Matt Reed, technology operations team member Anduril Industries puts together a Sentry Tower in support of Service Level Training Exercise (SLTE) 2-20 of at Marine Corps Air Ground Combat Center, Twentynine Palms, Calif., Jan. 24, 2020. (U.S. Marine Corps photo by Lance Cpl. Colton Brownlee)

Story updated Feb. 25, 2021 at 1:55 pm ET to include a clarification that Steckman was referring to Federal Acquisition Regulations-based contracts when talking about the difficulties startups face when trying to contract with the Defense Department, according to Anduril.

WASHINGTON: When it comes to landing defense contracts, non-traditional defense firms, including startups, have so little chance against the towering traditional primes that there is “no fair competition,” according to blunt remarks from a senior officer at one startup.

“I would love someone to do a study to figure out how many open competitions are wired for a winner ahead of time before that solicitation ever hits the light of day,” Matthew Steckman, chief revenue officer at Anduril Industries, said during a panel discussion at the WEST 2022 conference in San Diego last week. “It’s got to be 85%, right? … There is no fair competition.”

After the publication of this report, an Anduril spokesperson clarified that Steckman was referring to companies using traditional Federal Acquisition Regulations, or FAR, -based contracts as a procurement mechanism rather than Other Transaction Authorities or Agreements. The panel discussion focused on these avenues designed to offer more flexibility and fewer traditional restrictions.

During the discussion Steckman described how he’d do things if he were the Pentagon, including forcing competitions to include the fielding of technology and the “actual demonstration of something real in the world,” as opposed to theoretical tech or designs. Another issue critical to startups: funding.

“I would pour a tremendous amount of money into the winner,” he said. “I wouldn’t sort of skirt around and do innovation theater and write million dollar checks here or there. I would say, ‘You won, and therefore here’s several hundred million dollars to keep this moving.’ And yes, you’re going to get the answer wrong one in four, but those three other decisions you made just changed the department in a way that you couldn’t have otherwise done.”

For a startup that was formed just five years ago and despite Steckman’s dim view of the acquisition system, Anduril has made major strides in the defense contracting world. Just last month, the company won a nearly $1 billion contract with Special Operations Command to serve as a systems integrator partner on its counter-drone systems efforts. 

Last summer, Anduril won a five-year $99 million production other transaction agreement with the Defense Innovation Unit for the counter-drone tech. The company also acquired mini-drone maker Area-1 and bought Copious Imaging last year. 

Still, Steckman said the “unfortunate reality” is that startups pursuing the military as a market is actually a terrible idea. 

“You cannot start a new business right now and reach any kind of scale working with the Department of Defense. Period,” he said. “We should all let that sink in for a little bit.”

Those new businesses need to have “an insane constellation of variables” in their favor in order to make the partnership work — a mix of lots of money, very patient investors, expertise from within the community and a deep knowledge of congressional affairs. 

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Non-traditional companies are also plagued by the so-called “valley of death”  where promising technologies fail to shift from the lab into operations. On the DoD side, the Pentagon’s chief technology officer Heidi Shyu in September said she was working on pursuing new legislation to bridge that gap by proposing multiple tranches of Small Business Innovation Research (SBIR) funding. 

The Pentagon did not respond to a request for comment on Steckman’s contention that competitions are “wired.” (After Steckman’s remarks, Navy Commander Jon Haase, principal assistant program manager for a Naval Sea Systems Command program office, joked that at least his office was in the 15% of fair competitors.)

But a DoD report released last week acknowledged the many barriers non-traditional defense firms face, and how the government hopes to lower them.

The report, “State of Competition within the Defense Industrial Base,” states a top priority for DoD is improving award timelines for the Phase I SBIR and Small Business Technology Transfer programs, which can bring new vendors into the national security and technology industrial base and enable current awardees to more rapidly mature technologies.

The report states a recent study of SBIR/Small Business Technology Transfer programs found DoD achieved a 22-to-1 return on investment in small business research and development over the last 23 years and generated $347 billion in total economic output nationwide. 

“Programs like SBIR and STTR attract small businesses to develop new or improved technologies,” according to the report. “Such programs stimulate technological innovation in the DIB and encourage new entrants and disruptors to enter markets. A priority for DoD is working to strengthen its partnerships with small businesses and make it easier for them to access the SBIR/STTR programs, which receive nearly $2 billion annually in DoD investment.”

But the report further paints a grim picture for the future of small businesses contracting with DoD: Over the past decade, small businesses in the DIB have decreased by over 40% and if the trend continues, DoD could lose an additional 15,000 suppliers over the next decade. 

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The report states the Pentagon has supported an interagency effort within the White House’s Office of Management and Budget and Small Business Administration to implement “meaningful reforms” to category management that will increase the ability of certified small businesses, such as small disadvantaged businesses, women-owned small businesses and service-disabled veteran-owned small businesses to compete for federal government contracts. 

“This interagency effort will also create more opportunities annually for small businesses to onboard onto contract vehicles and compete for contract awards,” according to the report. “Additionally, DoD is working within the interagency to develop a definition of new entrants, to allow it to benchmark against and track the inclusion of new entrants in the federal marketplace.

“DoD will also continue to implement management practices that are focused on raising the visibility of small business capabilities across the DoD and holding senior executives accountable for small business objectives in their annual performance planning,” the report continues. “These efforts are aimed at reversing the decline in the small business supplier base and increasing competition, specifically through small business set-asides.”