Defense startups’ new hope in D.C.: Donald Trump and Elon Musk

Summary

POLITICO Tech Podcast Summary

Episode Title: Defense Startups’ New Hope in D.C.: Donald Trump and Elon Musk
Host: Stephen Overlea
Release Date: November 13, 2024

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Introduction

In the November 13, 2024 episode of the POLITICO Tech podcast, host Stephen Overlea delves into the emerging optimism among defense startups following Donald Trump's recent election victory. Despite the Department of Defense (DoD) allocating over $400 billion in contracts last fiscal year—more than all other federal agencies combined—startups have long struggled to secure a meaningful share. This episode explores the factors driving this newfound hope, the role of influential figures like Elon Musk, and the potential reforms that could reshape the defense procurement landscape.

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The Current Landscape of Defense Contracts

Stephen Overlea opens the discussion by highlighting the stark contrast between the substantial DoD budget and the limited access startups have to these funds. Historically, long-established defense contractors have dominated the procurement process, leaving innovative startups with only marginal opportunities.

"The Defense Department shelled out over $400 billion in contracts to companies last fiscal year, more than all other agencies combined. But for years, defense startups have complained that it's hard to get a piece of that pie."
[00:14]

Startups in the defense sector often invest in cutting-edge technologies such as artificial intelligence and advanced engineering solutions. However, transitioning from prototype to fully funded contracts has been a significant hurdle, a challenge referred to as the "Valley of Death."

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Reasons for Optimism Post-Trump Election

Following Trump's election, there is a surge of optimism among defense startups. Although Trump has not explicitly outlined his plans for defense procurement reforms, his administration is perceived as more receptive to the demands of these emerging companies.

Christine Moy, a POLITICO colleague, explains that the enthusiasm stems not directly from Trump but from his influential supporters advocating for significant changes in how the Pentagon allocates its budget.

"There’s a whole orbit of people around Trump, including supporters of his campaign, who have been pushing for big reforms to how the Pentagon buys technology."
[01:50]

Notably, Elon Musk's support has been pivotal. On election night, Musk urged Palmer Luckey, founder of Anduril Industries, to engage with the Trump administration to open up the DoD to entrepreneurial ventures.

"Elon Musk tweeted at Palmer Luckey... it’s very important to open up the Defense Department and the intelligence agencies to entrepreneur companies like yours."
[02:00]

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Influence of Elon Musk and Palmer Luckey

Elon Musk's involvement adds significant weight to the startups' push for reform. Musk, known for his ventures like SpaceX and Starlink, is expected to play a crucial role in the new government department aimed at eliminating bureaucratic inefficiencies within the DoD.

"Musk has been... expected to have a role at the head of this new government department, tasked with removing bureaucratic inefficiencies."
[03:29]

Although Musk does not hold a formal position, his public support signals to startups that their concerns are being heard by influential figures within the administration. Musk champions a meritocratic approach to procurement, emphasizing the selection of the best technology over rigid adherence to predefined requirements.

"The current process that the Pentagon uses... it's very fixated on checking off... a meritocracy argument that Musk has repeated himself."
[04:37]

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Challenges in the DoD Ecosystem

Despite the DoD's expressed interest in leveraging emerging technologies to remain competitive, startups face significant obstacles in securing long-term contracts. Christine Moy outlines that while the DoD invests in research and development, translating these investments into substantial contracts has proven difficult for startups.

"These startups have basically gotten these small... door prizes. And they haven’t really been able to persuade the DoD to invest in these longer-term contracts."
[04:57]

The "Valley of Death" metaphor captures the difficulty startups encounter in moving from prototyping to actual contract acquisition. Last fiscal year, venture-backed defense companies secured less than 1% of the $411 billion in federal defense contracts, highlighting the gap between interest in innovation and actual procurement.

"Last fiscal year, venture backed defense companies took less than 1% of $411 billion in federal defense contracts awarded."
[05:58]

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Desired Reforms from the Trump Administration

Defense startups are advocating for comprehensive reforms to enhance their access to DoD contracts. Christine Moy identifies several key areas where these companies seek changes:

1. Increased Procurement Dollars: Startups demand a larger share of the defense budget to fund their innovative technologies at scale.

2. Enhanced Competition: Introducing more competition by allowing new entrants to compete for contracts, thereby breaking the dominance of established contractors.

3. Domestic Manufacturing: Ensuring that a greater portion of the defense industrial base is manufactured within the United States.

"The single biggest thing that they're advocating for is just putting more money, more procurement dollars to buy their technologies at scale."
[07:11]

Palantir's Chief Technology Officer emphasizes the need for a fundamental shift in the DoD's mindset, advocating for broader organizational reforms to facilitate innovation and flexibility in budgeting.

"DoD basically needs to shift its entire mindset... introducing more competition for contracts, granting those opportunities to new entrants."
[07:11]

Additionally, the sector has made some progress, with Congress mandating a panel to study and recommend reforms for the DoD’s budget process. Recommendations include reallocating a portion of the budget directly to Combatant Commands to expedite technology experimentation.

"The leader of the House Armed Services Committee... endorsed a recommendation from Palantir to reroute a small percentage of budget funds directly to the Combatant Commands."
[08:00]

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The Role of Congress in Defense Procurement Reform

Reforming the DoD’s procurement process requires substantial support from Congress, as lawmakers control the defense budget and its allocation. Christine Moy highlights that key committees and appropriators must agree to both increase the overall defense budget and reallocate funds from existing programs to support startups.

"Congress, you know, totally needs to be on board with these reforms specifically. The Armed Services Committees and the appropriators for those committees."
[09:34]

This support could involve a combination of increasing the defense budget and cutting legacy programs to free up funds for innovative startups, aligning with the sector's dual advocacy for enhanced funding and streamlined procurement processes.

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Challenges Ahead: Insights from Industry Experts

Despite the current enthusiasm, not all experts are optimistic. Steve Blank, a former Navy science and technology advisor and startup founder, warns that defense startups may be underestimating the entrenched interests and complexities of the DoD ecosystem.

"There’s incredible enthusiasm right now for change, but there’s also an entrenched set of incumbents... within the key committees that they need to secure actual changes."
[10:30]

Blank underscores the necessity for startups to develop cohesive organizational strategies and cultivate a unified voice to effectively navigate and influence the legislative and bureaucratic landscape. He points out that significant systemic changes require dedicated efforts to understand and modify existing structures, a challenge for relatively new industry players on Capitol Hill.

"The industry is relatively new to the Hill... they need to learn how to organize and be equal for single voice."
[11:42]

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Conclusion

The episode concludes with Stephen Overlea acknowledging the formidable challenges defense startups face despite the current wave of optimism. While the Trump administration and influential supporters like Elon Musk present potential avenues for reform, substantial hurdles remain in overcoming entrenched interests and navigating the complex defense procurement system.

"Any system that is going to be hard to change, I think it could be the military and all of these major defense contractors that for decades have built their businesses on the existing system."
[11:58]

Ultimately, the success of defense startups in securing a more significant portion of Pentagon contracts hinges on their ability to effectively advocate for and implement the necessary reforms within a traditionally rigid and established defense infrastructure.

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Notable Quotes:

• "Elon Musk tweeted at Palmer Luckey... it’s very important to open up the Defense Department and the intelligence agencies to entrepreneur companies like yours."
  — Elon Musk, [02:00]

• "DoD basically needs to shift its entire mindset... introducing more competition for contracts, granting those opportunities to new entrants."
  — Palantir's CTO, [07:11]

• "There’s incredible enthusiasm right now for change, but there’s also like an entrenched set of incumbents... They need to secure actual changes here."
  — Steve Blank, [10:30]

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This comprehensive summary encapsulates the key discussions and insights from the episode, providing a clear understanding of the current state and future prospects for defense startups within the U.S. defense ecosystem.

Transcript

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[Stephen Overlea]

Hey, welcome to Politico tech. Today's Wednesday, November 13th. I'm Stephen Overlea. The Defense Department shelled out over $400 billion in contracts to companies last fiscal year, more than all other agencies combined. But for years, defense startups have complained that it's hard to get a piece of that pie. Sure, the military invests in companies developing artificial intelligence and other cutting edge technology, but when it comes time to actually purchase new technology, startups say that long time defense contractors wind up pocketing most of the money. But my Politico colleague Christine Moy reports that those firms are feeling fresh optimism after Donald Trump's election victory last week. And they're hoping Trump will listen to influential supporters like SpaceX CEO Elon Musk and Enduro founder Palmer Luckey who are calling for reform. On the show today, Christine explains what defense startups want from Trump's incoming administration and what hurdles they will need to overcome. Here's our conversation. Hey, Christine, welcome to Politico Tech.

[Christine Moy]

Hey, Steven.

[Stephen Overlea]

So Trump's election last week has startups in the defense space excited that they may be getting more access to government contracts, that is more money. Where is this enthusiasm coming from?

[Christine Moy]

So the enthusiasm isn't exactly coming from Trump himself. He hasn't signaled very much on what he'll do in a second term. But there's a whole orbit of people around Trump, including supporters of his campaign, who have been pushing for big reforms to how the Pentagon buys technology. And so, you know, in the recent years, there's been a burgeoning defense tech industry from Silicon Valley. And they really see the Trump presidency as a big opportunity for what's a relatively young sector to finally land a bigger cut of Pentagon contracts. So in the very late or early hours of election night, basically at midnight, it looked pretty likely that Trump was gonna win. And Elon Musk tweeted at Palmer Luckey, who's the founder of Android Industries. It's one of the big players in this space. And he basically said it's very important to open up the Defense Department and the intelligence agencies to entrepreneur companies like yours. That was a very good signal to supporters who have long felt there's a need for, you know, disruption. Like this is not something, what they're describing is not something that can be solved by tiny incremental reforms. They are really trying to completely Change the way the Pentagon sets rules around its budgets and what portion of them go out to these companies.

[Stephen Overlea]

Got it. Well, and we'll definitely dig more into that. You know, you mentioned Elon Musk. Of course there's an Elon Musk factor here. I mean, he competes for government contracts himself through Space X and Starlink, two of his companies. What influence is he expected to have here?

[Christine Moy]

So Musk was the one who tweeted this. Right. And Musk has been. He's expected to have a role at the head of this new government department, you know, that's tasked with removing bureaucratic inefficiencies, waste from various agencies. And so he doesn't really have a formal role here, but he's already indicated his support. Important that he would be sympathetic to these companies concerns. They feel that, you know, the type of disruption that they're describing would be right up Musk's alley based on what he said he wants to do with this department and this new role in the Trump administration. A lot of the companies, what they say is the issue here is that the current process that the Pentagon uses to do its budgeting, it's very fixated on checking off basically a long list of requirements it doesn't choose for the best technology for the job. It's a kind of like, you know, meritocracy argument that Musk has repeated himself and repeated, not just for this issue, but for other things. And so that's why Musk is basically someone that they think will listen to their concerns and bring them to the Trump administration.

[Stephen Overlea]

It's interesting because the Defense Department has talked a lot about the need for artificial intelligence and kind of other emerging technologies in order to stay competitive with China. I'm curious, you know, why do defense startups say it has been so hard for them to break into the DoD kind of ecosystem?

[Christine Moy]

Yeah. So basically, from the company's perspective, it's just what you said. Like, there's a lot of rhetoric around this. Right. The DOD has talked a lot about seeking out and being interested in systems that are powered by AI. There's also all these new global conflicts since the first Trump term. And so there's a lot of talk about the need to modernize military arsenals around the world. But when you look at the hard numbers, it's pretty clear that like, you know, these startups have basically gotten these small, you know, they call it like door prizes. And they haven't really been able to persuade the DoD to invest in these longer term contracts. Right. There's been a Lot of kind of R and D funding and things like that. And so they talk a lot about, you know, this thing called the Valley of Death, which is, it's basically the journey that it takes a vendor to convince the DoD to go from being interested in just a prototype of their product to actually giving them a contract. Basically the difference between liking an idea and actually buying it.

[Stephen Overlea]

Right.

[Christine Moy]

And this is the type of thing that they, you know, the Pentagon has talked, defense officials often talk about narrowing that gap. Right. But so far last fiscal year, venture backed defense companies took less than 1% of $411 billion in federal defense contracts awarded. That's based on Wall Street Journal reporting. And so when you look at the numbers, it doesn't really match up with this rhetoric and this appetite.

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[Stephen Overlea]

I'm curious what changes they're looking for specifically from this incoming administration. I mean, obviously they want more money, but what kind of reforms to the process do they say are needed for that to happen?

[Christine Moy]

Yeah, so I talk to companies like Anduril and like you said, the single biggest thing that they're advocating for and that they think will make the difference here is just putting more money, more procurement dollars to buy their technologies at scale. But I also spoke to the chief technology officer of another company, Palantir, and you know, he framed this more of instead of just an opportunity to reform the acquisition process for these technologies. He specifically said there's an opportunity, but as part of reforming and modernizing the entire organization, meaning DoD, and days before the election, his company published an entire treatise, basically said that DoD basically needs to shift its entire mindset. And so the changes that they're advocating for are things like introducing more competition for contracts, you know, granting those opportunities to new entrants, and broader changes around making sure more of the manufacturing for America's defense industrial base occurs here. There is also, you know, the sector has been advocating for this for some time now and they have been able to get some initial progress on that front. So Congress has mandated a panel to study this issue, you know, how to reform DoD's process for making and executing on the defense budget. So as our defense reporters have reported this spring, that panel made 28 recommendations for the Pentagon and leaders on the Hill. And so those are things like changes in how funding is distributed to different programs to give more flexibility. And this fall, actually the leader of the House Armed Services Committee, Mike Rogers, he endorsed a recommendation from Palantir to reroute a small percentage of budget funds and give them directly to the Combatant Commands. And that would allow them to, you know, speed up their experimentation of new technology rather than the alternative. How it exists right now is routing all the money through the military services.

[Stephen Overlea]

You mentioned Congress, and I was going to ask you what role they would need to play here because obviously Congress, you know, controls the purse strings in this town. Like, do they need to be on board with these reforms and, you know, in order for kind of this money to actually make its way to these companies.

[Christine Moy]

Yeah. So Congress, you know, totally needs to be on board with these reforms specifically. Right. The Armed Services Committees and the appropriators for those committees. So to get to basically direct more funding in the way that the sector is describing, they'll need these key lawmakers to either agree to increase defense budget overall, decide where, you know, they should cut some tech programs that they've been spending money on for a long time so they can free up more funding to go toward these companies company's contracts and likely like some combination for both. Right. These companies are advocating for both.

[Stephen Overlea]

There was a quote in your piece from this Navy advisor who said that defense startups are naive about the battle that they're going to face. I was wondering kind of what he meant by that and how hard of a road ahead there is despite all of this enthusiasm.

[Christine Moy]

Yeah. So that's Steve Blank. He's a former science and technology advisor for the Navy. He's also a startup founder himself. And he said there's incredible enthusiasm right now for change, but there's also like an entrenched set of incumbents on K Street. So among the lobbyists for these companies and also within. Right. The key committees that they need to secure actual changes here.

[Stephen Overlea]

Right.

[Christine Moy]

And one thing he noted is that this industry is relatively new to the Hill. And to actually think about this bigger question of how you permanently change the system, someone needs to do the very menial task of going through the org charts, going through, right. The budgets. And for. For all the enthusiasm, there's been in kind of big talk from people like Musk. It's not clear exactly who would do that. Like, his point is, if you're going to seek to make radical change in a system like it's not going to be the lawmakers who adjust to you how to go about changing it.

[Stephen Overlea]

Right.

[Christine Moy]

And so he said like one of the things he said is like the industry really needs to learn how to organize and be equal for single voice which they have been improving on in recent years. But like I said, you know, they're relatively new to the Hill.

[Stephen Overlea]

Got it. Yeah. I mean any system that is going to be hard to change, I think it could be the military and all of these major defense contractors that for decades have built their businesses on the existing system. Well, fascinating topic, Christine. Thanks for being here on Politico Tech.

[Christine Moy]

Thanks, Stephen.

[Stephen Overlea]

That's all for today's Politico Tech. For more tech news, subscribe to our newsletters, Digital Future Daily and Morning Tech. Our managing producer is Annie Reese. Our producer is Afraid Abdullah. I'm Stephen Overlea. See you back here tomorrow.