North Carolina in the Modernized Defense Industrial Ecosystem
by Maj. Harrison Green, USA
North Carolina’s world-class research and development centers, high-tech businesses, and increased federal interest in commercial technology promise to create a more robust defense innovation ecosystem. The state has all the components to meet many DoD innovation needs: a thriving dual-use innovation ecosystem; deep partnerships between DoD, industry, and academic institutions; a significant military presence; and an expansive commitment to national defense. This combination of factors uniquely postures North Carolina to facilitate DoD’s strategic priorities outlined in the recent National Defense Industrial Strategy (NDIS).
The state and DoD have more work to do. As DoD’s recent Small Business Strategy states, one of the key objectives at the federal level is to “Strengthen the [DoD]’s engagement and support of small businesses.” The state government could continue promoting and facilitating development of dual-use technologies and critical business skills for innovators. The state also could cultivate relationships with potential private investors. Tax and financial incentives are important and must be coupled with direct outreach to coach and help companies create viable commercial business plans.
DoD also can do more to support local innovation, expanding the efforts begun by the Office of Small Business Programs and APEX Accelerators. The acquisition system can continue reducing barriers to entry, in part by developing faster acquisition processes; promoting more interactions between Warfighters, academia, and business; and expediting contract awards. Enhanced federal and state partnerships ultimately will improve DoD’s ability to provide technologies and innovative tools to the Warfighter and better prepare for an uncertain future.
The acquisition system can continue reducing barriers to entry, in part by developing faster acquisition processes; promoting more interactions between Warfighters, academia, and business; and expediting contract awards.
Why North Carolina?
North Carolina is the “Frontline of the Future.” With a thriving dual-use ecosystem, the state already is “home to hundreds of aerospace and automotive companies …” and realized a 96 percent increase in patents awarded over the last decade, including in areas of interest to DoD. The state’s IT sector has grown more than twice as fast as the national average and boasts the country’s largest research park (Research Triangle Park [RTP]). Google, Apple, and Amazon already have recognized North Carolina’s innovation potential and are investing in facilities and increased hiring for engineers and other high-tech positions.
North Carolina enjoys a long history of collaboration and partnerships between its seven major military installations and its world-class colleges and major research universities. The state is home to innovators at U.S. Army Forces Command, U.S. Army Special Operations Command, the XVIII Airborne Corps, II Marine Expeditionary Force, and the Army Research Office—locations where military users can test, improve, and procure the systems and tools to spur innovation, design thinking, and best business practices. Furthermore, veterans and Service retirees often stay local, bringing specialized skills and enriching workforce quality, directly enabling the NDIS strategic objective of facilitating workforce readiness.
Private sector partners also enhance innovation and collaboration. For example, the First Flight Venture Center is a technology incubator in RTP that provides training to advance innovation efforts. Similarly, the North Carolina Biotechnology Center, a nationally recognized model and state-funded research entity (working in part on areas of DoD interest, such as biodefense) is an engaged team member. Federal agencies are also increasing their presence. Recently, the Air Force’s AFWERX and the National Security Innovation Network (NSIN) established outposts to capitalize on North Carolina’s innovation ecosystem.
The state government formally boosts defense innovation with direct funding and matching awards for Small Business Innovation Research (SBIR). In Fiscal Year 2022, North Carolina awarded 67 matching grants totaling more than $4.6 million in additional public investment for small businesses. State-funded organizations, especially the states’ modestly funded Defense Technology Transition Office (NC DEFTECH), which is the innovation and collaboration arm of the North Carolina Military Business Center, serves as a defense innovation hub. As such, it brings together DoD innovation elements like AFWERX and NSIN, dual-use innovation industries, academics and Federally Funded Research and Development Centers, and the vast network of potential government end-users in the state.
NC DEFTECH’s free services help small businesses navigate DoD funding opportunities. Its unique network also facilitates connections between innovators and other businesses and various agencies that can unlock federal resources. Through NC DEF-TECH, companies in 2022 won more than $20 million in various forms of nondilutive funding, which allows entrepreneurs to retain full ownership of their startup companies. In only three years, NC DEFTECH participants grew 63 percent to more than 800 business and academic members and 80 government participants. NC DEFTECH is a uniquely bright spot and worth further study as a state and regional model.
Still, to realize North Carolina’s full economic and national security research and development potential, the state’s public and private sector leaders should prioritize the following actions:
- Improving commercialization opportunities.
- Increasing state investment, including construction of a physical and virtually connected defense innovation hub based on NC DEFTECH’s success.
- Attracting more private investment.
NCInnovation, a nonprofit dedicated to boosting the state’s entire innovation ecosystem, noted in a recent study that “North Carolina has fallen behind other innovation leaders in its ability to commercialize its world-class research base. … Ideas and technologies are being developed …. but few are capitalizing on opportunities to commercialize.”
Some small businesses across the state have successfully pursued private-public partnerships. For example, at this year’s North Carolina Medical, Biomedical, Biodefense (MBB) Summit, the CEO of a small business (410 Medical) stated that a partnership with DoD provided “nondilutive funding and free consulting” that enabled his business to grow.
According to Jackson Barnett at FedScoop, “The problem for many startups that want to work in the defense space is that money is relatively easy to find in small, short bursts; but major contracts take years to land.” That is why the Army is trying to jump-start its own venture capital organization.
“The problem for many startups that want to work in the defense space is that money is relatively easy to find in small, short bursts; but major contracts take years to land.” That is why the Army is trying to jump-start its own venture capital organization.
Unfortunately, government grants and nondilutive funding cannot be the only means for creating growth because many companies still succumb to the “valley of death” even after achieving phase one or phase two SBIRs for early stage funding. Without an immediate, substantial contract or other source of funding, commercialization efforts following phase II SBIRs are essentially not feasible, and thus, possible acquisitions cannot come to fruition. Both SBIR funding and venture capital were used by 410 Medical to develop and then scale its business. Innovations using SBIR funding often achieve early development but find they still lack sufficient funds to achieve the scale required to function. Here private investment or more responsive public funds are critical to provide fuel for the state’s defense innovation engine.
Many prospective entrepreneurs in the state’s ecosystem are innovators, engineers, or have some other technical background. These typically are not people with business expertise; consequently, they may struggle to develop cohesive business plans that attract essential private investment, and this creates a talent mismatch. The state’s academic institutions offer resources that can help bridge this gap. These institutions include Duke University’s Translation and Commercialization program and the University of North Carolina’s Office of Technology Commercialization. These resources are useful but not by themselves a systematic way to alleviate talent mismatch or move from technology development to operation of a viable business.
Source: Photo by Heather Wilburn
Photo cropped to show detail.
For example, one North Carolina-based company is developing a shock absorption system that could dramatically improve ballistic protection among other uses. Sara Hall, founder of Talus Ridge, raised more than $2.8 million from friends, family members, other small businesses, and local farmers. She has no previous business experience and leans on state partnerships and personal relationships. NC DEFTECH connected her with potential DoD customers. Hall won nondilutive funding, built a viable product, and recently entered a defense subcontractor agreement with Lockheed Martin. Though promising, the commercial application for her dual-use technology has yet to be fully realized.
For startups that have not yet developed commercial revenue streams, DoD funding may provide a foundation for prototyping and initial business development needed to scale and attract more investment. Therefore, efforts to increase partnerships with business-oriented organizations and seasoned entrepreneurs could be integrated into North Carolina’s defense innovation network. Business experts might gain additional avenues to develop companies; likewise, technologists may increase their capacity to develop and grow a business. And, together, they can scale technology and production to improve outcomes.
State government can increase investment, too. A North Carolina Board of Science, Technology, and Innovation study noted that the state was not keeping pace with other regions despite the various players focused on helping grow its innovation ecosystem. This was said to be in part “due to lack of strategic leadership, operational coordination, effective corporate communications, and adequate and sustained funding.”
In addition to its existing mechanisms, North Carolina might consider expanding its matched funding programs for small businesses that win certain DoD awards, including SBIRs, Small Business Technology Transfers, and Other Transaction Authorities (OTAs). DoD recently awarded $161 million to various universities across the country to support defense-related research, including multiple universities in North Carolina. The state should seek to encourage further research in North Carolina, matching these federal awards with state-level incentives. Furthermore, the state should invest in a statewide physical and virtual defense innovation network to help develop synergy across the state’s institutions, both private and public.
Three viable options might include enough funding for NC DEFTECH to increase its small staff, establish a secure IT network and information sharing platform, and build on current state services. Expanded staffing could include intellectual property and patent filing experts as well as business advisors who understand how to transition from DoD to public-sector use.
The state could encourage university research elements and business schools to further augment the defense innovation network. For example, Duke University’s Fuqua School of Business and the University of North Carolina’s Kenan-Flagler Business School could support development of key partnerships via consulting practicum programs and increased engagement with entrepreneurial centers. Similarly, North Carolina universities might expand established educational partnerships with local military bases to offer active-duty military personnel more courses on innovation, design thinking, and best business practices.
Disconnects and Hindrances
The disconnect between investors and potential investment opportunities is reflected in poor private investor attendance (only two of 1,200 attendees) at four major defense trade shows and summits in North Carolina and the apparently widespread belief that the state’s investment establishment is very insular. For early stage private investment, the state could prioritize developing relationships with domestic and out-of-state seed investors through advertisements and state tax incentives or matching funds for investments in North Carolina-based entities. As an added incentive, the state could offer free or low-cost opportunities to attend defense technology summits and “pitch sessions” at local incubators and accelerators. (Early stage investment generally is defined as the capital raised near the beginning of a company’s life cycle that can facilitate technology development or prototyping, typically before larger investment firms or venture capital enter the picture.)
As the macroeconomy continues signaling instability in the face of inflation and concerns over monetary policy, later-stage venture capitalists have begun to depart their “comfort zone” and embrace the defense industry, in part because they see a potential longstanding revenue stream and defense is considered recession-proof.
Another hindrance to obtaining outside seed investment is the reluctance of innovators to sell equity in their firms. Asked why he had not pursued private investment, John Harer, founder of Geometric Data Analytics, Inc., of Durham, N.C., reportedly replied that “[he] did not want to give up control of his company,” a sentiment shared by many small businesses in the region. Longtime local business journalist Dan Barkin also noted a “lack of sophistication in how to access [venture capital] in the state.”
Another reason seed investors hesitate to embrace defense is that the market often is quite small. DoD recognizes that, in most cases, the department cannot be the sole client for companies. Therefore, when possible, DoD acquisition organizations focus on advancements driven by commercial technology that can serve a dual-use purpose—a technology that can fulfill a DoD or other federal government need but also offer a commercial application. This enables the business to grow and become self-sustaining. According to one consultant, “ … when entering the DoD market, you’re in it for the long haul, and that can be tough, especially for startups.”
“Long hauls” and historically high DoD investment risk traditionally have deterred seed investors. An increased need for dual-use technologies may reduce risk. The DoD market can provide a lucrative component within a comprehensive business plan, and seed investors need not stay for the long haul; they must simply get companies to the next funding rounds where venture capital might be attracted.
Mike Prorock, chief technology officer and founder of Mesur.io, of Yanceyville, North Carolina, a firm that provides supply chain intelligence, indicated that his company balances government and commercial uses. He estimated that about 20 percent of his business is with the U.S. Departments of Agriculture and Homeland Security, including Customs and Border Protection, and that this provided a major hedge for his firm during the COVID-19 pandemic.
He asserted that Mesur.io’s involvement with the government created a positive cycle for business development. When the government requested that Mesur.io develop a capability, the company usually was able to transition that capability for private sector use. Furthermore, he said that working with the government increased the business’s credibility and helped boost commercial sales.
Mesur.io relied on NC DEFTECH to help enter the government market, connect with specific government partners, and eventually win an initial contract with the Department of Homeland Security’s Silicon Valley Innovation Program.
As the macroeconomy continues signaling instability in the face of inflation and concerns over monetary policy, later-stage venture capitalists have begun to depart their “comfort zone” and embrace the defense industry, in part because they see a potential longstanding revenue stream and defense is considered recession-proof. Early-stage investors, who typically exit when venture capital comes into play, also would be smart to investigate opportunities in North Carolina.
Further Reducing Barriers to Entry
Based on multiple interviews with North Carolina entities and businesses, several recommendations emerged for DoD to reduce barriers to entry for nontraditional businesses. For example, the Defense Alliance of North Carolina (DANC), a local defense industry group, found in a recent study of the state’s nondefense businesses that barriers include “poor awareness of opportunities specific to their capabilities; difficulties in navigating defense proposal, contracting, and accounting processes; expense and time required to meet DoD quality, cybersecurity, and other requirements; and perceived less lucrative business opportunities in defense than in their current commercial markets.”
Brett McCoy, CEO of Huck Cycles, said that he made sales to various local military units but prefers dealing with the private sector rather than with DoD’s “red tape.” He “found it easier to work with the DoD through representatives and existing contract holders instead of going directly to them.”
DoD might consider expanded use of OTA to expedite funding for prototypes that the Services can evaluate for procurement decisions supporting smaller innovative businesses entering the DoD system.
DoD also could encourage increased engagement between local base commanders and other military personnel with private sector and academic innovators who may be able to satisfy defense needs. With seven bases and a large military cadre, North Carolina has a solid competitive advantage for improving partnerships, increasing business opportunities, and offering better end-user outcomes.
North Carolina has a strong defense innovation engine with expansive technology development opportunities in academia and businesses. Business development and public sector acquisition are facilitated by the forward movement of various accelerators, state agencies, academic institutions, and nonprofit organizations. Small business grants and other state funding already exist. The state provides a strong environment for DoD to successfully implement objectives of the NDIS. To realize its full potential, the state could increase its investment, with DoD continuing to grow its presence in North Carolina.
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GREEN is a U.S. Army UH-60M Black Hawk pilot and an MBA candidate at Duke University’s Fuqua School of Business. He recently completed an internship with NC DEFTECH and is grateful to his mentors, Kim Kotlar and Dennis Lewis, for their input, guidance, and support in the preparation of this article.
The author can be contacted at [email protected] or [email protected].
The views expressed in this article are those of the author alone and not the Department of Defense. Reproduction or reposting of articles from Defense Acquisition magazine should credit the authors and the magazine.
