For startups that plan to sell to both commercial customers and the military, the first big question is which market to enter first.
The answer? It depends, but you have to decide early, experts said at the inaugural Dual-Use Technology Summit at Carnegie Mellon University on Friday. The event brought together about 100 founders, investors and stakeholders in the dual-use space — or tech that’s suitable for both civilian and military purposes — to discuss the changing landscape.
Most panelists agreed that it’s ideal for a company to develop commercial tech that can then translate to defense. That’s because “the military does not like to be a first mover,” said Paul Benfield, an Army vet and vice president of strategy at software company Forterra.
“If you’re a two-person startup in a garage, how much of your resources in terms of time and money are you going to put towards chasing two rabbits and catching none?” Benfield said.
However, the calculus can look different for every startup. Founders first have to decide whether a dual-use strategy makes sense for them at all.
The security requirements needed to translate commercial tech to defense can be so stringent that startups end up having to build an entirely separate product, according to Sloane Tilley, CEO of the sensor startup Aegilys.
Her recommendation is to do the more complicated thing first: defense.
“I think that word [dual-use] gets thrown around a lot, and fundamentally, as a startup, you’re already trying to do something so hard by going from zero to one,” Tilley said. “Don’t try to be dual-use. Build for defense, and the market will be there.”
Going the defense route can come with its downsides, too. Selling to the military first can pigeonhole a startup into one niche, making it harder to pivot to the commercial side, according to panelist Rich Fruehauf, chief venture officer and general counsel for Carnegie Foundry.
Both paths have success stories, though. Palantir, which was present at the summit, initially focused on counterterrorism and intelligence work for government clients. Today, it’s expanded to commercial markets, becoming one of the most valuable companies in the US.
Pittsburgh-based startup Astrobotic did it the other way. Since adapting its commercial space tech for the military, it’s landed millions in national defense deals.
Either route, panelists at the summit offered advice on navigating government contracts, avoiding regulatory issues and funding opportunities dual-use startups should consider.
Understand how government works — or partner with someone who does
When a startup wins a government contract, it’s very different from a commercial deal, according to Fruehauf.
When working with the government, the end-user, financial decision-makers and officers who forge the contract are all separate people startups need to win over. Plus, there are limits to reworking the terms of a deal.
“There’s very little negotiation,” Fruehauf said. Generally, there are mandatory clauses and it’s more focused on regulatory compliance than contracts in the commercial world.
However, less rule-intensive government contracts are trending.
For years, the federal government has been working to adopt more flexible contracting options. Traditional government contracts are heavily governed by the Federal Acquisition Regulation, but alternative approaches can reduce some administrative hurdles and make it easier for agencies to work with nontraditional contractors, including startups.
One common mistake, though, is assuming contracting officers know everything about these flexible contract options, according to Benfield from Forterra. A contracting officer might not know everything about Commercial Solutions Openings or all the pathways to Other Transaction agreements.
So, startups “need to have experts that you can rely on,” Benfield said, “whether that’s from your investor community or board advisors, that can help you navigate that.”
Vet your partners carefully
Startups need to watch their supply chain and cap table closely for red flags, according to panelists, going all the way back to every dollar and vendor’s origins.
A startup might think it’s buying from a safe, US-based supplier, only to discover that — right as a big defense deal is on the line — a critical subcomponent is ultimately coming from a factory overseas that the government won’t work with, Benfield said.
The same thing can happen on the financing side. Institutional investors may have complex structures that obscure foreign or sensitive capital, he added.
“As a startup founder, it’s really hard to go to your investors and say, ‘Give me a list of your [limited partners],’” Tilley said. “They tend to not like that very much, but that’s what the [Department of War] is asking you to do.”
Find the lesser-known paths to funding opportunities
Startups have traditionally turned to the government’s Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR) programs to fund tech development, but these grants are currently in limbo as they await reauthorization from Congress.
In the meantime, there are alternative funding routes panelists pointed to.
There’s a growing number of ecosystem marketplaces like TradeWinds, where startups can post a short video, deck or white paper and let government customers come to them. There are also set-aside contracts, which are government contracts specifically for small businesses.
Another option is that early-stage startups can become subcontractors for bigger defense companies, but be cautious, founder and CEO of BridgePoint Capital Solutions, Tyler Brock, said. Primes, a common term for large companies that hold direct and often high-value government contracts, can squeeze small businesses on costs and terms.
In one case, Brock said he saw a prime contractor hire a small subcontractor to build a specialized part for a military system. Then, it turned around and charged the startup thousands of dollars for the ultra‑precise testing of that part that only the prime had the equipment to perform.
“I have seen firsthand,” Brock said, “subcontractors get driven to bankruptcy.”
