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STRATFI and TACFI Programs Catalyze Funding to Overcome Valley of Death
SpaceWERX Aims to Find, Fund and Field Space Capabilities for the Warfighter
SpaceWERX, the space innovation arm of AFWERX, recently announced the nine recipients of its first funding opportunity specifically tailored to bring space capabilities across the ‘Valley of Death,’ or the difficult transition of scaling a high-potential capability into a formal program of record. The Strategic Funding Increase (STRATFI) and Tactical Funding Increase (TACFI) Programs, first introduced by Air Force acquisition officials in 2020 and 2021, respectively, are funded by AFWERX and designed to accelerate funding for start-ups and small businesses receiving Small Business Innovation Research (SBIR) grants. Through the STRATFI/TACFI Programs, eligible businesses may have their SBIR grants matched with additional funds from the Department of Defense (DOD) and private capital partners. Now, AFWERX is leveraging the STRATFI/TACFI Program through its SpaceWERX division to facilitate acquisition of space capabilities for the warfighter.
“The Valley of Death in the context of start-up businesses refers to a critical early phase where a company has started operations but hasn’t yet generated sufficient revenue to cover its expenses. You’re operating on borrowed time. The challenges experienced during this phase can be exacerbated for companies who have pinned the core of their business model around government contracts,” said Major General (Ret) Roger Teague, Founding Partner at Elara Nova: The Space Consultancy. “Start-ups operate in business cycles of months while DOD budgets operate to a five-year plan. The Air Force and Space Force are using these acquisition tools to help, with many small company SBIR awards to advance research and development. Initiatives like STRATFI and TACFI are great, but they will only get you so far. The hard part is getting all the way across that Valley of Death to realize a revenue-generating business that produces consistent returns, enabling further future funding, investment and overall business growth.”
The Valley of Death: A Three Phase Process
The Small Business Administration’s SBIRs Program categorizes the Valley of Death through three phases: Concept Development (Phase I), Prototype Development (Phase II) and Commercialization (Phase III). The STRATFI/TACFI Programs, meanwhile, are designed to provide an influx of funding at the most vulnerable point in the process.
“In Phase I, a business may have funds from the Small Business Administration to initialize research and develop a capability through engineering and design,” said Rear Admiral (Ret) Boris Becker, partner at Elara Nova. “Then in Phase II, they may acquire materials to contract and build mock-ups that advance the technology’s readiness level. But there’s a struggle to close that gap between Phase II and Phase III to bring that technology to commercial viability.”
A primary challenge for many of these start-ups and small businesses, especially those developing capabilities with national security implications, is that the government’s lengthy budget cycles and extensive oversight can prove costly and burdensome to a start-up with minimal revenue and finite financial backing from its original funding sources.
“Even when the government is funding the technology’s Phase II development, the small business may be struggling to pay the bills as they wait for a determination on an award or contract bid,” Adm Becker said. “The government can generate cash flow as a customer, but that alone may not be enough to keep the business operating. So the aim of STRATFI/TACFI is to provide these start-ups with matching funds to scale a great idea into a fieldable design and ultimately, a viable capability.”
Matching Funds to Catalyze Growth
STRATFI award recipients receive matching funds at a ratio of 1:2. For every SBIR dollar the business receives for developing a defense-specific capability, the DOD will match with two dollars. However, if the business is developing a ‘dual-use’ capability, or one that can be leveraged for both defense and commercial applications, every SBIR dollar can be matched at a 1:1:2 ratio from DOD and private capital partners, respectively.
Meanwhile, TACFI offers a 1:1 match for every SBIR dollar from the DOD for defense-specific capabilities, and 1:1 matching dollars from private capital partners for capabilities with dual-use applications.
“A STRATFI or TACFI award recognizes that there is operational value and a mission application according to DOD requirements, so they’re targeted investments,” Gen Teague said. “The awards demonstrate the DOD’s belief in these capabilities and sends a strong signal to the investment community that their investment is expected to have a strong outcome within a particular DOD program of record, which will ensure customer demand and revenue growth over time.”
Incentives for Developing a Commercial Space Market
Additional matches from private capital partners remain a point of emphasis for these funding programs to prioritize capabilities with dual-use applications.
“Dual-use application in space is sorely needed, because businesses that never realize their growth objectives never really mature as companies,” Gen Teague said. “Some estimates project upwards of a $1.5 trillion market opportunity in space over the next 10 or 15 years. It’s important that businesses embrace their responsibility to grow their capabilities outside of DOD and present those capabilities that are going to be more dual-use and of broader reach across commercial markets.”
As such, STRATFI/TACFI funding can provide a direct path to viability for small businesses seeking an entryway into the emerging space economy, as well.
“The STRATFI/TACFI Programs send an important message to industry and private capital partners,” Gen Teague said. “The Department of Defense is following through with specific investments that they recognize will help mature technologies and capabilities within space mission areas of interest for the Department of Defense. But it’s often wise for companies to move forward with growth paths that feature dual-use applications and services, both within the government as well as in the commercial marketplace to grow their businesses.”
Incentives for Private Capital Partners
The STRATFI/TACFI awards are catching the attention of other private capital and venture capital firms, which have traditionally shown to have somewhat of a hot-and-cold relationship with the space sector.
“Only around 5 to 10 percent of VC firms focus specifically on the space sector, and those that do are primarily driven by the advancements and investment opportunities in these STRATFI/TACFI programs,” said Jim Sullivan, partner at Elara Nova. “Those acknowledgements, endorsements and validations from the DOD are vital for these smaller start-up companies, so that the venture community can see their value as an investment, as well.”
A primary challenge faced by not only these start-ups and small businesses, but also the DOD and its industry and private capital partners, is the inherent risk that comes with developing innovative technologies and capabilities.
“One of the most difficult problems that the government faces is applying a risk-based approach to funding a small business,” Adm Becker said. “The Valley of Death issue is all about who is going to take the risk and how the reward is to be found. So organizations like AFWERX and SpaceWERX are about managing that risk in a better way. One of the advantages to the SBIR process is that the small business has been through Phase I and Phase II development, and so their STRATFI/TACFI strategy allows for the transfer of risk, as well as reward.”
A Collaborative Solution to the Valley of Death
The intentional design of the STRATFI/TACFI programs not only increase the likelihood of a start-up or small business scaling from development to commercialization, but also opens communication channels across the national security apparatus to find, fund and field capabilities effectively.
“STRATFI/TACFI is a coordinated funding strategy that ensures a strong partnership, where all sectors share the risks and benefits,” Sullivan said. “Initiatives like these foster direct communication between the government, industry and private capital, by ensuring that innovation aligns with DOD requirements. It clarifies DOD needs so industry can more effectively develop solutions that enhance mission outcomes. Meanwhile, it demonstrates the government’s commitment to innovation and signals confidence to the investment community that there is a need for financial resources to invest in developing cutting-edge technologies.”
Unveiling its first space-specific STRATFI/TACFI funding opportunity comes at a critical point in time for the space enterprise, especially as the latest warfighting domain plays an increasingly prominent role in facilitating operational success across military domains.
“Space is a fundamental capability for our national defense,” Adm Becker said. “Without space capabilities, we cannot execute the missions of the Department below, on or over the sea that we do today. Therefore, we need to defend our space capabilities the same way that we defend our use of, and freedom of navigation on the sea. That is the compelling reason why whatever success we have in acquisition, operations and maintenance among the military services, we need to re-create for space.”
Emerging Tools and Resources for the Valley of Death
In recognition of this growing imperative for space capabilities, AFWERX is leveraging its funding tools to develop space capabilities, so new and emerging commercial space companies can take advantage of its STRATFI/TACFI Programs.
Further, Elara Nova’s roster of former military, industry and financial experts can support start-ups and small businesses apply these funding tools to overcome Valley of Death challenges.
“Space startups and small businesses should see these programs as vital opportunities to gain the financial support and enlist partners on strategic guidance to carve its pathway to a successful deployment within the DOD,” Sullivan said. “STRATFI/TACFI can enhance credibility throughout the development process, provide the necessary resources to scale, and facilitate entry into discrete markets that are in line with DOD mission objectives. Elara Nova is well-positioned to guide these companies through the ‘Valley of Death, by offering governments and the commercial marketplace opportunities to grow space capabilities through funding programs like this.”
For Gen Teague, what makes Elara Nova so well-suited for these efforts is that many Elara Nova partners have personally and professionally confronted the complex challenges brought by the Valley of Death.
“Elara Nova bridges the conversations across industry, government and investment circles to better enable and position the national security space enterprise for success,” Gen Teague said. “We have a number of consultants and advisors within our team who have served at very senior levels across the industry, government and the financial community and understand these challenges first-hand. They understand what it takes for a small business to grow and secure government contracts that contribute to broader space capabilities and architectures at-large.”
Elara Nova is a global consultancy and professional services firm focused on helping businesses and government agencies maximize the strategic advantages of the space domain. Learn more at https://elaranova.com/.