Free Money, Few STTRings Attached

[UPDATE: The links are fixed. Some had trouble viewing the links yesterday. There are no other changes.]

Arming defense tech innovators with expert knowledge to build tomorrow’s arsenal of democracy.

Free Money - Because Congress Said So

Any entrepreneur will tell you that funding an idea or startup can be a significant challenge, and any investor will tell you that finding a good startup to invest in is equally challenging. The first funding option that comes to mind might be an angel / seed investor or venture capital. While many use dilutive funding by exchanging equity for cash, (yet another) unique aspect of working in defense innovation is access to non-dilutive capital. A seed stage investment or series round can dilute equity ownership by as much as 20 to 30%, but the Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR) programs can provide non-dilutive funding to innovative companies.

Last week we took a look at where DoD’s tech money goes, specifically from the perspective of the research, development, test and evaluation (RDT&E) budget, which spans science and technology to prototype development. This week we go a little more Schoolhouse Rock style (“I’m just a [dollar] bill”) and follow one path of the cash from a DoD agency to the entrepreneur. Specifically, the small business entrepreneur. And by small, we mean what the Small Business Innovation Development Act (P.L. 97-219) of 1982 considers small: < 500 employees. And even smaller in practice:

Introducing the oft-vaunted and equally oft-maligned SBIR and STTR programs. It turns out that these programs, billed as paragons of innovation usually including an X suffix for some reason (AFWERX, NavalX, SOFWERX, Spacewerx), are written into law for federal agencies that get more than $100M in extramural R&D funding (SBIR), or $1B (STTR). Is the DoD interested in small business innovation? Yes. But is the DoD Congressionally-mandated to be interested? Also yes. Here’s a crash course on the basics:

SBIR

• Dates from 1982, currently 11 federal agencies must participate (+DoD)

• Must set aside at least 3.2% of budget for multi-phase R&D grant program (last available complete data for DoD is 2019, $1.572B)

• Phase I: feasibility studies, generally capped at $150k and 6 months

• Phase II: commercialization potential, generally capped at $1M and 2 years

• Phase III: further maturation, no SBIR money - but agencies can still spend other funds here

• Eligibility

  • more than 50% directly owned and controlled by 1+ citizens or permanent resident aliens, principal investigator primarily employed by business

  • more than 50% owned by VCs, hedge funds, PE firms (but not by just one firm owning >50%)

  • joint ventures adhering to first two conditions

STTR

• Dates from 1992, currently 5 federal agencies must participate (+DoD)

• Must set aside at least 0.45% of budget for multi-phase R&D grant program (last available complete data for DoD is 2019, $207.6M)

• Difference from SBIR: these are collaborative (business performs >40% of research and research institution performs >30%, need to establish IP rights/agreements)

• Phase I: feasibility studies, generally capped at $150k and 1 year

• Phase II: commercialization potential, generally capped at $1M and 2 years

• Phase III: further maturation, no SBIR money - but agencies can still spend other funds here

• Eligibility

  • more than 50% directly owned and controlled by 1+ citizens or permanent resident aliens

  • more than 50% owned by VCs, hedge funds, PE firms (but not by just one firm owning >50%) not for STTR!

  • joint ventures adhering to first condition

Also last week, we introduced the DoD CTO’s (Under Secretary of Research & Engineering) 14 critical technology areas. Trusted AI & Autonomy and Advanced Materials account for nearly half of all SBIR / STTR Phase I/II awards. Here’s how the SBIR/STTR funds map to those areas:

Since the mandated 3.2% floor means more SBIR funding for more total R&D funding, the Department of the Air Force will most likely end up spending the most on SBIRs, though there’s nothing theoretically preventing a Service or Agency from spending even more (this hardly happens - in fact, a 2019 Government Accountability Office report found that DoD only spent 3.04% of its R&D funding on SBIRs).

More recently, Congress passed the SBIR/STTR Extension Act of 2022 to fund the programs through September 2025, but not without a few areas of housekeeping concerns:

• due diligence process for assessing foreign risks

• requires at least 1 open topic to submit proposals to

• increased minimum standards for repeat winners (“SBIR mills”)

• prohibits private entities from shaping solicitation eligibility requirements

• GAO report on repeat winners and subcontracting (we’d also like to know how to subcontract out a $150k(ish) award!)

We’ll delve into some of the critiques of the programs in a later newsletter: what’s our defense ROI as a Nation for continually shelling out “participation trophies” to small businesses?

News & Opportunities

• DoD asks Congress to approve Rapid Response to Emergent Technology Advancements or Threats, granting DoD legal acquisition authority to initiate new development activities, up to a preliminary design review level of maturity

• CENTCOM hires former Google Cloud exec as first-ever AI, robotics advisor

• DARPA is developing agile, reliable sensing systems with microbes through the Tellus program - explores the development of an interactive, platform methodology for the rapid design of microbe-based sense-and-respond devices for monitoring DOD-relevant environments

• Rocket Lab (NASDAQ: RKLB) introduces suborbital testbed rocket, selected for hypersonic test flights, branded HASTE - Hypersonic Accelerator Suborbital Test Electron

• US Cyber Command requests nearly $90M for key offensive cyber platform

• DoD needs three future missiles for Pacific Deterrence - Hypersonic SM-6 Block 1B, a Maritime Strike Tomahawk, and a future iteration of the Army’s Precision Strike Missile (PrSM Increment 2)

• NASA is close to releasing final RFPs for a lunar terrain vehicle service on the moon; the request is likely to come in May 2023

• JetZero, a California startup, unveiled a multimission, blended wing body aircraft for midmarket airliner and Air Force Tanker use cases

• The UK Royal Air Force (RAF) is testing sustainable aviation fuels and investing in synthetic fuels to achieve the net zero carbon emissions goal by 2040

• US Space Force is launching five Strategic Technology Institutes to advance research and development for space technology

• National Reconnaissance Office (NRO) is seeking new technologies and processing for electro-optical (EO) imaging; the request will be officially released under Strategic Commercial Enhancements Board Agency Announcement for new commercial EO capabilities

• The Air Force released its Global Futures Report 2040 detailing four future operating environments through the lenses of continued growth, transformational, constrained and collapse representations

This Week’s Upcoming Events

• 4/24 - 4/27 AEA Convention - event held in Orlando, FL to connect manufacturers, distributors, technicians & business leaders of the avionics industry

• 4/25 Raytheon Technologies (NYSE: RTX) announces Q1 2023 earnings

• 4/25 - 4/26 National Summit on Hypersonic Weapon Systems - analyze the DoD’s approach to hypersonics and learn about advancements in hypersonic weapons technologies - Arsenal will be in attendance, so if you see us, say hello!

• 4/25 - 4/26 AFCEA Spring Intelligence Symposium - flagship intelligence community event for intelligence professionals to discuss capabilities and lessons learned in the current environment

• 4/26 Boeing (NYSE: BA) annonces Q1 2023 earnings

• 4/26 Northrop Grumman (NYSE: NOC) announces Q1 2023 earnings

• 4/26 General Dynamics (NYSE: GD) announces Q1 2023 earnings

• 4/26 - 4/28 Army Aviation Mission Solutions Summit gathering to focus on Army Aviation issues, namely the FLRAA program

• 4/27 Textron (NYSE: TXT) announces Q1 2023 earnings

• 4/28 L3Harris (NYSE: LHX) announces Q1 2023 earnings

• 4/30 - 5/4 SPIE Defense + Commercial Sensing in Orlando, FL to discuss cutting edge research in sensors, infrared, laser, spectral imaging, radar, lidar, and autonomous systems

Red Team - Adversary Investments and Tech

• China may have a supersonic UAS unit

• AeroEngine Corporation of China (AECC) is investing in the supply chain and superalloys for its military engine production

•  Iran developed an air defense boat modified from a British Bladerunner

• CSIS released an analysis covering western sanctions impacts on Russia’s defense industry

About Us

Our team has 30+ years of combined experience as military officers using the end products. We’ve worked in both government and industry. From MIT to Wharton, Wall Street to biotech, and DARPA to the flightline, we will offer you a unique perspective on how to navigate America’s defense tech industry.

The opinions expressed in this newsletter are solely those of the authors and do not necessarily reflect the views of DoD, our employers or any affiliated organization. This newsletter is for informational purposes only and is not intended to provide legal, financial or professional advice.