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Disciplined Entrepreneurship

 

 

 
 
   
   
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As the primary attorney to Army Applications Lab (AAL), Army Futures Command’s tech-focused outreach organization, I began a curated professional development program to understand how a company might build a business model around the Army as its target market. After reading my first book, I was not very optimistic.

Like many of you, I don’t have a background in business. In school, I turned to an English degree because the idea of reading novels in coffee shops for “homework” appealed to my artistic side. But, when I was assigned as the legal advisor to AAL,1 I found myself in the midst of the Austin startup scene: a new environment with its own etiquette, lingo, body of law, and key leaders. It was not unlike what some of us have experienced as rule of law attorneys in Iraq or Afghanistan—only with gourmet food trucks, live music, tacos, and some pretty nice swimming holes.2 That, and no one has tried to kill me yet—that I’m aware of.

The AAL was formed in late 2018 with the express purpose of expanding the Army’s access to non-traditional companies: startups, entrepreneurs, and other technology-focused companies.3 It went through several iterations trying to implement lessons-learned from other Department of Defense (DoD) acceleration-focused organizations, including Defense Innovation Unit (DIU) and AFWERX.4 When I arrived in July 2019, AAL had settled in on identifying its core value proposition to the Army and its non-traditional audience: to accelerate the discovery, evaluation, and transition of technology in support of the Army’s modernization priorities.5

I see AAL’s mission as a push and a pull. The AAL tries to push Army problems to the solver community in plain language to allow true innovation, and to use contracting and funding structures that make sense from a commercial industry perspective. The goal is to pull in technical solutions to the Army and transition the capability into the hands of a Soldier. While not limited to startups, ultimately, AAL’s mission is to allow America’s most innovative, agile, and creative companies to participate in the Army’s modernization efforts—regardless of their size or history of working with the Government.6

When I finally learned what AAL’s mission was and that I was going to be working with them on a day-to-day basis, I thought back to my wasted days drinking espresso and reading poetry in Chicagoland coffee shops. “It’s time to learn something useful,” I mused; so, I checked out a book on startups.

Disciplined Entrepreneurship

The book I chose was Disciplined Entrepreneurship by Bill Aulet.7 The book was recommended by one of AAL’s core leads, Porter Orr, a former Navy pilot who received an MBA from Massachusetts Institute of Technology.8 Coming from previous innovation-focused jobs,9 he was an incredible source of knowledge on the culture, incentives, decision-making process, and lingo of startups. As added street cred, he lived in an Airstream10 with his wife, three kids, and two dogs.

During our many conversations wearing flannel shirts and drinking coffee, Porter impressed upon me the idea that, for the Army to truly allow America’s small businesses to participate in its modernization efforts, it had to be able to demonstrate the potential for long-term value to the company’s investors. If we expect them to turn to the Army as their target market, even bootstrapped companies with next-level technology have to be able to build a sensible business model that will lead to recurring revenue.

I began reading Disciplined Entrepreneurship to understand how a startup might build a business model around the Army. The book lays out a twenty-four-step guide for entrepreneurs who are seeking to commercialize their idea, invention, or intellectual property,11 and walks through the market research, product development, and basic financial projections required to ensure that the business has the proper product-market fit and will be profitable after launch.12 The concepts and calculations in the book provide a common language to discuss a venture13 and would help answer the primary questions a venture capitalist would ask before deciding to invest.14

However, beginning with step one—market segmentation15—I struggled to reverse engineer how a company might build its target market around the Army as a customer. Specifically, I questioned whether a company has access to enough information to conduct the necessary calculations to forecast its expected profits and to understand the end user. Also, I questioned whether the Army’s contracting and capability development process were so complex that a company could not adequately map a path to recurring revenue.

This article attempts to compare the business development concepts highlighted in Disciplined Entrepreneurship with Army processes to show some of the challenges that a startup might encounter trying to develop technology for or pivot its business to the Army. While attracting entrepreneurs to the Army’s modernization efforts is only one part of AAL’s efforts, the intent of this article is to convey some of my thought process watching Army culture collide with the Austin technology ecosystem.

1. Does the Startup Have Sufficient Access to the End User to Develop a Relevant Solution?

The first steps in Disciplined Entrepreneurship are focused around interacting with and understanding the needs, desires, and values of the end user.16 From market segmentation, to building an end-user profile,17 to quantifying their value proposition,18 an entrepreneur must first understand the needs of the customer.19 But even more than their needs, before they achieve product-market fit and start generating traction, a company should know the priorities of their customer. Do they value usability over cost, for example, or is it some other performance metric such as size, durability, or power consumption?20

For companies to develop products that make sense and add value to Soldiers—the end user under Mr. Aulet’s framework—they have to know what Soldiers actually do and how the Army operates. However, there may be misconceptions about what a Soldier’s typical tasks are or how a headquarters element receives information and makes decisions. If a company doesn’t know how the Army shoots, moves, and communicates—as well as resupplies, maintains, gathers intelligence, treats its wounded, and feeds its Soldiers—they either don’t know if they have a solution to an Army problem or they can’t develop a new solution. For the Army to attract innovation, it must provide an abundance of access to observe Army operations and interact with Soldiers.

2. Can a Startup Calculate the Total Addressable Market for Their Solution in the Army Market?

Step four in Mr. Aulet’s process is the requirement to calculate the Total Addressable Market (TAM) for an entrepreneur’s beachhead market.21 The TAM is a calculation that describes the amount of annual revenue a business would make if they achieved one hundred percent market share for a particular market.22 To calculate a TAM, a company needs to know the number of potential end users in their target market and estimate how much revenue each end user is potentially worth:23

TAM = (Revenue per customer per year) x (Number of potential customers in target market)24

The calculation is a baseline estimate that is used to demonstrate to investors, partners, and other team members the potential value in a particular market.25 While the TAM is only an estimate—and a running estimate at that—it’s the gateway data point for major business decisions. 26 If the estimated value of the TAM is low, a company would likely decide against developing a product line or pivoting to that market.27 More than flashing dollar signs on a pitch-deck, savvy business partners require a company to show their work and explain how they arrived at their TAM.28

For the Army to attract discerning business partners, it needs to provide enough data for companies to conduct their own market analysis and business calculations. Underestimating the TAM could cause a company with disruptive technology to pass on an opportunity to work with the Army because they couldn’t see enough value.29 Overestimating could be disastrous for a company who expends time and resources on a market that can’t support their investment.30 If there aren’t enough end users in the Army for a niche technology, accurately calculating the TAM may be a lifeline for a small business who decides early to change course and focus on a different market.

3. Can a Startup Understand the Army’s Decision-Making Unit?

Assuming that a company has enough information to sketch out a detailed end-user profile and can identify the potential for value in the market, the next challenge for a startup is to understand the internal business processes of the Army as a customer.

The Army has what Mr. Aulet would describe as a “complex” decision-making unit—meaning there is a difference between the person who will use the product and the person who will buy it.31 In the Army, there are major organizational differences between the two: the end users are Soldiers and Civilians under the Chief of Staff of the Army,32 and the purchasing agents are the Program Executive Offices under the Assistant Secretary of the Army for Acquisition, Logistics, and Technology (ASA(ALT)).33 There are a lot of other organizations and personalities within and outside the Army that would be considered, within Mr. Aulet’s framework, influencers, veto-holders, and champions—not the least of which is Congress.

If companies better understand who the true purchasing agents are for the Army, instead of scheduling office calls with general officers of operational units (i.e., end users), they could better focus their efforts on connecting with the right decision makers. Understanding which Army organization will be the buying agent and what it values in purchasing decisions, often expressed in evaluation criteria, is arguably more important for a company than knowing what the end user wants.

It’s also important for startups to understand the role of other influencers in the Army’s process of deciding what and when to purchase: Who is involved in the requirements generation process or the approval process to field a new capability? Who controls the funding that will be used? What contracting office will be used for the solicitation? Determining the decision-making unit of the customer to understand these key players and their priorities is a critical step before moving to that all-important step of charting a path to acquire a paying customer.

4. Can a Startup Map a Pathway to Recurring Revenue?

Mr. Aulet begins his book with the statement, “The single necessary and sufficient condition for a business is a paying customer. The day someone pays you money for your product or service, you have a business, and not a day before.”34 While the first steps of his book are focused on ensuring a startup has a thorough understanding of the customer, Mr. Aulet then fleshes out how a company will sell its product, build its business model, and make basic projections on profitability.35

In applying these steps, it seems that there are major challenges for a company to map out how it can get from product development to making its first sale to the Army. Specifically, the Force Development process requires significant internal-government coordination and multiple approvals before the Army can purchase and field new capabilities to Soldiers.36

As a brief aside, it should be noted that, under Mr. Aulet’s framework, research and development (R&D) awards and expenses aren’t considered part of a company’s long-term financial projections.37 Unless a company’s business model is conducting R&D for the Army, the revenue streams included in the Lifetime Value of an acquired customer should come from a sale, such as a production award, purchase agreement, or some other licensing or maintenance arrangement.38 This distinction is important because there are a lot of flashy R&D opportunities in the DoD right now—such as prize, pitch, or challenge competitions, as well as Small Business Innovation Research awards and prototyping projects using Other Transaction Agreements (OTA). However, the difference between an R&D award on a promising technology and that company generating recurring revenue is not so subtly referred to as the Valley of Death.39 While an R&D funding opportunity may provide a longer runway through non-dilutive capital, transitioning technology into the Army requires more than production language in an OTA.

Purchasing and issuing new technology to an Army unit may require going through the Force Development Process—a process that the company has no control over and requires inter-agency coordination and, potentially, Congressional involvement.40 A disruptive technology would need to be approved through the capability development process and its effect would have to be assessed with respect to the way the Army operates, as well as the way it is structured and manned.41 Once those hurdles are cleared, a company may still have to compete for and win the production award;42 and, depending on the company’s intellectual property strategy, it might find more competition than expected if it conveyed Government purpose rights during the R&D effort.

There may be other avenues for a company to get their product into the hands of a Soldier, however. For instance, a validated operational needs statement is a way to short-circuit the capability development process and field nonstandard capabilities to units for ongoing or imminent missions,43 and it may allow for quick, sole-source awards.44 Joining with a prime-contractor to license or integrate technology may be a lucrative partnership for a startup that doesn’t have the cash-flow to weather the technology maturation process or production capabilities.45 There may be agency-wide or interagency multiple-award contracts they could be awarded, either directly or as a subcontractor, that would provide a company with an avenue into the Army or greater-DoD market.46 The special operations community, which has its own procurement authority,47 may also be a good sandbox for companies to receive user feedback and iterate on its solution before scaling into the big Army.

The bottom line is that finding a path to sell technology to the Army is not as easy as getting buy-in from an influential two-star general or winning a competitive R&D award. Because of the complexities of the Army decision-making unit, the Army might be preventing a company from being able to map out that process in a way that allows them to identify and mitigate risk.

Conclusion

My purpose in reading Disciplined Entrepreneurship was an attempt to understand the thought process of working with the Army from the perspective of a startup. In reading the book, I saw that there were challenges that extended beyond Government contracting and Army requirements documents. How the Army makes decisions on what to field and how its funds are partitioned and controlled impose significant obstacles for a company trying to understand and break into the Army market.

With the creation of the Cross-Functional Teams and AAL, Army Futures Command is addressing many of these difficulties—such as consolidating the requirements development process and increasing the frequency and quality of interactions between industry and Army end users, also called Soldier touch-points. But the Army is a big organization inside of another big organization. Also, Army Futures Command only has control over the Army’s funding designated for lower-level technology maturation,48 and has to rely on an external Army organization for its contracting support.49

I’m certainly not the first person to recognize that there are challenges doing business with the Army; but—to me—the book underscored that, just as the Army uses a deliberate planning process,50 businesses make decisions based on detailed analysis to maximize long-term value capture. If the Army wants high-quality solvers to focus their business and product development on the Army, it must ensure that companies have the ability to make informed decisions. Just as Porter told me from the beginning, for Army modernization to attract innovative solvers, companies must be able to demonstrate to their investors and business partners that there is the potential for long-term value and growth in the Army market. TAL

 


MAJ Castlen is a business and general law attorney at U.S. Army Futures Command in Austin, Texas.



Notes

1. While I may be tasked to support the Army Applications Lab, it’s more accurate to say that I am the legal point man to a team of highly intelligent and supportive contract, fiscal, and ethics attorneys.

2. This assertion is based on the author’s recent professional experiences as an attorney at U.S. Army Futures Command, from 16 June 2019 to present [hereinafter Professional Experiences].

3. Jen Judson, Army Futures Command Is Leading a Cultural Shift, Much to the Delight of Industry, Def. News (16 Oct. 2019), https://www.defensenews.com/digital-show-dailies/ausa/2019/10/16/army-futures-command-is-leading-a-cultural-shift-much-to-the-delight-of-industry.

4. Professional Experiences, supra note 2.

5. Army Applications Lab, Army Futures Command, https://armyfuturescommand.com/aal (last visited Aug. 17, 2020).

6. Army Applications Lab, Overview, LinkedIn, https://www.linkedin.com/company/army-applications-laboratory/about (last visited Aug. 17, 2020).

7. Bill Aulet, Disciplined Entrepreneurship: 24 Steps to a Successful Startup (2013).

8. Porter Orr, LinkedIn, https://www.linkedin.com/in/porterorr01 (last visited Aug. 17, 2020).

9. Id.

10. An Airstream is a brand of travel trailers.

11. Aulet, supra note 7, at 8–9.

12. Id. at 20.

13. Id. at xiv.

14. See, e.g., Laurence K. Hayward, Twenty Questions You Will Be Asked By Venture Capitalists (If You Get That Far) – Abbreviated Version, VentureLab, Inc. (2009), http://www.theventurelab.com/assets/resources_twentyquestions.pdf.

15. Aulet, supra note 7, at 25-40. Market segmentation is the process of identifying the group of potential customers that, “share many characteristics and who would all have similar reasons to buy a particular product.” Id. at 26.

16. Id. at 13.

17. Id. at 51-56.

18. Id. at 105-11.

19. Id. at 13, 51.

20. See id. at 72-75.

21. Id. at 57.

22. Id. at 59.

23. Id.

24. Id. at 59.

25. Id. at 60.

26. Id. at 59-61.

27. Id.

28. Id. at 60–61.

29. See id. at 60.

30. See id.

31. See id. at 27, 51, 139–47.

32. See generally 10 U.S.C. § 705 (2018).

33. See 10 U.S.C. § 7016(b)(5)(A) (2018); see also Program Executive Offices, Assistant Secretary of the Army (Acquisition, Logistics & Technology), https://www.asaalt.army.mil/About-Us/Program-Executive-Offices (last visited Aug. 7, 2020).

34. Aulet, supra note 7, at 25.

35. Id. at 13.

36. U.S. Dep’t of Army, Reg. 71-32, Force Development and Documentation Consolidated Processes (20 Mar. 2019) [hereinafter AR 71-32].

37. Aulet, supra note 7, at 186.

38. See generally id. at 181–93. The Lifetime Value (LTV) calculation is the Net Present Value of profits over the first five-years of a startup’s existence and includes the expected revenue per product/service balanced against the company’s gross margins, production costs, costs of capital, etc. Id. at 186.

39. See, e.g., Cross the Valley of Death with Confidence, MITRE, https://aida.mitre.org/blog/2019/03/24/cross-the-valley-of-death-with-confidence (last visited Aug. 7, 2020).

40. See generally AR 71-32, supra note 36.

41. Id.

42. 10 U.S.C. § 2304 (2018).

43. See U.S. Dep’t of Army, Reg. 71-9, Warfighting Capability Determination ch. 6 (15 Aug. 2019).

44. See generally 10 U.S.C. § 1034(c)(2) (2018) (allowing for other than competitive procedures when there is “an unusual and compelling urgency”).

45. See, e.g., Theresa Hitchens, Northrop Teaming With Startups To Build Autonomy Chops, Breaking Defense (July 27, 2020, 12:24 PM), https://breakingdefense.com/2020/07/northrop-teaming-with-startups-to-push-air-forces-skyborg.

46. See, e.g., NASA SEWP V, https://www.sewp.nasa.gov (last visited Aug. 7, 2020); Computer Hardware, Enterprise Software and Solutions (CHESS), Program Executive Office Enterprise Information Systems, https://www.eis.army.mil/program/chess (last visited Aug. 7, 2020); GSA Schedules, U.S. General Services Administration, https://www.gsa.gov/buying-selling/purchasing-programs/gsa-schedules (last visited Aug. 7, 2020).

47. Contracting, Special Operations Forces Acquisition Technology & Logistics, https://www.socom.mil/SOF-ATL/Pages/contracting.aspx (last visited Aug. 7, 2020).

48. U.S. Dep’t of Army, Dir. 2019-35, Funding Flow for Future Force Modernization Enterprise para. 4 (20 Nov. 2019). The Secretary of the Army split the Army’s Research Development Testing and Evaluation (RDT&E) budget between ASA(ALT) and AFC, with AFC being responsible for Budget Activities 6.1 through 6.3, which is Basic Research, Applied Research, and Advanced Technology Development; and ASA(ALT) responsible for Budget Activities 6.4 through 6.7, which is Advanced Component Development and Prototypes through Operational System Development. Id.

49. U.S. Gov’t Accountability Office, GAO-19-511, Army Modernization 19 (July 2019).

50. See, e.g., U.S. Dep’t of Army, Doctrine Pub. 5-0, Army Leadership ch. 3 (31 July 2019).