January 6, 2005    Volume 12, No. 1

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DOD To Propose 'Investment Fund' To Jumpstart Innovative Companies


The Defense Department is considering creating a new program aimed at helping small- and medium- sized companies overcome the "valley of death" in introducing new technologies into a variety of weapons systems. The Office of the Deputy Under Secretary of Defense for Industrial Policy has proposed an "Industrial Base Investment Fund" that would grow to about $100 million a year over a five-year period and could become even larger. The fund would be administered at "the most senior level" of the Defense Department to "inject real-time innovation into programs" from a variety of companies throughout the U.S. industrial complex, says the Industrial Policy office.

"We have great hopes for the Industrial Base Investment Fund," says Suzanne Patrick, Deputy Under Secretary of Defense for Industrial Policy. "It may well be over time -- if we're successful -- that a number of such funds [could be created to] provide production-rated technology into programs of record."

The idea for the program, which would likely start in 2007, sprang from work being done by Patrick's office chronicling the depth of the U.S. industrial base and its ability to supply the technologies needed for radically innovative future weapons systems. The office has completed four of five major studies that provide a detailed view of the capabilities needed by the future military force over a variety of "functional concept" areas. These studies, conducted with the help of Booz Allen Hamilton, have found that the United States remains well ahead of the rest of the world in most technological capabilities that will be needed in the future, but that it is deficient in some areas.

"We continue to be concerned that production-ready technologies have limited on-ramps to ongoing programs," says the office in its latest industrial base capabilities study on force application.

The Industrial Policy office has found that some small high-tech companies are able to move from winning Small Business Innovation Research (SBIR) contracts to receiving more substantial Defense Advanced Research Projects Agency (DARPA) awards. Some are then able to sell their technology into a specific military program. The company is happy -- "thinking they hit the jackpot," says Patrick -- and program managers are pleased they were able to do something innovative with a focus on cost, schedule and requirements.

"But I'm not certain that benefits the department to the fullest extent because we have seen many cases where there are very innovative technologies that go into one program and the company has no idea of the multiple, myriad applications their technology has" across the military complex, Patrick told a recent meeting of the Center for Strategic and International Studies. "The program manager is not motivated to shop that technology around even to other program managers in his own service much less shop it around through the department, and the company is often not particularly motivated or doesn't have the need to do that. So it doesn't benefit the department and the entirety of our enterprise to the greatest extent possible. That is one of our concerns we're trying to ameliorate with our Industrial Base Investment Fund."

The fund would be unlike the other venture capital endeavors created by Congress that are now deployed throughout the defense and intelligence agencies. The Industrial Base Investment Fund (IBIF) would function as a "Chairman's Innovation Fund" managed by the Principal Deputy Under Secretary of Defense for Acquisition, Technology and Logistics. It is intended to take "producible" technologies and "basically buy them and put them in programs across numerous warfighting applications," says Patrick.

"The neglect of fully developed, near production-ready technology is particularly troubling to the department," says a recent report from Patrick's office describing the fund. In many cases, the Pentagon funds the development of technologies up to the point of production, "and then all too often fails to leverage these investments to the benefit of the warfighter. As envisioned, the IBIF is the functional equivalent of a strong 'red-zone offense' that pushes promising technologies over the goal line and fully leverages the department's investments to benefit the warfighter."

Proposals for consideration will be provided by military program managers "who would love to have the technology but for lack of funding cannot incorporate it," says Patrick. Funding will also be provided to U.S. companies that are developing critical technologies that exist elsewhere in the world and could provide an adversary with an advantage over the U.S. military. These technologies are on "watch lists" being created by Patrick's office as part of its defense industrial base capabilities studies. Industry will also be able to nominate technologies for funding. Other technologies that would receive support would come from the "cutting room floor" --technology nuggets that were part of losing bids and are worthy of continued support.

"The IBIF, over time, will likely provide innovative emerging firms -- and the department -- an important vehicle not available in other vehicles or even through joint ventures with larger, more established defense firms," says Patrick's office. "Corporate relationships with larger companies do not necessarily improve the department's access to innovative companies. Sometimes larger companies can restrict visibility into smaller companies' innovation."

Patrick's office says big defense contractors might be stifling innovation of military systems. "Based on their own strategic direction, prime contractors may not be motivated to advance innovation that may compete with proprietary approaches," says the Industrial Policy office's report on force application. "Second, prime contractors might choose to be more predatory, actively seeking to 'buy and bury' innovative technology rather than risk disrupting a lucrative and potentially captured market position -- a point verified through our research and reengagement with smaller, innovative emerging defense suppliers. Third, emerging suppliers might 'pick the wrong horse' by aligning with larger firms whose programs are imperfectly aligned with their technology. From the perspective of the emerging defense supplier, this could be catastrophic, and certainly does not leverage the full value of their technology to the firm or to the warfighter. From the department's perspective, this largely ad hoc --- and unsuccessful -- market entry of emerging firms demonstrates a significant shortfall in department processes and militates against broad awareness and application of innovative technology."

Patrick sees the program starting in 2007 at $20 million to $30 million and growing by about $20 million each year for five years. "It would be irresponsible to start at a size larger than $20 million, and to be meaningful it would need to grow to $100 million," she says. "It's an idea. It's a very tight budget environment. There may be a lot of concerns from the services or others who think they are being competed against with our idea....It would be congressionally funded....It hasn't been stood up yet....We invite all of your comments on it."

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