Almost a decade ago, Secretary of Defense Ash Carter came to Stanford University in 2015 to announce a bridge between Silicon Valley and the Pentagon, a new organization he termed the Defense Innovation Unit Experimental or DIUx. Secretary Carter realized earlier than many of the technologies the military needed would come from commercial companies at the forefront of AI, autonomy, cyber and commercial space—not from government labs or defense primes.
Why? The Defense Department provides a much smaller proportion of global R&D than in the past (as other countries invested) and commercial businesses now invest more R&D dollars than the government. Sixty years ago, the Defense Department represented 36% of global R&D vs. 3% today. The five largest tech companies spend more than 10x on R&D in comparison to what the five largest defense primes spend.
This year marks an important inflection point. Bipartisan Congressional support affirmed Defense Department views that commercial technology and methodologies are important not only to national security but economic security. Congress provided support in the most meaningful way possible with a defense appropriation that allocates nearly $1 billion to accelerate the adoption of commercial technology into the military through DIU.
Inauspicious Beginnings
Changing how the Department views and incorporates commercial technology has not been easy. DIU was initially conceived as a defense embassy to Silicon Valley. What became apparent was that Silicon Valley was not interested in an embassy but instead wanted opportunities to compete for defense contracts. In the fail-fast mode of Silicon Valley, Secretary Carter restarted the operation with a Silicon Valley entrepreneur and F-16 pilot, Raj Shah. Raj had the insight that DIU should be a front door to Pentagon projects which offered revenue contracts for companies that could solve military problems. His team pioneered the use of a fast-track acquisition authority and a competitive process that mirrored how most companies do sourcing.
However, there was a struggle getting Congress to approve and sustain a budget for this startup organization of about $30 million in 2017, and another hiccup when DIU’s reporting relationship changed from the Secretary to an Undersecretary whose primary focus was defense-developed technology—not commercial technology. I succeeded Raj as DIU director in 2018. Despite inconsistent support from defense leadership for budget and manpower, DIU gained approval for its own contracting capability and subsequently scaled to add 100 new vendors who, in turn, attracted 10-20x in venture capital for every $1 awarded in a DIU prototype contract. DIU also increased its transition rate for production contracts to 50% of every prototype effort begun, which in turn attracted 43 potential suppliers for every prototyping effort. Some of the companies now most associated with defense tech like Anduril, C3.ai, Rhombus Power, Shield AI and Vannevar Labs all got a start with DIU prototype contracts but have gone on to develop much more significant businesses serving the Defense Department.
Commercial Technology In The DoD Today
The Defense Department has again realized that accelerating the incorporation of disruptive technology is most effective when reporting to the Secretary of Defense. The Department is now applying commercial technology to its most important problems, specifically, what the military commands of the Indo-Pacific and Europe face in deterring China and Russia. Now with nearly $1 billion from Congress, DIU can field new capabilities in one to two years to support those military commands without waiting for multi-year budget alignment or traditional acquisition processes which on average field new capabilities in 17 years.
In addition, venture capital has begun to support defense tech in an unprecedented way. New firms like ours, Shield Capital, have formed to support national security applications while more established venture firms like Andreesen Horowitz, Lightspeed, and Bessemer Ventures have developed practices focused on defense within their firms. In aggregate, investment in defense tech is up 5x in the past six years and now represents $40 billion annually. With a larger amount of DoD’s budget focused on commercial tech, this is a win-win for the nation—new paths for businesses to ramp revenues faster while modernizing capabilities for the warfighter.
A New Age Bridge From The Pentagon To Silicon Valley
The early days of DIU began to attract the best and brightest of the Valley through contracts, but now with increased resources, there can be a much stronger flywheel effect when more companies receive larger production contracts and, in turn, the companies invest more in their defense product lines and production capacity. Expanding the defense industrial base is critical to any future war effort since the base has consolidated to such a degree that it would be severely constrained in wartime as production constraints in supplying Ukraine have highlighted. As more dollars flow to commercial companies, investors will back more entrepreneurs creating solutions for warfighters. A virtuous circle forms when the defense industrial base grows, is more competitive, offers more choice for the Department in terms of cost/performance and warfighters gain access to leading technology. For too long, our soldiers, sailors and airmen have had access to more modern technology in their civilian consumer lives than while in uniform.
Change is hard and it has taken dedicated civilians, investors, men and women in uniform as well as Congressional leaders years to realize the opportunity and momentum in leveraging commercial technology for defense applications. There is an opportunity at this inflection point to provide the nation and our allies a hedge that can complement the exquisite defense platforms today such as the F-35 and Columbia-class subs.
Today, DIU has the reporting relationship and widespread support to provide the best of what Silicon Valley can offer to equip our warfighters. In August 2023, Deputy Secretary of Defense Kathleen Hicks announced that DIU would be a focal point of the Replicator initiative with the aim of delivering thousands of autonomous, low-cost drones to the Indo-Pacific Command within 18-24 months. There appears to be progress 8 months in with an announcement this week that “the delivery of Replicator systems to the warfighter began earlier this month.”
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