The House Small Business Committee and the House Science, Space and Technology Committee announced an agreement to reauthorize the Small Business Innovative Research (SBIR) Program. The reauthorization legislation was submitted as an amendment to the National Defense Authorization Act, passed by both the House and the Senate in mid-December. Under the agreement, majority owned and controlled venture capital-backed enterprises can compete and win government grants for up to 25% of the research topics released by the National Institute of Health (NIH), the Department of Energy (DOE), and the National Science Foundation (NSF). The Department of Defense (DOD) and other participating agencies will be able to award as many as 15% of the SBIR topics to privately backed firms. To put this in perspective, in 2010, there were nearly 5000 SBIR Phase 1 awards valued at nearly $600M.
The Federal Government has not always been so kind to venture capital-financed firms, at least when offering SBIR R&D grant access. Indeed, the U.S. Small Business Administration had consistently ruled since 2001 that VC-backed enterprises could not receive SBIR funding. The reasons are outlined in a 2009 Wall Street Journal blog post.
The Venture Capital community has actively been advocating this legislative change for many years through the National Venture Capital Association. Will venture-backed companies max out their annual topic allocation given the current funding environment, or will narrowly defined SBIR research topics, many of which are tailored to support specific procurement programs, keep them away? Companies will need to carefully evaluate how much the SBIR grant will assist them in getting to a viable commercial product that can appeal to a broad market.
Regardless of the final number, more active engagement of the VC community with the defense laboratories can be mutually beneficial in the long-term, potentially bringing higher return on taxpayer-funded R&D, in addition to improvements to the operational capabilities of Soldiers, Sailors, Airmen and Marines.
In November, DoD released information about additional funding opportunities for U.S. small businesses, this time through the Small Business Innovative Research (SBIR) program office. The office announced over 400 new research topics, and is expected to award up to $100K to U.S. small business to investigate each topic.
As in the past, the most promising projects will be awarded up to $1 million in Phase 2 funding. But it doesn't end there. Companies can compete for yet another tranche of up to $1 million to assist with the commercialization of the research, whereby the company's product can be integrated onto an existing military system, or be acquired by the government as a standalone system.
The DOD continues to improve the SBIR program, in part by offering small businesses a variety of benefits that are intended to help them achieve commercialization and attract private investment. Awardees are allowed to maintain ownership of any intellectual property or technical data developed under the program. Topic sponsors often help awardees identify a military and commercial market, like those drafted by the U.S. Air Force (see the "Phase III Dual Use Commercialization" section under each Air Force SBIR topic). When the product’s market potential is unclear, the SBIR office can match small companies with experts who assist in drafting business plans, and facilitating face-to-face meetings with potential government and private-sector customers.
By providing critical 'seed stage' non-equity capital, the DoD SBIR program could one day serve as a pipeline of early-stage venture capital deals, and help the DoD reassert their dominance as a primary source of American technical innovation.
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.
The sad passing of Steve Jobs deserves a moment to reflect upon how his products shaped the Department of Defense. At first blush, there isn't much to say. Military laptops and desktops, almost without exception, employ Microsoft Windows operating systems, and hardware from Dell, Toshiba and other well-known brands. Military-issued handheld devices - Smart Phones, GPS transceivers, laser target designators, laser range finders, etc. - often employ BlackBerry systems, or custom designed hardware and software. The artful design choices that evoke so much emotion when looking at Apple devices has always been a low priority for defense product engineering shops.
Yet the dearth of Apple or Apple-inspired military products overlooks the grassroots, almost disruptive impact Apple has had on the military over the past 10 years. This influence began on the battlefields of Iraq and Afghanistan, where Soldiers seeking an escape played music on their iPods and connected to family through their video camera-enabled Macbooks. It gained momentum with the release of the iPhone and iPod Touch and the opening of the AppStore, innovations that quickly found a combat role, and shocked a military industrial complex that was fielding cumbersome GPS handhelds and radios that lacked graphical user interfaces. And Apple's influence will likely continue to grow and shape military products as the iPad proliferates, Apple business enterprise offerings gain acceptance, and the iCloud reaches it's full potential.
With these game-changing innovations, the level of Apple's influence on the military may continue grow. However, Jobs' death may very well slow the pace of change the consumer electronics industry - led by Apple - has on the military industrial complex. And for that reason, in addition to countless others, he will be sorely missed.
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.
The iPhone 4S’ Talking Assistant Is a Military Veteran:
DOD must purchase alternative fuels with baseline lifecycle greenhouse gas emissions that are lower than or equal to conventional ones. That’s according to a controversial law entitled the Energy and Security Act of 2007 (EISA 2007). But the devil is in the details, and in 2008, the DOD’s Legal Office expressed concern over the law’s vagaries:
"Section 526 [of the 2007 law] applies to “an alternative or synthetic fuel, including a fuel produced from nonconventional petroleum sources.”…The law’s terms are not defined and some may argue that it covers a very broad range of fuels commonly purchased by DOD…The provision opens the Department up to court or administrative challenges to every fuel purchase it makes, with the inherent potential for an adverse decision that would cover fuels the military already relies on as well as potential reliable sources of fuel that would be developed in the future."
It turns out their fears were justified: in 2010, the Sierra Club took the Defense Logistics Agency to court, arguing purchases of fuel derived from Canadian Tar Sands broke the law. The court ultimately disagreed, finding that tar sands qualified as conventional fuels, and thus not in violation of EISA 2007.
Do other lawsuits lurk? Potentially. EISA 2007 is open to broad interpretation, with environmental groups tending to take a more expansive view of the law’s intent. Like the Sierra Club, environmental groups may seek to challenge other ‘alternative or synthetic’ fuels purchased by DOD that are perceived to have a higher Greenhouse Gas content than conventional sources, like those produced with coal, natural gas, or other fossil fuel sources.
Letter from the General Counsel of the Department of Defense to the Ranking Member of the Senate Committee on Environment & Public Works: http://solveclimatenews.com/sites/default/files/assets/2011-07/DOD%20Response%20re%20526.pdf
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
Attention entrepreneurs: the Navy wants YOU! Navy Secretary Ray Mabus (i.e., @SECNAV) tweeted that the military is getting serious about biofuels. So serious that they want the ability to purchase over 8,000,000 barrels of fuel per year by 2020. To back up their ambition, they’re teaming with the U.S. Departments of Agriculture and Energy to invest $510 million in the industry over the next 5 years. Solutions must be cost competitive with traditional petroleum-based fuels, and cannot use feedstock that infringe on food supplies.
Navy Pursuing Biofuel Development: http://www.stripes.com/news/navy-pursuing-biofuel-development-1.153127
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:
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:
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:
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.
The Giffords-Udall Department of Defense Energy Security Act:
Udall Provisions to Help Military Save Money, Lives with Renewable Energy Included in Major Defense Bill:
Beltway Insiders Cast Doubts on Defense Energy Strategy:
Johnson Controls released their 5th Annual Energy Efficiency Indicator survey this month. The survey asks global executives and building owners about their energy efficiency priorities, practices, investment plans and financial evaluation criteria.
In a first, respondents cited ‘increased energy security’ as motivation for pursuing energy efficiency measures. More specifically, respondents from China and India rated energy security as the #2 driver of efficiency measures, while those in Europe listed it as #3. All respondents listed ‘energy cost savings’ as a primary driver.
The Defense industry could emerge as a leader in addressing energy security concerns. Lockheed Martin and Honeywell have both been approved by the Department of Energy as qualified Energy Service Companies (ESCOs). In that capacity, they plan and execute Energy Savings Performance Contracts (ESPCs), whereby energy conservation measures (e.g., LED lighting, improved insulation, ground sourced heating and cooling) are installed and paid for over time with the energy savings.
In addition to deploying energy efficient technologies, defense contractors aim to implement microgrids. A microgrid enables organizations to prioritize the criticality of energy consuming devices. When power is disrupted, the microgrid automatically turns off non-critical devices and maintains power to the highest priority systems. On-site renewable energy systems and stand-by generators are installed to provide reliable power to critical systems for an extended duration.
A huge opportunity to deploy microgrids already exists at U.S. military installations. As market research firm SBI Energy explains: “The majority of U.S. military bases are powered by public electrical grids, which in some instances lead to as many as 300 power outages per year. These interruptions weaken military readiness and security. In the face of a terrorist attack or natural disasters, reliance on conventional energy supplies may be inefficient and may even be detrimental to military functions.”
SBI estimates the global microgrid industry reached $4B in 2010, and the military microgrid segment is expected to top $1.6B in 2020, a 375% increase from today’s $330M market.
2011 Energy Efficiency Indicator: Global Results --
High-Tech Weapon Makers Set Sights on ‘Smart Microgrid’ Market: