Why the business 'valley of death' needs special attention

The “valley of death” adage has two definitions to consider when we talk about the intersection of defense and commercial technology, particularly in getting commercial tech to soldiers quickly.

Definition number one is the most frequently used. It is the gap in acquisition that keeps new and innovative prototype tools from becoming programs of record with real, tangible support in the budget.

Honest question: How many panels and events have we all listened to that cry out for reforming the budgeting process at the Defense Department? Including this one from early November that asked all the right questions.

Which gets to definition number two of the “valley of death.” It requires giving equal attention to how the venture capital-dominated technology industry actually works, or perhaps does not from DOD’s point-of-view.

The valley of death from a business point-of-view is the phase of a startup when it is trying to develop its core offerings on a shoestring budget and get enough interest to seek venture capital financing and keep going.

A business crosses that treacherous valley when it achieves enough sustainable cash flow to keep going.  Failure to cross the valley equals closing it all down, after which entrepreneurs and other investors move on to try again.

How does this valley of death play out for the U.S. military as a customer that wants the kinds of technologies commercial start-ups seek to create?

During the Reagan National Defense Forum in Simi Valley, California on Saturday; DOD’s chief technology officer Heidi Shyu explained her goals for engaging with the venture capital community:

“I went to visit one small business in Santa Monica (California), superb product. They said ‘we’re running out of money.’ I said ‘Hello, you’re just telling me today? You think I have a bank account that I can open up and give to you tomorrow?’” 

“So that’s the problem, we need to have a lot more feedback and interaction. They actually have some Air Force funding, they have venture capitalists interested in putting funding in them, if they have production contracts,” Shyu said.

The full exchange featuring that anecdote from Shyu starts at around 19:45 of the video below this story.

Founders, entrepreneurs and other investors essentially make a lot of disparate bets to try and find the one gem that turns into something like a Palantir or Anduril Industries, just to pick a couple high-profile examples out of some. But there are truly not a lot of success stories.

Shyu’s example highlights both definitions of the valley of death: a company’s prototype will not be ready for another year-and-a-half, which puts someone like her in the position to figure out how to find more money in the system to bridge that firm through to the production phase.

This reality check that Shyu somewhat hinted at is also needed: nine out of 10 startups in the U.S. fail. Google that statistic and one finds a plethora of research supporting that.

Rarely is that failure ever because “the technology was bad.” Other reasons loom large such as not applying the product to the right problem, never identifying a problem to solve or just plain old internal company issues that few businesses will ever overcome unless they are extremely lucky.

Both sides of the situation Shyu described are in a bad spot. The company needs that U.S. government contract to continue developing its technology or it will shutter.

DOD needs that technology to stay on the cutting edge or else the tools and ideas cannot be cultivated with an end goal in mind. Then perhaps the tech ends up somewhere DOD does not want it to go.

Palantir, Anduril and even SpaceX became success stories both for business reasons and because the U.S. government has developed its relationships with those companies over time and with thought.

With where we sit today, the contracting system involving both government and industry is attempting to hash out the problem in real time.

DOD’s honesty about how the acquisition system works and does not work is out there in full view. More honesty from the venture capital universe on how real successes happen in the tech industry would help as well.

The valley of death was one of several topics in that Reagan Forum panel discussion titled “Operation Innovation: The State of the National Security Innovation Base,” moderated by defense and space journalist Morgan Brennan of CNBC.

Other panelists were Joe Lonsdale, co-founder and managing partner of venture firm 8VC and a Palantir co-founder; Rep. Ken Calvert (R-California), House Appropriations defense subcommittee ranking member; and Air Force Chief of Staff Gen. Charles Brown Jr.

Below is the full panel discussion. Let’s keep the dialogue going in these pages too.