Photo - Army University Press
Futures Command Use of Venture Capitalism
By Lieutenant Colonel Scott E. Rutter - columnist and senior contributor to Warrior Maven -- U.S. Army (Retired)
The U.S. Army has seized the initiative with its future command and its pending urban location in order to capitalize on tech and academic cultures to reform and modernized the Armed Services. With the same energy, the Army should exploit new and innovative contract and acquisition methods to include streamlined procedures and lessons from venture capitalism. As a Fort Benning and combat trained entrepreneur, this essay captures my thoughts and ideas to match innovation with risk and opportunity focused on getting superior solutions to our Warfighters in a timely and efficient manner.
There are huge differences between "contracting" and "venture capital (VC)." I personally think it is a very unique idea to start up a government venture capital fund, but the "process" needs to be approved outside the Federal Acquisition Regulations (FAR) restrictions that limit and delay much contracting activity. This can be done with the idea that this is actually not a "contract" but an "ownership" interest by the government. Venture capitalists make investments for one purpose only and that is to make money. If the government is interested in some other moral or ethical objective, i.e. increase job opportunities for Veterans, funding certain types of research for the betterment of mankind, or just stimulating business, this is not the right way to go as it will conflict with the underlying goal of a venture capitalist. All decisions must be made based on the future marketability and sale of the products\services\technology created. Of course, there could be dual purposes such as:
The mission of the US Army Advanced Technology Partners (for example) is to incubate new research and development activities and businesses in order to develop solutions to modern day warfare threats and to ensure growth and social equity as a result of these innovative investments and partnerships.
When I spoke with my COO, she informed me that there is one VC firm that she saw that has a “CEO in Residence” program in which they partner with proven entrepreneurial CEOs in order to identify new funding opportunities. In addition, we have standout Veterans that are in MBA programs ready to create the conditions to establish VC opportunities. Having a government trained contracting officer be in charge may not be the answer. The culture needs to encourage rapid turn around and responsive decision-making unburdened by much of the current FAR rules established ostensibly to ensure fairness, but in some cases only stifling the ability of government to make decisions without directed workarounds. The contracting overhead is just too high, and they all fear making a mistake which results in layers and layers of bureaucracy - a sure recipe for disaster.
To implement this mechanism, the Army must wrestle with the idea of an investment vs. contract. The government has worked partnerships with universities and other medical research labs to fund the development of new ideas. In addition, the Small Business Administration found a way to fund businesses through lending initiatives. The primary goals of these relationships is not to make money, it is to support research and business initiatives. This VC idea suggests that the US taxpayer is going to put at risk money in a venture capital relationship (at risk) for the purpose of a return. While the goal for this organization might not be that overtly capitalistic, this idea essentially makes the government a player in the VC marketplace. The conceptual idea of incentivizing new business by offering these "investment" opportunities is very attractive and personally, I don't see why the US taxpayer should not get the dividends of the new ideas that will be forthcoming from this organization. Notoriously, the government has provided contractual funding (i.e. grants and loans offered), but not strategically protected the interests of the taxpayer if such results are hugely successful from a monetary standpoint. Of course, some solutions may not financially payoff, but may solve a real problem identified by the DoD. As the US taxpayer is now or has been during recessionary periods "co-owner" of several car companies and banks, I think the path is less murky and interesting enough to pursue.
One step further, the fund can let individuals invest potentially a revolutionary idea of investing in a US government backed VC fund, vs just having the option to invest in US debt.
As with all VC, there is a lot of money at stake, and a lot of risks. Yet, if the Army wants to attract real tech talent and find a driver of interest in the participation of the powerhouse of US technology, the concept of VC funding should be a serious consideration as a component of the Futures Command. Of course, there needs to be controls in place to choose, monitor and sit on the Boards of these start-up companies. Essentially, the government has to be an active investor, not a behemoth organization that doles out money and then proceeds to forget why and where it went. That is a recipe for disaster. But, the payoff can be enormous and the second and third order of effects (again these are not primary) such as job opportunities, development of certain targeted technologies, and attracting the best and brightest to the government market in an innovative way is very exciting and a new and innovative way to attract the talent and share the risk with the powerful capital structures available in the US.
To sum this up, I put together 5 steps for the leadership of the Futures Command to consider.
5 Areas to Strategically Evaluate in Establishing a Government Sponsored Incubator
● Investment Vehicles – Certain investment structures are more conducive to motivating and attracting start-up businesses. Incubator businesses have limited administrative resources to successfully meet FAR contracting requirements. Alternative vehicles such as joint ventures and direct equity investments should be used to streamline relationships and attract innovative ideas and people. Whichever investment vehicle is used, there should be standardized legal documents that define the rights, roles and responsibilities of the government and the business owners.
● Define a Clear Mission – Venture capitalists make investments for one purpose only and this is to make money. A government sponsored incubator vehicle needs to have the flexibility to terminate, initiate and fund projects with the purpose of achieving growth. The government can not dole out money and then proceed to forget why and where it went. For example:
The mission of the US Army Advanced Technology Partners (for example) is to incubate new research and development activities and businesses in order to develop solutions to modern day warfare threats and to ensure growth and social equity is created as a result of these innovative investments and partnerships.
● Decision Maker \ Management - A government trained contracting officer may be competent in the FAR requirements but has little or no knowledge of the evaluation of appropriate investment targets. The greatest racehorse in the world still needs a great jockey to win. Consideration should be given to engaging CEOs in residence that have proven experience in taking start-ups from initiation to capital realization. Current government contracting methods impose severe overhead that can stifle and destroy innovation. Many contracting decisions are made based on lowest cost or are an effort to protect the government from potential protests. These objectives often are in direction contradiction to those risk / reward calculations that need to be made when venture capitalists invest in start-up businesses. Small businesses have a hard time holding out for the government to make a decision in the current contracting environment and will go under or lose talent. The management of both the government incubator and the businesses chosen to be funded needs to carefully evaluated for competency and experience.
● Implementing Controls, Without Killing Innovation - As with all VC, there is a lot of money at stake, and a lot of risks. These guys on Wall Street and in Palo Alto will be out to exploit this opportunity. There needs to be controls in place to choose, monitor and sit on the Boards of these start-up companies. Balanced by this, is the need to be able to react to new opportunities and support the direction of activities which achieve the mission of the incubator. A contracting officer with a preset checklist that is unable to understand the dynamics of a certain investment or start-up requirement, will be detrimental to achieving the endstate of this government VC organization. On the other hand, out of control funding without proper oversight by a knowledgeable government representative on the Board of Directors will result in financial loss, poor investment decisions and taxpayer anger.
● It’s About The Bottom Line – Venture capital and incubator initiatives are about creating businesses that can provide new technology, services and products for a return on equity. While there may be second and third order of effects such as job opportunities, development of certain targeted technologies, and attracting the best and brightest to the government market in an innovative way, the primary function is to achieve the mission of the organization. The government needs to understand and evaluate investments based on business plans, impact statements and management leadership. These are very different evaluation factors than normally found in most contracting solicitations.
In summary, the Futures Command has the right idea, let’s not limit the potential by imposing current contracting standards in an environment targeted for growth and technical innovation. The same willingness to change the structure of this organization needs to be implemented to fund and attract talent. Considering alternative contracting and funding vehicles, such as VC options will provide a needed boost and attract significant interest to this emerging powerhouse.
Silver Star Recipient Lt. Col. Scott Rutter commanded the 2nd Battalion, 7th Infantry, 3ID (M) destroying Republican Guard Forces as Baghdad International Airport during the combat phase of Operation Iraqi Freedom I (2003). Scott is an Entrepreneur and Founder and President of the Valor Network, a Service Disabled Veteran Owned Small Business that is one of the largest Telemedicine/Teleradiology providers to medical facilities in the Department of Defense, Department of Veterans Affairs and the Department of Homeland Security.
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