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Team Army venture capital - 2021 Technology, Innovation & Great Power Competition
The U.S. military faces a diminishing innovation gap with China, particularly in the Indo-Pacific region, necessitating a reevaluation of its venture capital strategies to maintain a competitive edge. The Army Venture Capital Initiative (AVCI) requires restructuring to better align with mid-stage private companies to foster dual-use technologies that can enhance military innovation. Recommendations include establishing a $750 million AVCI fund and promoting partnerships to invigorate the military's technological capabilities.
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Team Army venture capital - 2021 Technology, Innovation & Great Power Competition
- 1. Army Venture CapitalInitiative ORIGINAL PROBLEM STATEMENT The gap between U.S. and Chinese military innovation is rapidly closing and poses a threat to U.S. military dominance specifically in the Indo-Pacific Region. In order to maintain our capability gap, the U.S. needs to reevaluate and improve its public venture capital economic relationship with companies that have potential for dual-use technologies which can play a vital role in leading U.S. military innovation. FINAL PROBLEM STATEMENT The gap between U.S. and Chinese military capabilities is rapidly closing and poses a threat to U.S. military dominance in the Indo-Pacific Region. In order to maintain our capability gap, the DoD needs to reevaluate and improve its funding strategies and partnerships with mid-stage private companies that have potential for dual-use technologies, which will play a vital role in catalyzing U.S. military innovation. Team 1 – Interviews: 54 Leopold van den Daele BA Product Design ‘24 Sophia Danielpour BA Economics ‘24 Joshua Vanderlip GSB MSx ‘21 Andy Yakulis GSB MSx ‘22
- 2. 2 Sclerotic AVCI design: beholden totoo many interests Private vs Public Sector: AVCI 2.0 is doomed to fail Unfair Adv: What is AVCI’s unfair advantage? Value Prop: AVCI’s DoD connections and culture Need Found: B-C stage, Partnerships & Support Functional Ecosystem: Afwerx, DIU, all promote DI Advisory Boards: empowering management team Bureaucratic Overreach: Can AVCI ever really be lean? Incentives: Who is running this and why? What’s at stake? System wide inertia: Difficult to enact durable change Andy Sophia L e o p o l d Joshua Real Potential: AVCI as an unprecedented opportunity Ineffectual management structure: Crowded The right stage?: Seed and Series A or B-C? Management workaround: Incentives and structures redesigned Management receives Carry: restructures incentives Stage Pivot: Series A-C It’s a culture question: Mil should adopt VC’s lean structure Potential workaround: Incentive and management structure Identified Investment Thesis: Incentivize Innovation AVCI Team Journey Map Fall 2021 Management Structure and conflicts of interest: Potentially Peter’s Recs: Apolitical and helpful moving forward Tax Incentives: Promotes tier 1 VC firm engagement Identification of Relevant Investment Stage: Later stage? Team Assumed Tested Applied Management Redesign: AVCI structural workarounds Intricacy and Incentives: systems needs redesign Team Journey Map
- 3. 3 Understanding the Problem:Great Power Concerns Require Innovation • The U.S. has ventured into a new era of competition with its adversaries, namely Russia and China, fought in cyberspace and in the economic and acquisition domains. • Now, more than any other era in history, the United States must rally its innovation base to maintain its edge and, in some areas, keep pace with its adversaries. • Chinese technology innovation is advancing rapidly and may outpace the United States if it does not take drastic measures to incentivize innovation. The Sputnik moment has passed.
- 4. 4 Sclerotic AVCI design: beholden totoo many interests Private vs Public Sector: AVCI 2.0 is doomed to fail Unfair Adv: What is AVCI’s unfair advantage? Value Prop: AVCI’s DoD connections and culture Need Found: B-C stage, Partnerships & Support Advisory Boards: empowering management team Bureaucratic Overreach: Can AVCI ever really be lean? Incentives: Who is running this and why? What’s at stake? System wide inertia: Difficult to enact durable change Andy Sophia L e o p o l d Joshua Real Potential: AVCI as an unprecedented opportunity Ineffectual management structure: Crowded The right stage?: Seed and Series A or B-C? Management workaround: Incentives and structures redesigned Management receives Carry: restructures incentives Stage Pivot: Series A-C It’s a culture question: Mil should adopt VC’s lean structure Potential workaround: Incentive and management structure Identified Investment Thesis: Incentivize Innovation AVCI Team Journey Map Fall 2021 Management Structure and conflicts of interest: Potentially Peter’s Recs: Apolitical and helpful moving forward Tax Incentives: Promotes tier 1 VC firm engagement Team Assumed Tested Applied Management Redesign: AVCI structural workarounds Intricacy and Incentives: systems needs redesign Team Journey Map: First Major Discovery: DoD’s innovation ecosystem Identification of Relevant Investment Stage: Later stage? Functional Ecosystem: Afwerx, DIU, all promote DI
- 5. 5 First Major Discovery:DoD’s Innovation Ecosystem is Fatally Flawed • Small business DoD innovation is misaligned with the goal of maintaining competitive military advantage: un-enticing investment check size, an archaic and risk averse DoD acquisitions ecosystem, and a fear of the loss of intellectual property. • Venture Capital (VC) firms do not want to invest in solely DoD-only companies: investment returns face speed and risk levels that are unacceptable. • DoD attempts to spur innovation have merely created a system of innovation tourism, almost exclusively focused on early-stage ventures. • The Defense Primes are best suited for the procurement of large material solutions, not innovative technology, and they have a systemic choke on R&D funding through ineffective requirements based “innovation”.
- 6. 6 Defense Acquisitions… A“Boil the Ocean Problem”
- 7. 7 Sclerotic AVCI design: beholden totoo many interests Private vs Public Sector: AVCI 2.0 is doomed to fail Unfair Adv: What is AVCI’s unfair advantage? Value Prop: AVCI’s DoD connections and culture Functional Ecosystem: Afwerx, DIU, all promote DI Advisory Boards: empowering management team Bureaucratic Overreach: Can AVCI ever really be lean? Incentives: Who is running this and why? What’s at stake? System wide inertia: Difficult to enact durable change Andy Sophia L e o p o l d Joshua Real Potential: AVCI as an unprecedented opportunity Ineffectual management structure: Crowded The right stage?: Seed and Series A or B-C? Management workaround: Incentives and structures redesigned Management receives Carry: restructures incentives Stage Pivot: Series A-C Identified Investment Thesis: Incentivize Innovation AVCI Team Journey Map Fall 2021 Management Structure and conflicts of interest: Potentially Peter’s Recs: Apolitical and helpful moving forward Tax Incentives: Promotes tier 1 VC firm engagement Identification of Relevant Investment Stage: Later stage? Team Assumed Tested Applied Management Redesign: AVCI structural workarounds Intricacy and Incentives: systems needs redesign Team Journey Map: Second Major Discovery: Uncovering AVCI “1.0” Potential workaround: Incentive and management structure It’s a culture question: Mil should adopt VC’s lean structure Need Found: B-C stage, Partnerships & Support
- 8. 8 Second Major Discovery:Uncovering AVCI “1.0” ● 2002 NDAA Section 8150 authorized an Army Venture Capital Arm ○ OnPoint Technologies was founded as a non-profit, managed by for-profit VC Firm, Arsenal Venture Partners ○ US Army was the “Strategic Investor” ● Communications and Electronics Command (CECOM) served as: ○ Principle interface with AVCI ○ Admin and Contracting Support ● 2002: $25.4 Million // 2003: $12.6 Million // 2004: $10 Million ○ Investments intended to provide: “The Service’s continued need for new power and energy solutions” Could the Army Venture Capital Initiative be a solution despite the ghosts of the past?
- 9. 9 First Organization ofAVCI Had Deep Structural Issues Fund & Check Size Poor Management Misaligned Incentives Flawed Investment Focus Lack of Oversight & Guardrails 1 2 3 4 5
- 10. 10 Sclerotic AVCI design: beholden totoo many interests Private vs Public Sector: AVCI 2.0 is doomed to fail Unfair Adv: What is AVCI’s unfair advantage? Value Prop: AVCI’s DoD connections and culture Need Found: B-C stage, Partnerships & Support Functional Ecosystem: Afwerx, DIU, all promote DI Advisory Boards: empowering management team Bureaucratic Overreach: Can AVCI ever really be lean? Incentives: Who is running this and why? What’s at stake? System wide inertia: Difficult to enact durable change Andy Sophia L e o p o l d Joshua Real Potential: AVCI as an unprecedented opportunity Ineffectual management structure: Crowded The right stage?: Seed and Series A or B-C? Management workaround: Incentives and structures redesigned Management receives Carry: restructures incentives Stage Pivot: Series A-C It’s a culture question: Mil should adopt VC’s lean structure Potential workaround: Incentive and management structure Identified Investment Thesis: Incentivize Innovation AVCI Team Journey Map Fall 2021 Management Structure and conflicts of interest: Potentially Peter’s Recs: Apolitical and helpful moving forward Tax Incentives: Promotes tier 1 VC firm engagement Identification of Relevant Investment Stage: Later stage? Team Assumed Tested Applied Management Redesign: AVCI structural workarounds Team Journey Map: Refining a Solution Intricacy and Incentives: systems needs redesign
- 11.
- 12. 12 Final Problem Statement Thegap between U.S. and Chinese military innovation and capabilities is rapidly closing and poses a threat to U.S. military dominance specifically in the Indo-Pacific Region. In order to maintain our capability gap, the U.S. DoD needs to reevaluate and improve its public venture capital economic relationship funding strategies and partnerships with companies with mid-stage private companies that have potential for dual-use technologies which can play a vital role in leading , which will play a vital role in catalyzing U.S. military innovation.
- 13. 13 Proposed New Structurefor AVCI & Associated Recommendations Board of Trustees → Advisory Board ATWG Advises Tech Roadmap ASA(ALT) → NVCA and DIN Contracting Support: CECOM → Army Futures CMD 1 2 3 4
- 14. 14 Final Recommendation: GoAll In on AVCI “2.0” Reaffirm and Improve Authorities Through Renewed Congressional Support Create a Competitive $750m AVCI Evergreen Fund Invest in Mid-Stage Companies Creating Dual-Use Technologies Empower and Incentivize the Management Team Encourage Creation of Dedicated Sidecar Fund and Co-investing From Large Firms Create a DoD Funded competitive 750m Venture Capital Evergreen Fund focused on investing in mid-staged dual use technologies. 1 2 3 4 5
- 15. 15 DoD Wide Recommendations Fundand Leverage AVCI 2.0 managed by 2nd Front, Inc via Army Futures 1 Encourage Larger Investments in Mid-Stage, Dual-Use Companies 2 Propose parallel 501(c)(3) Venture Capital Arms for Each Military Branch 3 Appropriately Fund and Encourage NSIC (DIU) to Use Existing Authorities (2019 NDAA) For Equity Investing Similar to the AVCI Model 4
- 16. Questions? Leopold van denDaele | Sophia Danielpour | Joshua Vanderlip | Andy Yakulis November 30, 2021