Innovation and the U.S. Military (Blog Post)

Blog Post
Title	Innovation and the U.S. Military (Blog Post)
Author	Dylan Dickens
Series	Applied Innovation
Content status	Tabled
Publication date
Notes	Eliza to peer review 11/7/16
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© edegan.com, 2016

Blog Material

The F-35 Lightning II program between the United States and Lockheed Martin has been described as the perfect example of a modern military R&D disaster. The fighter jet, with its plans to wield literal laser weapons(1), and fulfill multiple roles from stealth to vertical takeoff(2) sounds like something out of science fiction. The program's lofty goals and many setbacks however have caused a political and financial uproar with Politico calling the project "$163 billion over budget [and] seven years behind schedule(3)." From the GAO warnings as far back as 2006(4) that the project would run over budget, to a report in 2015(5) that the F-35 would be "unable to enter realistic combat scenarios unsupported," its safe to declare the project less than a success.

The greatest disappointment from the F-35 program is not the billions of dollars lost in development and back-alley deals, but the harsh wake-up call that the worlds "greatest military," the engine of innovation which help churn out GPS, digital cameras, and microwaves, is no longer working. In classic entrepreneurial fashion however, there is opportunity in this failure. The major failures in the F-35 program reflect the major failures in the system at large including a lack of budgeting, a faulty contracting system, and a discrepancy in innovation.

A 2010 internal pentagon report stated that "affordability is no longer embraced as a core pillar" when asked to comment on the exponential increase in cost for the program. This mentality, spurned by an exorbitant defense budget and limited financial oversight represents one of the core problems with the Department of Defense system of innovation. There is little accountability for an idea being cost effective. This is further exacerbated by the second issue of a faulty contracting system.

When the United States awards multi-billion dollar defense contracts to companies before they have a system of accountability and solid development plan it inevitably leads to disasters such as the F-35 program. Lockheed Martin and other contractors in fact, have very little incentive to do any kind of cost control as the longer they can prolong a contract, the more funding they will receive. This combined with a powerful congressional lobby have allowed the contract system of innovation to fail.

Finally, the very nature of defense innovation has fallen into a discrepancy, where companies are innovating for the sake of innovating, rather than attempting to meet specific goals or fulfill current gaps. Many features of the F-35 have been called out as redundant and unnecessary in our modern world, and many of its "innovations" are mere upgrades and reshuffles of already existing technologies. With all of the above, what is the solution for military innovation?

The RAND Corporation(7) has put forth an interesting idea to handle military R&D in a similar way to many major corporations, by having a strategic investments arm which follows a venture capital model. By investing in smaller companies and lending military resources and expertise to their development teams, a strategic investment wing of the military could help start-ups develop cutting edge technologies at a fraction of the current price. This would solve the key issues, providing a return-on-investment rather than a contract style arrangement with developers, and would focus on true, cost-effective innovation rather than the current overblown targets such as the F-35.

Google Doc Link: https://docs.google.com/a/rice.edu/document/d/1DXcQzkBHOOtPjKiPIHgYYf4kdUTV5tAShYnu6NG9HZg/edit?usp=sharing

(1) http://web.archive.org/web/20040626050316/http://www.aviationnow.com/content/publication/awst/20020708/aw32.htm (2)https://en.wikipedia.org/wiki/Lockheed_Martin_F-35_Lightning_II#Armament (3)http://www.politico.com/story/2014/02/f-35-fighter-plane-costs-103579 (4)http://www.gao.gov/new.items/d06356.pdf (5)http://aviationweek.com/defense/test-report-points-f-35-s-combat-limits-0?NL=AW-05&Issue=AW-05_20160201_AW-05_373&sfvc4enews=42&cl=article_1 (6)http://www.reuters.com/article/lockheed-fighter-idUSN1123180820100312 (7)http://www.rand.org/natsec_area/products/vc.html

From the Old Policy Report

Abstract

1,700 words proposing a strategic venture capital investment arm for the DoD, similar to In-Q-Tel, the strategic investment wing of the CIA.

Current Issue

The F-35 Lightning II program between the United States Department of Defense and Lockheed Martin has manifested into a research and development nightmare. The program's intent is to generate a 5th generation fighter jet capable of replacing the currently utilized F-16 Fighting Falcon's developed in the 1970's. Reports on the program have not bore good news however, with **Politico** declaring the project "$163 billion over budget [and] seven years behind schedule(1)," and **Breaking Defense** pointing out the fact that the antiquated F-16 has beaten the novel F-35 in test dogfights(2).

The program was lofty from the get go. The F-35 was designed to fulfill multiple roles including stealth reconnaissance, ground attack, air defense, vertical takeoff, precision bombing and air support(3). There were plans for the fighter jet to wield literal laser weapons(4) and dominate the skies, yet internal Defense Department reports in 2015 announced that the F-35 would be "unable to enter realistic combat scenarios unsupported(5)." The lofty goals and eventual technological disappointment of the F-35 program have been further compounded by the programs seeming inability to follow budget. As far back as 2006 the Government Accountability Office warned that the project would run over budget with its current model, and recommended delays in appropriation till further test flights and prototypes were completed(6). Now, $163 billion dollars later with little revision to the contracting model, an internal Pentagon report stated that "affordability is no longer embraced as a core pillar" when asked to comment on the exponential increase in cost for the program(7).

The F-35 program, in all of its disaster, should not have come at a total surprise, as academic literature for many years has failed to draw meaningful economic benefits from research on military R&D. As early as 1967 literature review from the **Institute of Electrical and Electronics Engineers** showed a trend of needing increased "outside assistance," in military R&D(8). Further contemporary research from the IEEE shows that military R&D spending has "no statistically visible evidence of direct effect" on the U.S. economy(9) and **Economic Development Quarterly** reports that extensive military R&D generally detracts from private sector R&D, which in long run hurts U.S. competitiveness(10). This amass of evidence against military R&D is not to say its unnecessary, it is the same engine of innovation which helped to produce GPS, digital cameras, and microwaves after all, and is necessary to keep the nation safe.

The United States spends over $76 billion annually on Defense R&D, which is more than the total defense expenditures, not just for R&D, but for all defense purposes, of every other country in the world except China(11). As the **Center for American Progress** notes, "we no longer have the luxury of throwing countless billions of dollars at Pentagon R&D and hoping they land somewhere(11)." While military R&D may be necessary and have a great track record of innovation, modern analysis, academic literature, and the F-35 Lightning II program provide convincing evidence that policy change is in order.

Potential Solution

Innovation is a key component of the private sector, and as reported by **Science Progress**, nearly 2/3 of all U.S. research and development investments are currently in industry(12). That is a nearly $230 billion sector which can be harnessed by the Department of Defense. Two different studies published in **Research Policy** indicate the successes of private sector led and public sector funded high-tech R&D(13)(14), demonstrating the past and future feasibility of public-private research partnership. While current contract partnerships do exist in the defense sector, they are notoriously complicated(15), politically motivated(16), and lead to "buying before flying" fiasco such as the F-35 program where the already-purchased product does not live up to expectations.

While the contract model has seemingly failed the United States, another option may be inherited from the private sector, strategic venture capital investment. Venture capital, defined as "financing that investors provide to startup companies and small businesses that are believed to have long-term growth potential(17)," is an essential component of the entrepreneurship ecosystem. Critical for startups to grow, venture capital is generally considered a high risk investment for its backers but can have major payoffs. Extensive research has shown that venture capital is valuable for the investor, investee, and overall economy(18). Venture capitalists almost always join the companies which they invest in, lending sector expertise, guidance and knowledge to the nascent business.

In order for a venture capital firm to generate profit, the businesses they invest in must succeed, so a strong desire for return on investment is instilled into the young company. This desire has been shown to be overwhelmingly positive, with research from the National Bureau of Economic Research showing that only one in ten investments does not return any money(19). One in four investments on the other hand, were shown to have a rate of return above 50%. While these statistics may be positively biased, other estimates point to two in ten investments making substantial amounts, and only a small amount of investments not at least breaking even. Venture capital does not only generate profits for both the investor and investee, but also the greater economy with major growth being driven by the rise of successful VC-backed enterprises(20).

Strategic venture capital investment firms, the subject of this proposal, are usually affiliates of corporations that invest on behalf of their parent company. Some examples include the Peacock Equity Fund of GE/NBC Universal, Time Warner Investments of Time Warner Cable, and Steamboat Ventures of The Walt Disney Company(21). While traditional venture capital firms provide funds to young companies with the desire to see these companies grow, strategic investors, due to their corporate backers desires, have an additional strategic goal beyond just this financial growth. Sometimes strategic's invest to fill in gaps where the corporate parent might see an opportunity to strengthen itself, and sometimes they invest in complementary companies where growth could help both the corporate sponsor and nascent company. In other cases, strategic investment firms make a sector bet and invest in an area that isn't directly related today but is of interest for the future. Generally these strategic investments are preparations for an eventual acquisition of the new company by the corporate backer.

Strategic venture capital investment, that is venture capital with the goal to produce strategic innovations rather than solely turn a profit, has been successfully demonstrated in the private sector and has even made an appearance in the public. Noticing the growing gap between defense and civilian R&D in 1999 the Central Intelligence Agency founded In-Q-Tel, a private, non-profit entity with the mission to "“to exploit and develop new and emerging information technologies and pursue R&D that produce innovative solutions to the most difficult problems facing the CIA and the Intelligence Community(22).” In-Q-Tel is run just like a strategic venture capital firm. It has tech-savvy entrepreneurs who know what it takes to get a small business off the ground at the helm, a highly knowledgeable in-house technology team for evaluation and mentoring, an innovative and creative corporate culture and flexible capital at its disposal. In the decade and a half since its inception, In-Q-Tel has been declared by the CIA as an evolving, useful, and effective tool.

Despite the inherent risks of venture capital, the Business Executives for National Security in their testimony to congress stated that "In-Q-Tel’s potential advantage to the CIA outweighs the risk," and internal memos suggest that In-Q-Tel's return on investment has been larger than anticipated(23). Major tenets of its success cited include the technical review performed by In-Q-Tel and the prestige of having the CIA as a customer(21). These are tenets which can be replicated by the Department of Defense. Strategic venture capital investment, from the private sector to the public, has demonstrated an effective model of research and development which is innovation and profits focused, feasible, and has a proven track record.

Specific Proposal

Drawing on venture capital research from the expert Kauffman Foundation(25), and the In-Q-Tel model, a strategic venture capital investment arm for the Department of Defense is recommended to first complement, and eventually subsume its existing R&D capabilities. This proposed new arm of the DoD would accomplish many of the goals highlighted in a less specific but similar proposal from the RAND Corporation(26). The DoD strategic would allow for the U.S. military to hold its position as a major innovator and technological giant while closing the existing gap between public and private R&D by blurring the lines further between the two. It would allow minimum taxpayer resources to be invested, and after a startup period, should run self-sufficient with the potential for a return on investment such as the In-Q-Tel program.

Following the In-Q-Tel format, the DoD strategic is recommended to be founded as a private, non-profit entity with strong ties to the Department of Defense. As a recommended physical location for operations, Boston's Route 128, long considered the high-tech industry's response to IT's Silicon Valley, would work well. Venture capital firms which are physically closer to the companies they invest in are often more successful, and much importance is attributed to micro-geography in the world of entrepreneurship. An executive unit consisting of successful high-tech entrepreneurs turned venture capitalists is required, as individuals with know how in both running a high-tech startup and investing through venture capital will be required. Other members of this should include military officials who can lend their expertise and connections to the strategic. Once again following the In-Q-Tel model, an in-house team of technology experts is required for both prospective investment evaluation and eventual mentoring of startup technologists.

The culture of this strategic will have to be different from the Department of Defense as a whole, with focuses on creativity, flexibility, and innovation. Without this corporate "startup" culture the strategic will struggle to promote innovation and growth within its investments. Emphasis must be placed on return on investment, as a constant stream of funding promotes lazy investment review and does not incentivize either the strategic or the startup to act cost effective and meet goals. Bureaucratic "red tape" must be minimized, and while oversight and security are necessary, alternate paradigms may be considered for the strategic in contrast to the DoD as a whole.

Understanding the past successes of strategic venture capital investment, and recognizing the current failures in U.S. military innovation, it is imperative that policymakers seek another solution. The mounting deficit and out of control defense budget demand a change in action, a change whose need is only further demonstrated through contractual R&D disasters such as the F-35 Lightning program. A promising solution exists in harnessing the private sector's demonstrated advances in R&D over the public sector. One of the most successful models in private sector R&D, strategic venture capital investment, has shown great promise in both the private and public sectors. Following a similar model to the strategic investments wing of the CIA, In-Q-Tel, the Department of Defense could revolutionize military innovation and bring the U.S. to a more stable sense financially without sacrificing technological superiority.