November 25, 2013

National Security Startups

By Phillip Carter, and Ben FitzGerald

My colleague, Phil, and I were talking on Friday afternoon about a variety of things (discursive discourse is both a perk and occupational hazard at CNAS) including his recent blog post on accounting systems at government-oriented businesses.

Running a startup with a predominantly U.S. government client base, something Phil and I have in common, is a rewarding and challenging undertaking. In many ways it is the same as running any other business but in others it’s like working in a parallel universe.

There aren’t too many venues to discuss the vagaries of running mission focused startups in the national security context (they always seem to turn into networking organizations). We’re going to use this blog to unpack some of these issues over a series of short posts where we’ll ask each other questions, share some lessons and generally look under the hood of national security startups.

I thought I’d start out by considering some of the differences between national security startups and regular businesses:

When I first started the business that I ran, I had only been living stateside for about 3 months. It was an exciting time and I was full of naïve enthusiasm at the opportunity to compete in the free and open American marketplace.

It took me a little while, at the cost of much righteous indignation, to realize that’s not how things work if DoD is your major client. Adam Smith’s invisible hand is, in the DoD context, frequently visible and often wears a rubber glove. DCAA audits, GSA price schedules and cost plus fixed fee contracts were unfathomable to me in what I had assumed would be a free and open marketplace. It was un-American! If my calculus had been solely to maximize profits I would have gone to some other industry.

It’s critical for a DoD focused startup to align back end systems, pricing (including government imposed costs) and contract types with business mission and client needs. Otherwise, you are in for a world of hurt. There is a sweet spot somewhere between irresponsible hope (we’ll do good work on important issues and DCAA will be nice to us) and cynical manipulation of the system (we’ll get a bunch of combat injured minorities together, win whatever IDIQ awards we can and cash in on pass-through fees to subcontractors). Failure to find and maintain that balance introduces a structural risk that can lead to the loss of business sustainability, your moral compass or both.