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Sea Service Recruits Venture Capitalists

December 2003
By Maryann Lawlor
E-mail About the Author

 

During this fiscal year, the Rapid Technology Transition Program, managed by the U.S. Navy's Commercial Technology Transition Office (CTTO), is set to identify high-risk/high-payoff technologies such as titanium nitride coating for helicopter turbine engine blades used in harsh environments. 

Creative deal-making techniques help military and industry.

The dot-com bubble may have burst, but the U.S. Navy is still in the market for entrepreneurs with promising innovations. It has revamped an office within the Office of Naval Research to seek out solutions then move them rapidly to the fleet. As the Navy sees it, this is a win-win proposition. Warfighters get cutting-edge tools that meet their requirements, and companies have the opportunity to get a piece of a $28 billion pie—the service’s acquisition budget.

Current transformation efforts in the Navy call for a new way of doing business. Although the old request-for-proposal paradigm can be effective in some cases, in the information technology realm it can result in out-of-date answers to today’s challenges. Often, the forces of supply and demand need a little help to push research and development way out ahead.

Enter the Office of Naval Research (ONR) Commercial Technology Transition Office (CTTO). As with the Navy in general, the CTTO, located in Arlington, Virginia, has undergone a transformation of its own during the past year that moves it from being a deal broker to being a deal stoker.

Susan L. Bales, the then commercial technology transition officer, ONR, joined the office a little more than a year ago and says she has seen the CTTO’s mission change radically during 2003. Although the organization has been involved in building deals since its inception four years ago, today it is facilitating the business process by demonstrating the Navy’s requirements to venture capitalists who can invest in companies that have the technologies to meet these needs.

The CTTO’s venture initiatives consist of two primary endeavors. The “spin-out” element is the concept of licensing naval intellectual property (IP) into the commercial sector. The CTTO is leading the Navy research community in exploring how to commercialize naval IP to venture capitalists. “Spin-in” brings commercial technologies into naval programs, which allows the service to take advantage of emerging capabilities as it builds systems for today and the future.

As part of this latter work, the CTTO conducts technical due diligence to confirm that the product the Navy is considering is the best choice and lives up to the promises made by the company. It also analyzes the business model of the firm offering the technology to ensure that the company’s plan is sustainable and that the organization is likely to still be in business to provide product support. In addition, the CTTO constructs deals much like the commercial sector does and forms deep, trusted relationships with technology providers, which include companies as well as government laboratories, Bales explains.

During the past year, the CTTO has been focusing on the entrepreneurial side of the commercial sector. The Central Intelligence Agency (CIA) introduced a similar program in 1999 when it chartered In-Q-Tel as a private, independent, nonprofit corporation that makes traditional equity investments in companies (SIGNAL, April 2001, page 64). Unlike In-Q-Tel, the CTTO does not invest funds. Instead, it demonstrates to venture capitalists that the Navy and the U.S. Marine Corps are desirable customers and that investing in start-up companies with technologies that interest the services is a sound idea. In addition, the Navy offers entrepreneurs access to its technical research resources, which benefits development of new technologies.

The CTTO helps assure venture capitalists that investing in a company is a good move by gathering and sharing a list of specific requirements identified by the service’s program executive officers. This demonstrates that a market exists for the solution a company is proposing. The CTTO asked the program executive officers for their top three requirements, which resulted in a list of 59 capabilities that vary in specificity and are posted on the organization’s Web portal.

Last year’s Congress asked the CTTO to examine how the Navy identifies and brings in leading-edge and disruptive technologies—in other words, transformation. The CTTO found that entrepreneurs often had technologies in portfolios that the Navy did not know it needed but that would support transformation initiatives.

“So the value of working with the entrepreneurial community is that we’re gaining great insight into what will be here in five years. If it takes us 15 years to build a ship, what should we be planning for? Five years ago, the venture capitalist community told us wireless will be here in 2002 and 2003. The acquisition managers did not plan for wireless for ships. They didn’t have a mechanism. What the venture capitalist community is telling us now is that not only is wireless here, but secure wireless will also be here in two years. One of our functions is to carry that message to the ships and tell them that this opportunity is going to be here. We don’t have to develop it, but we need to know. We need the room to design concept development to spin it in two years, so that the next aircraft carrier has the benefit of wireless on the ship when it is launched,” Bales explains.

This approach gives the Navy a hedge on the future, she says, adding that it will allow transformation to begin to spiral in ways that are limited only by the imagination.

During the four years the CTTO has been in existence, it has constructed between 20 and 25 deals that have been executed. The value proposition of these business processes was in the neighborhood of $650 million, money that was saved through improved warfighting techniques or cost avoidance. At times, these technologies also increased safety. “The acquisition managers had the foresight, when the deal was presented to them, to sign up for them and help fund this. That has been our traditional role,” Bales offers.

For example, two years ago the Navy’s contract with Boeing for the F/A18-E/F Super Hornet stipulated copper wiring for the communications systems. The program executive officer approached the CTTO and requested that it look into installing fiber optics instead. As a result of work between the CTTO and Boeing, a fiber optic backbone was installed in the F/A18-E/F from the beginning, which resulted in savings that could be reinvested in the warfighting suite. In addition, the decision to go to fiber optics affects the design of future aircraft.

The organization’s new mission is to bring venture capitalists into the mix by demonstrating products that may not yet be available. Since January, the CTTO has been working with venture capitalists, and last August the CTTO opened its Web portal. The initial goal of the project was to determine what the organization could do to bring new technologies to the Navy without requesting funding from Congress or setting up a private nonprofit company such as In-Q-Tel. As a result, the CTTO has six deals with venture-capital-backed companies that are either in the demonstration phase or in the pipeline.

To build trusted relationships, Bales says her group selected some of the top-tier venture capitalist organizations in the country and took them to Navy and Marine Corps functions. This initiative includes a program called VC@Sea, where venture capitalists are invited aboard ships so they can observe first-hand how technologies are being used by the services and what requirements exist.

This hands-on approach is especially valuable because it demonstrates that infusing technology into the fleet environment is different from installing a system in a hospital, for example. At the same time, personnel on a ship can see how technologies will work. “It’s negotiation and collaboration at sea, in motion,” Bales says. The program executive office works out the details of the deals; however, the CTTO handles the proof-of-principle work and at-sea testing. The first venture-capitalist-backed deal resulted from the initial VC@Sea trip and involves voice over Internet protocol.

Another goal of the CTTO’s efforts is to get technologies into the hands of the Navy quickly. Bales points out that the technology patents that make the global positioning system (GPS) possible were actually issued in the 1960s; however, GPS, which was viewed only as an asset to military, did not take off until a viable commercial market was identified. If another course had been taken and someone had had the foresight to recognize the technology’s potential, or if venture capitalists had been made aware of it, perhaps GPS would have been introduced sooner, Bales says.

“We’re asking to look at their portfolio; they should be asking to look at ours. We want them to because their imaginations will go ways ours do not. We want to speed up that process of getting to a commercial product that could impact and lead to a military product as well. If we can cut the time in half or down by a third, that would give our warfighters a tremendous edge, and it might also cut the cost because there would be a very large commercial market,” she notes.

Expanding into the commercial world is important, Bales says, because start-up companies are strong in areas such as information technology, radio frequency technologies, encryption, wireless and the technologies that will follow wireless communications. All of these are important to transforming the Navy, including network-centric warfare, FORCEnet and Sea Power 21, she offers.

However, Bales stresses that the work with venture capitalists and the CTTO in general is still experimental. She refers to the organization as a very agile startup that is searching for and finding new ways to accomplish tasks and establishing its credibility while acting as a gatekeeper.

In response to an inquiry from the House Appropriations Committee about how it will address disruptive, leading-edge and venture-capital-backed technologies, the CTTO is forming the Naval Research Advisory Committee, a body similar to the Defense Science Board. The committee will comprise a standing panel of venture capitalist advisers who this month will begin working with the CTTO to identify technology trends of the future.

In addition, Congress recently approved the Rapid Technology Transition Program. This program will allow the CTTO to administer the deal-making process in a more structured format through its portal. Initial funding for this program is $10 million, which will be used to prototype and demonstrate solutions, a process that aims at attracting more acquisition money from the program executive officers who would then complete a technology project.

To ensure that technologies will address future needs, the CTTO is beginning to work with other organizations such as the U.S. Joint Forces Command and ManTech International. The organization also is looking at groups such as the Small Business Innovation Research program to see if they offer solutions that would be applicable to the work it is doing. 

Additional information on the Commercial Technology Transition Office is available on the World Wide Web at http://www.onr.navy.mil/ctto.