I often get asked by prospective investors, other venture capitalists, or Department of Defense officials why defense technology has suddenly become salient to venture capitalists and entrepreneurs. Over the last five years, venture capitalists have invested approximately $135 billion in defense technologies compared to a paltry $40 billion in the prior five-year period. The answer is Shift, and the Defense Ventures Program that Shift built. For the last five years, the Defense Ventures Program has been embedding high-potential active-duty, reserve, and civilian members of the Department of Defense inside the top venture capital firms and defense-focused startups around the country on one- or two-month high-impact fellowships.
These fellowships, and the community that Shift built up around them, helped revitalize the defense technology movement. In addition to the major influx of private capital, founders and entrepreneurs have begun flocking to the industry, bringing with them hope for rapidly expanding both capability and capacity. A16z is one of the venture capital industry’s most prestigious firms. In January of 2022, they launched a billion-dollar American Dynamism sub-brandfocused on funding solutions to some of America’s toughest national security challenges. Before they started funding the revitalization of the defense industrial base, they were hosting Shift fellows who were contributing to a culture change. True Anomaly, a recent startup focused on space domain awareness and orbital conflict, has raised over $100 million from venture capital firms. Before True Anomaly landed mission-critical contracts with the department, they had hired a graduate of Shift’s fellowship. Apollo, a brand new company focused on getting undergraduates interested in solving national security challenges, hosted the El Segundo defense tech hackathon this past February, which captured imaginations and inspired over 400 engineers. Before the Apollo founders had plotted their course, they attended the Shift Defense Ventures Summit in Washington D.C. and were themselves inspired. Finally, even before I co-founded Marque Ventures as a pure-play national security focused venture firm or spent two years trying to save Army Venture Capital, I was one of the first investors in Shift and was hosting fellows at a sector-agnostic Alpha Bridge Ventures. As an investor in Shift, I have a financial interest in the success of the program but as an American and as a frequent host for fellows I also have a deep personal interest in it or a successor’s fortunes. While the renaissance in national security technology happening right now has many contributing factors, much of the momentum in industry can be traced to the Shift team and to Mike Slagh, Shift’s founder.
While it may seem shocking — especially to those new to the club — this story doesn’t have a happy ending for the fellowship or for Shift. Due to a combination of malignant neglect and gross incompetence inside the Department of Defense, the program was not renewed for 2024. The loss of this program is a perfect demonstration of the capriciousness of the valley of death in action and shows why even successful programs can fail to transition. Unfortunately, the fellowship’s death comes at a pivotal moment for the relationship between the department and the innovation ecosystem. It’s not hyperbole to say that the loss of this program, and what that tells founders and investors about the department’s credibility as a counterpart, is likely to destroy critical trust between the two sides.
To say that this is an “own goal” is an understatement. Just a few months ago, the Department of Defense’s own 2023 National Defense Science and Technology Strategy specifically mentioned Shift’s Defense Ventures Program as a critical component of the department’s technology strategy. In fact, the Defense Ventures Program was literally the only private effort called out by name in the official document. Now, just a few months removed from publication of that strategy, the department has killed the very program it was counting on.
Putting aside for a moment the value of the fellowship itself, the broader issue is that with this kind of callous disregard for a universally praised and innovative program the Department of Defense cannot possibly hope to win or maintain the trust of the private sector. If industry and investors can’t validate demand signals from the department, they will either try to intuit those signals and waste billions, eventually abandoning the industry entirely, or they will skip the first step and just move on to easier fishing. Repairing trust and regaining the momentum engendered by the fellowship can be accomplished with a few concrete steps. There should be a full accounting of what happened in order to inform policy changes that give industry confidence. A program like the fellowship should be enshrined in the fiscal year 2025 National Defense Authorization Act to keep key relationships alive. Finally, to minimize the devastating impacts that continuing resolutions have on nascent startups building for the Department of Defense, Congress should create a small, expiring, emergency bridge fund for non-traditional defense contractors whenever they pass a continuing resolution. Even a tiny fund can be the difference between a promising company surviving to deliver its capability and a company falling into the valley of death.
The Shift Defense Ventures Program and Fellowship
The Shift fellowship was a relatively straightforward program. High-potential active-duty, reserve, and civilian members of the Department of Defense applied on a cohort-by-cohort basis. Once selected, they were embedded within industry hosts who were also competitively selected. The hosts were startups and venture firms interested in working with the Department of Defense. The program facilitated a deep and meaningful exchange of cultures and best practices that resulted in measurable improvements both inside and outside the Department of Defense across retention, continuing education, industry engagement, and private investment. Several months ago, Shift conducted a survey of its hosts and graduated fellows. The results of that survey, which have not been published until now, were telling. On the retention front, of all graduated fellows, 92.2 percent reported either an increased desire (50 percent) or a greatly increased desire (42 percent) to continue serving. Anecdotally, one of the more innovative services was using the fellowship as a means of attracting new top talent into the service. The benefits didn’t stop at retention, the fellowship helped with education as well. At the conclusion of their program, 72 percent of the fellows reported between a threefold and a tenfold increase in technology proficiency and increased understanding of industry best practices. Fellows learned how to assess and evaluate the companies building the weapons and information systems that the Department of Defense relies on and they learned what it is like to interact with the Department of Defense as a non-traditional defense contractor.
While the fellows and the services for which they worked gained direct benefits, the hosts benefited as well, ultimately creating substantial indirect benefits for the Department of Defense. 96 percent of graduates and hosts report that industry would be disappointed or greatly disappointed if the fellowship went away. While the Defense Innovation Unit might have been founded to be the embassy to Silicon Valley (and the technology ecosystem writ large), it is the Shift fellows who are the department’s ambassadors, embedded within the ecosystem itself. Venture capital investment in defense has grown from roughly $12 billion in 2018 to roughly $30 billion in 2023. That is a net increase of $18 billion, which is roughly the size of 4.5 new Defense Advanced Research Projects Agencies. While Shift can’t claim to be responsible for all the increased funding, I don’t believe it’s an exaggeration to say that their program is one of the largest catalyzing factors in what can be described as a revolution in civil-military affairs. To the extent Silicon Valley continues to build without fellows in its midst, it will build products less aligned to warfighter needs and fewer of those products will successfully transition and be fielded. This will inevitably lead to huge cuts in private sector investment in defense relevant technologies, an outcome directly antithetical to the department’s stated goal of leveraging more private investment.
So What Went Wrong?
There are those who will read this and think that if the program were really as useful to industry and to the Department of Defense as described than it would not have failed. They will ask why industry didn’t fund the program or why it did not transition. Here is story of Shift’s failure to transition as relayed to me by company sources and folks on the Hill.The essential elements are that AFWERX made promises it couldn’t keep and pulled the rug out from under the program at the eleventh hour. This was the result of multiple personnel turnovers, an indefinite-delivery/indefinite-quantity contracting process that stretched for over a year before it was abandoned, and a promised contract extension that was pulled without enough warning for the company to implement a back-up plan. Shift had plenty of interested buyers within the Department of Defense and the intelligence community for seats in the upcoming cohort but because of the continuing resolution, those buyers could not begin a contracting process or fund a new contract. Therefore, the national security customers had to rely on the AFWERX contract already in place, which AFWERX chose not to extend. While this train wreck was slowly unfolding, Shift had lined up millions in private capital from tier-one venture capital firms and defense industry executives. That capital was prepared to meet the department halfway, but when AFWERX announced its intention to drop the contract extension, private capital took the signal and walked away. Shift has died in the valley of death, the space where a program needs to transition from a research, development, and prototyping effort into an acquisition program. It has died not through intention but through inaction.
It might be fair to ask whether Shift has done what the United States needed it to do. There are now 450 fellows who have graduated, scores of firms now investing in defense, and hundreds of new companies building in the space. Maybe we should just say “mission accomplished” and move on. However, this would be a huge mistake. While we shall certainly reap the benefits of the program over the next decade, the program itself compounds. The value it has already created is not an argument that it has outlived its usefulness — it is proof that it was and remains sorely needed.
More importantly, the United States is at a critical point in civil-military relations and the loss of Shift may push things in the wrong direction. In the last two weeks several anecdotes have made me question whether America may already be at the peak of cooperation between the innovation ecosystem and the Department of Defense. In a conversation with a prospective limited partner, someone who is considering investing in our firm behind a defense-focused thesis, the prospective partner expressed grave concerns that continuing resolutions and general congressional dysfunction were risk factors that might prevent them from investing in venture firms investing in the defense space.
Subsequently, an entrepreneur in residence (someone who is a skilled and experienced entrepreneur who is working for a venture firm while they think about their next company) told me that he is abandoning the company he had been working on for the last six months and pivoting outside of defense. Why? Because the department isn’t moving money to non-traditional defense contractors fast enough. Finally, another venture capital firm that had adopted a dual-use investment thesis last year told me that they are pausing their defense investment because their companies aren’t finding material traction.
These are just anecdotes, but they aren’t surprising, and they highlight how fragile the new détente between industry and the Department of Defense really is. The death of Shift will send shivers through this nascent bridge.
The Way Forward
A number of steps could begin to mitigate the damage. First, members of Congress should request a full report on why this program has been allowed to slip through the cracks and should demand accountability. There should be no world where the National Defense Science and Technology Strategy highlights a program or company as a lynchpin and then that same program is allowed to die a few months later. If the United States is going to be successful in harnessing its private sector, the signals it sends to industry must be backed by follow-through.
Next, as the FY25 National Defense Authorization Act begins to take shape, a program like the fellowship should be enshrined in law to ensure that its benefits are not permanently lost. The fellowship has done incredible good in the five years it has operated — that good should not be ignored, and it should be fostered through a successor program that continues the deep engagement with industry pioneered by Shift.
Finally, while the proximate cause of the fellowship’s failure to transition was essentially an acquisitions failure, there were numerous Department of Defense customers ready to step up and purchase access to the program who, due to the ongoing continuing resolution, could not begin their own contracting process in time. While Shift isn’t the first and won’t be the last company killed by the impact of a continuing resolution, Congress should act to minimize the damage caused by budget negotiations. Something as simple as an emergency fund in the tens of millions of dollars dedicated to bridging non-traditional defense companies could have averted this crisis and should be considered for all future defense continuing resolutions.
The Shift Defense Ventures Program was a crown jewel of a program. It was exactly what the United States needs more of today — asymmetric capability. For roughly two million dollars a year Shift delivered energized servicemembers, industry engagement, private capital alignment, counterintelligence in the heart of American innovation, and a whole host of less tangible benefits. That program is now gone and with it will go some of the fragile trust that the Department of Defense has worked hard to develop. There is no way to look at this situation as anything other than a profound failure of the acquisition process. I hope that we can all take this failure seriously and work diligently to address the cracks in the system so that this does not happen again. Even the most patriotic investors can only take so much friendly fire before succumbing. To end on a slightly brighter note, while the fellowship may not exist anymore, the fellows themselves are all hard at work fighting to support the United States. Some of the fellows are in industry, some are back in the Department of Defense, and several have joined me at Marque ventures. Wherever they are, I know that we have only begun to see the good that they can do.
Jake Chapman has been in and around the venture industry for almost 20 years as a lawyer, three-time founder of successful companies, and venture capitalist, including as managing director of the Army Venture Capital Corporation. He is the managing director of Marque Ventures, a venture capital firm focused on national security technology. He writes all too frequently on Twitter as @vc and somewhat less frequently on LinkedIn.
Image: Senior Master Sgt. Matthew Hecht
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