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The Department of Defense recently announced its intention to disperse a $500M+ Rapid Innovation Fund (RIF) targeting U.S. small businesses.   According to the announcement, the fund is intended to deliver solutions that satisfy a Joint Urgent Operational Need, a major combat system deficiency, or a critical national security need across a broad range of technology areas.  Each company is eligible to receive up to $3M in funding--a hefty sum for DoD small business awards--which means that 160 companies or more could be funded.

The RIF is a great opportunity for small companies to integrate their products into the defense market and obtain valuable product testing/demonstration data.

While many good small businesses will benefit from this program, AVP is not expecting a large number of new venture investment opportunities to result.  Many of the RIF topics have limited commercial applications.  Those topics that appear to have dual-use potential have small commercial markets.

Nevertheless, Arsenal Venture Partners intends to monitor RIF selections for potential VC-investment opportunities, and stay abreast of DoD technology priorities.

It is never easy to predict when a military-funded innovation can satisfy a commercial need.   And it’s especially doubtful that the Defense Advanced Research Projects Agency (DARPA) could have predicted that the 'Personalized Assistant that Learns' (PAL) program would eventually be used by millions of people around the world.   Yet that is exactly what is about to happen, when Apple, Inc releases its iPhone 4S with the Siri Personal Assistant.   Apple purchased Siri Incorporated in 2010, about two years after Siri was spun out of SRI International.  Prior to the spin-out, Siri's core technology was developed under multi-million dollar DARPA grant. 

It's clear from this video that DARPA's intended customer was not the smart phone user, but instead a military officer issuing orders in a command center.   Luckily for DARPA, and iPhone users worldwide, SRI International saw the potential to employ PAL in the embedded environment.  As a result, we iPhone users will all soon be benefiting from DARPA’s investment.

Referenced Video:

The iPhone 4S’ Talking Assistant Is a Military Veteran:
http://www.youtube.com/watch?v=BF-KNFlOocQ&feature=player_embedded

Imagine Department of Energy researchers had responded to Navy Secretary Ray Mabus’ recent twitter message on biofuels (see previous post).   What would they tweet?   The National Energy Technology Laboratory (@NETL_News) might have said “Get cost effective, locally produced, Sec 526 compliant fuel using CBTL: http://tllg.net/y66”

Coal to Liquids (CTL) is a fuel manufacturing process that converts coal into traditional diesel fuel.    The inclusion of 8% non-food biomass-derived fuel, known as Coal and Biomass to Liquids (CBTL), is expected to make the life cycle Greenhouse Gas Emissions 20% lower than oil-derived diesel fuel.   This allows the government to purchase the fuel, as per Section 526 of the Energy and Security Act of 2007.   NETL estimates this CBTL fuel can be cost effective when oil is $93 per barrel or more.    Given the high price of oil in recent years, CBTL could potentially be a solution to DoD’s energy security, sustainability and cost (i.e., surety) concerns.

Referenced Articles and Concepts:

Affordable, Low-Carbon Diesel Fuel from Domestic Coal and Biomass: http://www.netl.doe.gov/energy-analyses/pubs/CBTL%20Final%20Report.pdf

Toward an Energy Surety Future: http://prod.sandia.gov/techlib/access-control.cgi/2005/056281.pdf

Investing at the intersection of Defense and Commercial markets involves, in part, keeping tabs on policy initiatives gaining momentum in Congress.  These initiatives offer new approaches to challenges faced by the Department of Defense (DOD).  With respect to power and energy, DOD’s most recent challenges revolve around annual energy costs and strategic energy security concerns, including:

• Increased fuel costs driven by rising oil prices;
• Higher fuel costs and fuel logistics costs due to increased usage in high risk areas like Iraq and Afghanistan;
• Increased concerns over the DOD’s (and the nation’s) reliance on foreign oil;
• Increased concerns over the DOD’s reliance on electricity from the national grid, which is potentially vulnerable to cyber or terror attacks;
• Heightened awareness over the DOD’s (and the nation’s) greenhouse gas footprint’s contribution to climate change.

Senator Mark Udall and the office of Congresswoman Gabrielle Giffords are spearheading the latest batch of policy initiatives to address these challenges through legislation entitled “The Department of Defense Energy Security Act”.   The act recommends variety of studies, pilot projects, funding initiatives and contracting authorities.  Not all of the recommendations will become law, but according to Senator Udall, five elements of the bill are expected to be included in the National Defense Authorization Act of 2012.  This means there is a good chance they will pass Congress and earn the President’s signature.  These elements focus mainly upon facility energy security, greenhouse gas emissions and electricity costs. Specifically, they do the following:

• Authorizes the Energy Conservation Investment Program (ECIP) (i.e., a program that invests in energy saving projects at military facilities);
• Requires installation energy metering data to be captured and tracked;
• Sets interim renewable electricity standards (RES) goals;

• Current DOD goals for RES leap from 7.5% in 2012 to 25% by 2025.
• The provision adds interim goals of 12% by 2016, 16% by 2019 and 20% by 2022.
• Identifies energy efficient products and technologies for use in DOD facilities, including direct use solar technology;
• Helps enhance cyber security on military installations to minimize risk of disruptions from cyber attacks on electrical infrastructure.

If these policy initiatives become law, and Congress appropriates funds for execution, DOD will have the opportunity to purchase innovative new products, in part, from small technology companies with VC-backing.   Some of these companies include:

• Energy Conservation:  Redwood Systems and Encelium Technologies install advanced lighting control systems to reduce facility lighting loads up to 75%.
• Energy Monitoring and Data Capture: Energy IQ provides tools to capture building energy usage data, and use that data to plan capital expenditures, reduce inefficiencies, and report to executives.
• Renewable Energy:  Petra Solar installs distributed solar systems that mounted to utility poles and building rooftops, and can dump power directly into the grid.   The design helps the DOD install megawatts of solar power generation without the need for large parcels of land, time intensive environmental impact studies, or installation of new distribution lines.

Great companies and new initiatives do not guarantee adoption, and critics of Congressional energy initiatives that target the DOD have questioned the ability of DOD to turn lofty goals—such as the aforementioned renewable energy standards--into reality.  Retired Navy Admiral John Nathman observes: “The toughest obstacle for the Pentagon is that, despite its enormous budget and clout as the largest U.S. government agency, its influence in the energy market is negligible, making up just over 1 percent of the nation’s fuel demand.”    In order to achieve aggressive goals, some believe the United States government would have to adopt an overarching policy that, among other initiatives, creates incentives to buy less oil and electricity and invest in alternative energy sources.

Those calling for this broader National Energy Strategy—one that helps the DOD better address its energy challenges—might just be shaping the next round of Congressional initiatives. 

Referenced Articles:

The Giffords-Udall Department of Defense Energy Security Act:

http://giffords.house.gov/energy-security-act.shtml

Udall Provisions to Help Military Save Money, Lives with Renewable Energy Included in Major Defense Bill:

http://markudall.senate.gov/?p=press_release&id=1135

Beltway Insiders Cast Doubts on Defense Energy Strategy:

http://www.nationaldefensemagazine.org/blog/Lists/Posts/Post.aspx?ID=469