Silicon Valley on the Potomac Redux
As a retired IT Senior Executive from the Department of Homeland Security, I saw the beast from the inside. Lord knows I made my share of mistakes, and I will always own that. One challenge I experienced was the complete willingness by most in Fed IT to accept the status quo (spending 10X what a small business would spend for new tech capability, two years to developing new services, little accountability, etc..), just knew there had to be a better Federal IT business model. And I didn’t have to look far for a proven model.
While at DHS and after, I have had the opportunity to talk with investors of all types and have ventured out to Silicon Valley as well as built a few apps.
With a new administration, maybe time is right to think about the Federal IT model differently. Also, the Feds are proposing $9Bio in new spend for “Transformation”. Not sure how you transform when every single business process stays the same as it has been for 30 years.
What I say next is said with peace and love, borrowing a quote from Ringo Starr. Here we go…
Why not implement the Silicon Valley venture capital model and open innovation approach to solve complex federal IT challenges? There I said it. What? That is lunacy you say? Well, hear me out.
Intel organizations have a similar model, so this is something we could build on in the traditional civilian space.
I am proposing the federal government establish a venture capital type fund to target complex government issues — immigration reform, finding the next GPS or weather data set, reducing the case backlog for veterans, identifying and eliminating fraud; to name a few. The government would set aside $100 million in year one, and ultimately up to $1 billion annually once this model gets rolling.
Just like in the Valley and on that TV show, non-Schedule 70 companies would pitch their solutions to an investment group (more on that later). The best idea at the right funding profile gets the opportunity. The incubator funding would be enough to get through prototype and verify business value. Then as the capability matures, additional funding, ala Series A would be applied to those companies making significant progress by hitting performance targets and funding would cease to those not achieving targets.
Rinse, lather and repeat for Series B funding, adding funding to companies hitting targets and immediately zeroing out funding to companies that don’t achieve performance targets. This approach would ensure failing early and with low expenditure is a strong tenant of the business model.
Series B funding would provide the valuable funding to bridge the new capability to go through the planning, programming, budgeting and execution process, where the operations and maintenance contract is awarded — currently a challenge today. Those entrepreneurs would serve as the “prime” on the contract and would be free to team with other companies from Silicon Valley, other commercial entities from the Washington, Maryland and Virginia or federal industry organizations on their solution.
How would something like this be governed you may ask? Good question.
What I propose is the government would set up a board of directors, similar to a private sector model, and a management team, accountable to the board. This would consist of a mix of current and former government executives, VC fund executives, hedge fund executives and Silicon Valley entrepreneurs that have had success taking a concept through several financing rounds and ultimately through an acceleration event, such as an acquisition or initial public offering (IPO).
The appropriate mix of talent from the government and industry will ensure the government’s requirements around items such as cybersecurity would be well understood by our new friends from the Valley. And the Valley entrepreneurs would bring a different perspective into solving these complex problems. The board would be based on a five-year term appointment and pay would not be constrained to the current federal pay system, as we would want to recruit the best executive talent to oversee the fund.
The board would ultimately be responsible for all financing, reports to the Congress, Office of Management and Budget, etc. The board would appoint the management team consisting of folks from those sectors above and manage the day- to-day of the fund, until it transitions into Operations and Maintenance mode with the appropriate agency. So there would be a light M&A overheard, somewhere around 10 percent sounds about right.
Each year the previous incubator projects that are successful, i.e. hitting performance targets, would receive the next round of funding up through the acquisition for O&M, at the discretion of the board. While those are underway, other complex problems would be proposed, approved and financed in the incubation phase and so on. So during any given year, you will have investments in incubation, Series A and B funding phases and some going through a transition to an operations contract.
The program would not follow standard federal contracting policies other than good business practices overseen by the board of directors and language articulated in the board charter. To make sure all is above board, no pun intended, the government could set up an independent organization to oversee the results and ensure transparency.
Furthermore, if we wanted to have some fun, get citizens involved and further ensure transparency, we could think big and get a “Government Shark Tank” show on a network, utilize social media for contests and board and management team report outs, etc.
What about the exit strategy? Another good question.
The company that makes it to Series B funding, can sell their developed capability to the private sector, commercial space with board approval. Additionally, that company could sell their company with board approval and General Services Administration Schedule 70 companies would have rights of first refusal. Operations and maintenance, i.e. Series C, the final stage in this model, would be awarded from government/Schedule 70 contract holders only, both large and small business would have a bite at that apple. The company that built the solution through Series B funding, would then receive 10 percent or more of the operations and maintenance contract. Similar to how it works in the Valley, when an acceleration event occurs.
Who wins in this model? Citizens first and foremost.
Government agencies get some help solving these complex problems, Silicon Valley has an entrée into the federal IT marketplace. Federal contractors get access to Silicon Valley talent and share in revenues throughout the funding cycles, to name a few. At its core, this model is based on the American dream. What’s not to like?
Sure there will be detractors to this model, as it hasn’t been done before in the civilian space and it costs money. With an $80 billion IT spend in the federal space, 1 percent spent to invest in our future seems like a fair ask. And I am not suggesting this is new money, quite the contrary. This can and should be a budget neutral play so all other spend stays the same.
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Now the hard part, agreeing this model could solve some of the most complex challenges facing federal organizations today. I see no barriers to executing this model that can’t be undone with a pen and the will to change. And there is a similar model working in the Intel space today. Sure we can tweak the model around the edges, but core tenants of this entrepreneurial model should remain true to the Silicon Valley Venture fund model.
“Go big or go home.” It’s a phrase I have heard a lot since I retired from government service. I also like, if it hasn’t been proven impossible, it is still on the table. My bet, this model could have real transformational benefits for generations to come for American taxpayers.
Channeling my inner Belushi from “Animal House” with one of the great motivational speeches of all time, “Who’s with me?”