I would love to see something that rhymes with the mentor-protégé program, but is not for small business. It's actually for venture-backed companies that want to become big successful companies or companies, like you said, the franchises that are big already. But it seems to me like there's a match to be made there to bring those worlds together. What do you think the industrial policy of the department should be to make those matches?
Kelleigh Cosentino Bilms (20:05):
So something that comes to mind is the Army's TITAN-Censored Shooter program, where I think as I understand it, it's very intentionally supposed to create a digital sensor-to-shooter architecture with Fusion AI targeting algorithms, other apps plugged in. And I think that the criteria itself pluses up teaming, use of small business partners. So I think you can get very tactical in the context of specific programs. You can also really incentivize open architectures where, and I think we're starting to see this more and more where the MOSA architecture itself is starting to be weighed in the evaluation criteria much higher than any given performance spec, than recurring price, schedule...having the teaming architecture, if not the actual specific partnerships, a key part of the evaluation criteria seems to be a mechanism I'm seeing more.
Joshua Marcuse (21:04):
That's a takeaway. I know we have our visual recorder here. I would say hacking, from "Hacking the DIB," hacking the evaluation criteria, you think, is a lever that we need to pull more of.
Kelleigh Cosentino Bilms (21:15):
Yeah.
Joshua Marcuse (21:16):
Okay. That's actionable. I like that.
Kelleigh Cosentino Bilms (21:17):
I think it's the number one lever.
Joshua Marcuse (21:18):
It's the number one lever. Okay. That's even better. What else? Any ideas from you and Lauren, Thom?
Lauren Bedula (21:24):
I think the incentives for partnerships right now are largely around optics and showing this united front, but I have not seen as concrete of incentives on the contract side yet that have worked. Some examples, I think that the JAIC tried, that maybe didn't work out as planned, but I'd say largely the appetite from the traditional defense industrial base is to show their customer, look, we have these partnerships, we're pulling in these folks, but if they have the contract, it's hard to share the pie if you don't have to.
Joshua Marcuse (21:59):
Yes. And that's one of the things that I've seen and observed as well is, that when they win the contract, they plan out a hundred percent utilization of all those dollars and their people, and it doesn't really leave that window to maneuver, which is what was promised, I think. But I don't think it is the reality that we see. So this idea of embedding new technology incrementally year-on-year into the programs of record that way, I just don't think that we're seeing it the way it was promised to us.
Thom Kenney (22:28):
And it's a disincentive in many ways. It's a disincentive for companies with the oftentimes onerous reporting and management responsibilities for doing this. And to your point, these budgets are set in for one year or two years or three years. To really get to a point, if we want to really hack the defense industrial base, one of the things that we need to be able to do inside of government is fail. We cannot fail. Startups across the globe fail constantly. My first startup failed before it became a success. My second startup failed before it became a customer success. Both times there was an idea, and this is what I'm going after, and six months into it was like, "Yeah, that ain't going to work. I got to pivot and I need to do this." But we are disincentivized to change anything inside of this long process.
(23:17):
I remember talking with the group and we were talking about the PPBE process and the Department of Defense and how rigid that is, and I worked with them for a few months, gave them some ideas and some ways to think, and I talked to them about an infinity cycle. You build a little bit, you try a little bit, you test a little bit, you learn, you feed it back in, you build a little bit more, you test, you try, you feed back. It just is a constant iterative motion of agility to create fantastic outcomes. And I was so excited to get the last brief from the group, and I thought that it all resonated and they showed me the PPBE and in the lower corner of the E was this tiny little infinity loop over here. I was like, "Yeah."
Joshua Marcuse (24:00):
I was going to say that when I hear PPBE and infinity cycle, I have a much more negative connotation. It does feel like an infinity, but more sisyphean than that. Well, I would just mention since PPBE has come up two or three times now, there is a planning, programming, budgeting and execution commission that is put out their interim report, their final report is coming. I do believe that it is really important that they hear from folks like in the audience. So it is well worth, I think, reaching out to them. You can just find them, just Google it, but they are still taking ideas for a few more weeks, and I just don't see a world in which we hack the defense industrial base if we don't also hack the resource allocation process.
Thom Kenney (24:41):
Absolutely.
Joshua Marcuse (24:42):
One of the reasons for that is that we now have, I think, over the last 5 to 10 years, created as many or more innovation formations than we need to do the intake. We have enough works' and you name it. The issue is they're all broke. They add up to less than 1% of the department's budget, less than 5% of the R&D budget. If DIU gets a billion dollars, it'll help. But how do you hack the DIB when you have enough agents that are supposed to look for tech injection, but they don't actually have the capacity and the resources to spin in?
Thom Kenney (25:17):
The resourcing is probably the number one limiting factor that I've seen. And we've got, to your point, a lot of innovation cells, and I would agree with you, we have way more innovation cells than we need because of what they're actually able to develop. There's one group inside the DOD that I'm very familiar with, and they were all excited about releasing this app. They released this app after a year of development, and from a user experience perspective, from a person who's done this for 30 years, it was just not a product anybody would ever invest in, not a product anybody would really pay for. But it was lauded as this is an amazing, amazing feat that we were able to create this. And for those of us from industry, we're looking at this saying, "In two weeks and maybe another week of testing, I could have created the same thing for you."
(26:06):
This is not innovation. This is on the job training. This is OJT. And there's value in that. There's value in OJT. There's value in having super smart folks inside of the government who understand how this works, but let's not call it innovation. Let's call it what it is, which is upskilling of the people that are the subject matter experts who can then speak to the companies that have this great technology, help support the resourcing and allocation process, and drive innovation that way. Because there are companies that are spending millions of dollars in really fantastic innovative technologies, six kids who are twenty-four years old, and their whole life was in the Armor corps, are not going to create some magical innovation from technology. It's going to require this real connection, this hacking between this, to make innovation happen and not just iteration. And that's a big difference for me.
Joshua Marcuse (27:00):
But I don't mind the upskilling because the limiting factor for the new entrance is the sophistication of the customers.
Thom Kenney (27:08):
Yes.
Joshua Marcuse (27:08):
So whatever it takes to get a smarter, savvier buyer of software in the Department is a price I'm willing to pay. But let me pivot away from this thread and pull something else. So we talked about the innovation organizations, and we talked about the PEOs that have the bulk of the buying power, but there's another element out there, which is the combatant commands. And I think one of the things that we've seen is a real pivot of autonomy, resources, focus and political influence towards COCOMs. I think Will Roper saw that with SCO and pivoted to that and tried to drive innovation by using their money. And I think we're seeing that. And now we've had, really with EUCOM and INDOPACOM, the new battle labs are opening, I think there's a question of "are we going to start to see COCOMs look a little bit more like procurement arms for the present and near-term future fight?" And Lauren, I'm wondering, are customers coming to you saying, "is it worth it for me to try to sell into COCOMs?" Technically they don't have the authorities, but they're actually seeming to get stuff done.
Lauren Bedula (28:14):
I'm glad you brought that up because I think the COCOMs are doing a lot of work to try to get tech tested in theater, which is really valuable for these companies that are trying to build for Warfighter needs. And it is fascinating. If you talk to the COCOMs and reference DIU programs, for example, there's just such disconnect where there's interest in the field to do things like predictive maintenance, DIU has had programs five years ago focused on this, and there was never any transfer of tech or successful connections between the two. I think they have to figure out how to have that procurement arm ultimately for it to be worthwhile.
(28:54):
But things like Task Force 59 at CENTCOM are a good example of closer partnerships like those that you were talking about that can lead to successes. There were some successful contracts as a service focus out of Task Force 59, for example. I think Saildrone is an interesting one to look at, but I do think that the COCOMs need to be a central focus point for tech companies looking to do this. If they can generate the demand signals there, I'm hopeful that the buying will follow.
Joshua Marcuse (29:23):
So takeaway being, you need to have a pull-through - you to have someone creating a demand signal. COCOMs are good for that, good for access to users, maybe good for testing, but maybe not production scale.
Lauren Bedula (29:37):
Yeah.
Joshua Marcuse (29:38):
Okay.
Lauren Bedula (29:38):
I haven't seen good examples, curious if you all have.
Joshua Marcuse (29:40):
That's a good nuance. Kelleigh, what did you say?
Kelleigh Cosentino Bilms (29:41):
Yeah, I think they create an environment to prototype some of these capabilities in a real operational fashion. So I look at defense of Guam and the urgency around integrated missile defense. So connecting Army's IBCS with Navy CEC and so on, through software connectivity, and having a real operational deployment use case, and a sense of urgency. It's still going to be driven by the PEOs. A lot of the technology is going to come through the labs. But what's our real-world deployment of some of these software-driven capabilities? I think we're going to start to see that with the Joint Fires Network coming out of INDOPACOM for long range targeting and ISR, but I don't see them as buyers, but I think I see them as almost the first prototype in deployment.
Joshua Marcuse (30:27):
First prototype in deployment. Got it. So we've talked about a dozen different parts of DOD. Now let's talk about the elephant in the room, Congress. They have a huge role to play in shaping industrial-based policy for all kinds of reasons that have nothing to do with technology, and nothing to do with capability, although occasionally they take an interest in either one. What do you think the reform agenda for Congress should be? They're liquored up on great power competition. They want to make a difference. There's more commissions every year. They want to be helpful. What do you think would be helpful for hacking the defense industrial base?
Lauren Bedula (31:04):
I'd say flexible funding. Just back to the issues you talked about in terms of resourcing comes to mind for me, and obviously the CHIPS Act is a good example of industrial policy is back. There's more of an appetite now to, I think, from the industry side, to explore policy matters, should we do that on a broader area of technologies, to really heavily invest in our manufacturing capabilities at home and R&D. But those are a couple of things that come to mind for me.
Thom Kenney (31:30):
I think that ties in well with the previous conversation about the COCOMs too. SOCOM is the only one that has acquisition authority. And if you want to look at good examples of where you were able to take a young company, with a great technology, and roll it out to a force that can test it on the battlefield constantly, that's a great example. But CENTCOM doesn't have that. INDOPACOM, EUCOM, AFRICOM, no one else has that acquisition authority. So when you think about reform, imagine what you could do if you were actually hacking. If you were saying, "I have this problem in Eastern Europe and EUCOM, I need this capability." And whether it's coming from 18th Airborne Corps, or whether it's coming from a SOCOM support team, or whether it's coming from the Air Force as a service level, shouldn't really matter. That ability for EUCOM to be able to innovate and iterate in their field of operations could be huge because the reality is, we all know this, fighting in Eastern Europe is going to be completely different than fighting in the South China Sea.
(32:26):
And so this idea that the Navy is going to have the same requirements in Eastern Europe as they are in the South China Sea is not the case, nor the Air Force, nor the Army, because they're very, very different fights. But if you empower the COCOMs with the ability to have this acquisition authority, it doesn't have to be massive. It doesn't have to replicate what the Services are already doing. But imagine the innovation that you could do. If you look at what the 18th Airborne Corps was able to do in Eastern Europe after the invasion of Ukraine with some of the smartest people on the planet, including my friend Jared Summers, he was the CTO and CDO of ExxonMobil, and when to become a senior executive for 18th Airborne Corps as their CTO, and when they went over there, brought all of this commercial experience to just go fast. And he still ran into all kinds of roadblocks. But imagine if EUCOM could have said, "we want to be able to invest and hack quickly, and iterate very quickly, because this dynamic is changing so fast." What a fantastic place to be able to try new things and to iterate quickly.
Joshua Marcuse (33:27):
So great question. So I think one of the things that is a criticism of the new entrants is that they are very focused on pushing the frontier. But as you heard, [inaudible 00:33:40] say very famously about the situation in Ukraine, they don't necessarily think as much about sustainment. When I look at the conflict you were describing in Ukraine, it is very much now almost like a battle of attrition. And the Defense Production Act issues that we're seeing with the industrial base is much more about "how do we generate the supply of munitions that we need, or how do we deal with all the parts issues that we're seeing for readiness?" as all the primes are struggling with all these kinds of production issues and supply chain issues.
(34:08):
So here's a question. Is part of hacking the defense industrial base to try to get some of the startups to focus their energy and attention on these issues that are very different than the SaaS questions, and the data and AI questions they've been asked, and just be like, "what does the 21st century of defense industrial manufacturing look like?" I'm looking at you, Kelleigh. I feel like this is your wheelhouse a little bit.
Kelleigh Cosentino Bilms (34:26):
No, yeah, I think that's exactly right. And I think we're already starting to see it. I think there's six solid rocket motor startups that are looking at second and third sources around SRMs. We're starting to see it with advanced composite manufacturing. I think CHIPS are a good example, and I think this is really a good intersection of where Congress and OSD can play a role of where do we really need to onshore multiple sources of capability, and create an enduring demand signal for some of these CapEx heavy industries, where industry is really afraid of investing now and facing a cliff.
(35:01):
We look at artillery, munitions, weapons: "OK, I can ramp up production for the next three years, and then what's going to happen with all of those facilities and that equipment in five years when there isn't that enduring demand?" So I'm almost honestly scared by the influx of startups in some of these CapEx heavy industries. I don't know what's going to happen to them, and I expect to see just industrial-based consolidation down the line. But I think this is a really good role for a DOD-wide and OSD lever to be focused.
Joshua Marcuse (35:30):
Building on that, let me ask you, Lauren, these CapEx heavy things that really lend themselves to the venture capital. We've mostly been talking about this venture capital-backed models. We've seen Office of Strategic Capital come on the scene, the latest of the new innovation children to be born. What do you think about debt? Or what do you think about private equity playing more of a role here, and it not being just so much VC money?
Lauren Bedula (35:52):
Yeah, my take on OSC is, at the end of the day, if DOD can focus on being a good customer, that's really going to help with the issues we're talking about today. But as the VC world faces an uncertain economic outlook or broader financing, I'd say to have a DOD solution here is pretty smart to leverage tech. I think Congress obviously plays an important role here, so we'll have to see how well-funded it will be if that's the case at all. But I think it's great to see DOD get creative in this sense. But at the end of the day, if you can focus on being a good customer, that'll solve a lot of these problems in my mind.
Thom Kenney (36:34):
Private equity has a bit of a challenge in this space too, because a lot of private equity is based on leverage, whereas venture capital is based on growth and innovation and building. And a lot of PEs will bring a bunch of companies together for economy of scale, but it's still more of a leverage play than it is an investment play. And if we're talking about for one year or two years or three years, I've got this manufacturing capability for this specific fight that's really, really hard to do a long-term financial projection for how this company is going to be valued in three to four to five years down the road.
(37:05):
It's almost as if in that particular case, more strategic investment, more DIU investment, the capability for the Defense Department to be able to over, I'm trying to think of the word that I'm looking for, but over-invest inside of those companies that it needs right now today that maybe the civilian world is not ready to invest in today. Boeing's going to invest in aircraft and aircraft parts that they can sell for 30 years. They're not going to invest in a drone that they're going to build for two years. That's attributable that when the fight is over, there's no longer an opportunity and a market. So it becomes really, really difficult.
Joshua Marcuse (37:40):
Exactly right. Well, we are at time. We could have gone on a lot longer, not bad for a group of people that didn't know they were going to be on stage until a few hours ago. Thom, Lauren, Kelleigh, I cannot thank you enough. I'm so glad we got to put these issues on the table to be part of Prodacity. Bryon, thanks for the opportunity. Thank you all for coming, and I'm sure we'll see you during the break.
