Podcast
The Elara Edge: Expert Insights on Space Security
Episode 16: STRATFI and TACFI Programs Catalyze Funding to Overcome Valley of Death
Host: Scott King
Subject Matter Experts: Major General (Retired) Roger Teague; Founding Partner at Elara Nova: The Space Consultancy (RT)
Rear Admiral (Retired) Boris Becker; Partner at Elara Nova (BB)
Jim Sullivan; Partner at Elara Nova (JS)
00:02 – 01:54
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 funding opportunity comes through two programs: the Strategic Funding Increase or (STRATFI) and the Tactical Funding Increase or (TACFI). STRATFI and TACFI are designed to accelerate funding for start-ups and small businesses already receiving Small Business Innovation Research or (SBIR) grants – issued by the Small Business Administration.
Through the STRATFI/TACFI Programs, eligible businesses can have their SBIR grants matched with additional funds from the Department of Defense (DOD) and private capital partners – an influx of cash that can help these businesses develop these capabilities and overcome the Valley of Death.
Now, AFWERX is leveraging these funding programs through its SpaceWERX division to accelerate the acquisition of space capabilities for the warfighter.
Welcome to the Elara Edge: Expert Insights on Space Security. I’m your host, Scott King. Today’s episode will serve as a round-table style discussion on how Valley of Death challenges affect start-ups and small businesses in the emerging space industry, and how the new STRATFI/TACFI funding opportunity aims to catalyze funding resources to overcome these challenges and meet DOD needs.
First, I’d like to introduce retired Major General Roger Teague, founding partner at Elara Nova: The Space Consultancy. General Teague served in the the United States Air Force for 31 years, before transitioning to a career as an industry executive at The Boeing Company, Terran Orbital and the PredaSAR Coproration – where he secured over $25 million in Series Seed funding as he stood up PredSAR as its first employee.
General Teague, welcome to the show!
01:55 – 01:57
RT: Great. Good morning. And it’s great to be with you today, Scott.
01:58 – 02:23
We’re glad to have you here, Sir.
Also joining us today is Elara Nova partner, retired Rear Admiral Boris Becker.
Admiral Becker retired as the chief executive of the Naval Information Warfare Systems Command with the United States Navy, where he led an 11,000-person global organization responsible for the design, delivery, and logistics of the Navy’s digital, cyber, and space systems enterprise.
Admiral Becker, thanks for taking the time to join us today.
02:24 – 02:26
(BB): Hi, Scott. Thanks for having me.
02:27 – 02:48
We’re happy to have you here, Sir.
And rounding out our discussion today will be perspectives from Elara Nova partner, Jim Sullivan.
With an extensive career as a C-Suite Executive and Board Director, Jim specializes in accelerating growth and profitability strategies for private equity firms, venture capital portfolios, public companies, and early-stage businesses.
Jim, thanks for joining us today.
02:49 – 02:53
(JS): My pleasure, Scott. And, look forward to participating in this august group here.
02:54 – 03:11
We appreciate you being here.
So our topic today is the Valley of Death, which is a common phrase in military circles, but it can still mean a variety of things.
So first and foremost, I’d like to define that term for this conversation.
General Teague, can you describe what we mean by the Valley of Death?
03:12 – 04:46
(RT): You bet Scott, as you mentioned, it typically is associated with military programs and technologies. But I think even more broadly, in the financial and the business community, it really refers to those companies that are small and start-up in nature. And they may have a great technology or capability or business idea, and ultimately it’s about taking that great idea and transitioning it to a revenue-generating business.
And that in and of itself is no easy feat. Particularly, a lot of small companies start out with some level of funding to initiate series seed typical funding that allows the company to get started and take the initial steps to field capability. But the real hard part is, then getting across that Valley to where ultimately there is a revenue-generating business, that is producing consistent returns that allows for further future funding and investment and overall business growth.
Some don’t face this, but many do. And it’s particularly noticed in the defense business in that many times those companies have a single customer, and that’s the Department of Defense and so it’s important for those businesses to be able to consider, ‘Hey, how do I do this? How do I represent my product, my technology, my capability? How do I ultimately get the Department of Defense interested in that? And then how do I scale and how do I grow and ultimately field and deliver capability at the speed of need?’
04:47 – 05:17
Thank you, Sir.
So the Valley of Death encompasses a broad scope of complex challenges for the DOD and its industry partners.
Now, the Small Business Administration, which oversees a program known as “SBIRs” – or Small Business Innovation Research – describes the Valley of Death in three phases:
Concept Development, Protoype Development, and Commercialization.
What does this three phase process indicate about how the government views Valley of Death challenges?
Admiral Becker, let’s start with you.
05:18 – 07:38
(BB): Well, I think from the government side of the equation, ultimately, it really is the same problem that the small businesses are having, because if the small business isn’t there to support the mission that the government is trying to acquire, then that’s a real problem. And so I think, it goes right back to what General Teague is talking about with the problems small businesses face in going from great idea to meet a general mission need that they understand, and then trying to take that into development and then from development, where they’ve got some initial investment, which might be friends and family.
It might be Series A, etc., to a point where they’re on contract and if we use the Small Business Innovative Research terminology of phase three, i.e. a Commercialization contract. Where they’ve got real money and transitioning to a program of record-scale funding.
The problem is that, from the government’s perspective it often struggles to find a way to close that gap, between having flow of dollars that in some cases initialize with the Small Business Administration and Small Business Innovative Research dollars, where they can fund that great idea, where they can develop that thought, that experiment, if you will, through PowerPoint engineering and into some initial design, and even maybe materials selection.
Through into a phase two where they’re where they can actually have a contract to start to build stuff, mock-ups, advancing the technology readiness level.
But then even there, that’s where the government can struggle sometimes getting from that phase two idea to a phase three where there’s program of record funding, to move it along. And in that middle, while waiting for a determination of that phase two award or waiting for determination on that phase three award, that small business is still struggling to pay the bills.
All those people with the smarts and the engineering and the capability. They’re drawing revenue into salary. And if there is no revenue, then how do you create that salary? So it becomes a cash flow issue, and if the government’s problem can often be that they can’t generate the cash flow from the customer side to flow into the business side to keep the business actually operating.
That’s kind of a long answer to your short question, but it really comes back to how to get the providers of that innovation, able to sustain the ramp from great idea, to great engineering, to mock-up, to fieldable design.
07:39 – 08:04
JS: And I would add to that, to what both Roger and Boris stated that for a smaller, younger company that may not have been through a process with the US government, depending upon DOD. The bureaucratic hurdles, the lengthy procurement processes that we discussed, it is not for the faint of heart. And so those who are not prepared to weather the storm will fall to the side of the road.
08:05 – 09:09
(BB): And I couldn’t agree more with what Jim is saying. To tie it back to some of the struggles that the government folks do face, it would be too easy just to blame it on the budgeting process. Everyone can talk about that. Throw rocks at it.
It’s a one year budget cycle instead of a two year budget cycle. Unlimited oversight. Multiple layers in the chain of command. All those problems exist.
But one of the most difficult problems that the government faces in taking that small business and being able to apply a risk-based decision approach to funding is that we often manage at a very defined requirement level, down to a project, instead of being able to manage resources at a broader level.
So imagine, if you will, you’ve got a business GM responsible for P&L for a sector. But they are unable to move budget around in that sector and every decision of moving $1,000 has got to go to the board, and be board-approved.
Imagine a company trying to function like that. Well, that’s a parallel you might be able to draw with government acquisition. And, Roger, I’d be interested to hear your take on that, that idea.
09:10 – 11:10
(RT): I agree with you, Boris. All of those factors really contribute and make the Valley of Death, so to speak, such a difficult challenge to overcome. The companies are very tightly restricted with regard to their spending ability. They have moments and windows of opportunity and pursuits as part of whether it’s Small Business Innovative Research projects or anything that would require some level of investment.
Those are very important investments that those small companies are making. And oftentimes they get washed up in and amongst a number of competing firms or SBIR award and I’ve been vocal about the need for the government to be much more rapid and much more deliberate about picking winners and losers, to be able to help some of these companies that, ‘Hey, if they don’t have something that’s going to be of interest, then they can pivot.’
That allows the smaller companies to go pursue potential commercial approaches or solutions or markets, for their particular technology.
Where they get crosswise is they put all their eggs in the DOD basket and that may not pay off in time. And or it takes too long to ultimately be selected for a potential SBIR award and they’ve spent a lot of the precious resources that they have, on some of those SBIR pursuits and ultimately are never selected. And I liken it to an individual or someone sitting at a park throwing breadcrumbs to pigeons. For those first couple of pigeons that are there.
It works out great. But it just doesn’t take long before the entire park is covered in pigeons and the amount of breadcrumbs are the same. And so those one or two pigeons that might have had a real good idea to be able to bring to the forefront, they just completely get taken over by everyone else who might have something to say.
And a lot of times those technologies and capabilities get lost and so it really is a very, very difficult challenge, especially if you’re pursuing solely DOD outcomes.
11:11 – 12:22
(JS): And I would add the inverse side of it as well, from a private sector and financial, industry perspective: over the decades, there’s been such an exponential growth and reliance on technology in general.
And there’s an ever-increasing need to break down and have less of a silo mentality and really have that unified strategic and operational and financial mindset between government, industry and the financial community.
Boris and Roger could speak much more, specifically about it. But the U.S government and the DOD really prioritize national security and mission success and readiness and stability and low-risk, all within the budgeting construct and the extensive oversight.
In contrast, you’ve got commercial and venture-backed companies are really emphasizing growth, innovation and ultimately profitability, with flexible budgeting and a much higher risk tolerance than the government is structured to do and these differences really shape distinct strategic and operational approaches.
There has historically been a fundamental difference, but there are a number of programs that are looking to break those down.
12:23 – 12:58
Now, the DOD is the largest federal agency that coordinates with SBIRs grants and its companion program, Small Business Technology Transfer or STTR.
In the case of the STRATFI/TACFI programs, businesses can have their SBIR grants matched with DOD dollars, private capital dollars, or both, based on whether the capability they’re developing has a defense-only application or dual-use application – meaning it can be used for defense purposes and in the commercial marketplace.
Why is it important to structure the STRATFI/TACFI programs this way? Particularly in how it aims to capitalize on the SBIR process?
12:59 – 16:03
(BB): It’s important to distinguish between, as Roger pointed out, a strictly DOD or very DOD-focused small business trying to bring an innovative idea into the marketplace as opposed to, a company that’s got a great idea that has identified a Total Addressable Market or TAM in the commercial world. And is looking to also have some DoD contracts. They’re kind of two different approaches.
And frankly, there’s a third as well, which is someone whose got a strictly commercial play and that’s the only marketplace they’re looking at. Then somebody realizes from the DOD side, ‘Hey, that we could use that, let’s go get some of that.’
So three, sort of, different use cases. Let’s talk about, specifically, this idea going from concept development to prototype to commercialization. We’ll start with the target in mind – which is commercialization. That term in the lexicon of Small Business Innovative Research, and STTRs in somewhat can be misunderstood in some way because that commercialization doesn’t strictly apply to being able to take that development item as a production item and sell it into the commercial marketplace only, it refers to being able to take that item and, use it to support an existing program where an existing program element, a ship, an aircraft, a weapons system, has been looking for an answer to a tough technical problem. They see the outcome of this product development and concept development in the SBIR and then take it on. They buy it.
That’s the dream. You start something. You designed it. You prototype it, you move it on and through phase two, and now you’re able to demonstrate it in an operationally relevant environment at the end of that. And then a program office comes and says, ‘I’ve got budget this year. Let me start buying some of that next year. Here’s your wedge and we’re going to ramp up production. How fast can you give me x number of widgets?’
That’s the dream. That dream collides with reality and the problem with that collision is how long it takes sometimes to get through that cycle. If you’re a small business, completely dedicated to the OSD play or to the defense play, can you survive long enough on the cash you’ve raised, to cross into that phase three commercialization contract? Does the contracting cycle line up with where you are in development? It’s a very real schedule issue to hit that window where you’re ready to go. But it’s October and, where’s the money?
There are advantages to going to the SBIR process. One of them is that you’ve been through phase one and phase two, you’ve been through competition, so you can go straight into production. But the money has got to be there. So there are all sorts of risks associated with this and yet a great community of innovators out there and businesses entrepreneurs and risk-takers, they keep going at it and we’re better for it.
We would not be where we are, with the technology that we have fielded for our Armed Forces around the globe today without the small businesses in the country coming up with great ideas, taking risk. But often enough, they come through and thank goodness they do.
16:04 – 16:59
(RT): Yeah. Boris, I agree with your assessment and the way you characterized that. I would just offer just another thought that, and while it is challenging and as frustrating as it can sometimes be for small businesses, we have to acknowledge and tip our cap to both the Air Force as well as Space Force, on these AFWERX and SPACEWERX opportunities.
While they have their own internal challenges and whatnot ever, the services are listening, and they’re adapting and they’re reaching out to industry and they’re trying to refine their processes to allow for continued maturation, and then bringing forward those capabilities as rapidly as possible. In the end, that’s what this is about:
Bringing capabilities rapidly for the warfighter and I think both services have done a great job of that. They continue to improve. But it is important to acknowledge that, in fact, they are making good progress. But, there’s obviously miles to go before they sleep.
17:00 – 17:54
(JS): And Roger, that’s so important because similarly, VCs are investing in any number of companies in the market.
But, those VCs that specifically invest in space technology, although it’s growing, it’s only around 5 to 10 percent of VC firms who will focus on the sector. And it’s primarily driven by advancements in these programs that you’re referring to.
But, if you’ve got 80 to 90 percent of venture capital firms prioritizing traditional non-space technology due to the maturity of these markets and lower risks.
In contrast, you’ve got aerospace and defense and the space industry are very capital-intensive businesses with long lead times, as we’ve just talked about. So it is so important that other industry players out there who are getting in and being successful, will only help to increase the participation of the VC firms along with those other programs that you referenced earlier.
17:55 – 18:42
(RT): Yeah. I mean, really, Jim, this is a discussion about risk and investment philosophy and patience. Is the patience there to allow some of these investment opportunities to see them through, and a very fickle market and very fickle views toward space in general, in that regard. And so how do I know?
How do I believe in the promise that, in fact, this particular investment is going to pan out? I think you hit the nail right on the head there is like, that’s the job of the individual business to be able to ensure, assure their investors that in fact, there is significant dollars coming or investment coming on behalf of the DOD, that there is significant interest in their particular technology, and that the contracts and the scope of work and growth of business ultimately will be achieved.
18:43 – 19:55
(BB): Yeah. I want to really pound something here that you guys have been talking about. But it was a note I took a few moments ago. This is really all about risk. It’s all about risk and reward. And who is going to take the risk, and where the reward is to be found.
And that’s part of what we’ve seen with the evolution of organizations like SpaceWERX and AFWERX and it’s a matter of managing that risk in a way that isn’t sort of the negotiation you get at, you know, a used car lot. Someone wins, someone loses, but there’s a way to negotiate that risk ownership such that all parties win.
And that’s a successful negotiation, where everyone’s aims are advanced. And I think that’s been the beauty of the forward-leaning organizations and contracting strategies that have allowed for transfer of and acceptance of risk, but being able to move the reward meter, if you will, accordingly. It’s when that risk and reward are out of balance, that we find friction that will ultimately create gaps and will drive innovation away or will separate between the commercial marketplace and the DOD needs.
19:56 – 20:20
On a previous episode of this podcast – we discussed what at times can be a hot-and-cold relationship between the space industry and the investment community.
But the investments through STRATFI and TACFI seem targeted in how these programs are intentionally designed. So how do these programs encourage private capital to embrace more opportunities in the space sector, while jointly bringing our national security and commercial space capabilities to bear?
20:21 – 21:05
(RT): Really TACFI and STRATFI are the next steps beyond the initial investment that’s made. A TACFI or STRATFI Award recognizes that there is operational value that it’s been validated by an operational requirement, there’s a mission need and a mission application.
And so they’re targeted investments that continue. If you will, the other side of the Valley of Death, really getting them to dry land, but there’s recognition and again, it’s an outward presentation of funding that says, ‘We believe in this capability,’ the government is effectively saying, ‘We value your capability from an operational perspective. And we want to make sure that that operational capability is delivered just as quickly as we possibly can.’
21:06 – 21:34
(JS): And I think from the venture world, those acknowledgements, those endorsements, the validations for these smaller start-up initiatives and companies, go a long way to the venture community to say the government and various programs are really stepping up to the plate. So therefore let’s put our dollars in this because this is a worthwhile endeavor. So again, those are a very strong signal to the investment community that this is not just a fly-by-night opportunity.
21:35 – 22:29
(RT): And so programs like STRATFI and TACFI are tools. But there in the end is, as Jim, so well-stated as well. It’s important that companies, if you will take that next step beyond this TACFI and the STRATFI and move forward into their own growth paths – both within the government as well as outside in the commercial business world and grow their businesses as they would be expected to.
These are nurturing steps designed by the government within AFWERX and SPACEWERX, to continue to mature the technology and bring about the promise that they inherently have. But it’s not and should not be the only source of revenue.
It’s really important that businesses embrace their responsibility to grow their capabilities outside of DOD and present those kind of capabilities that are going to be more dual-use and of broader reach across all markets.
22:30 – 22:52
(JS): Yeah. You need to diversify your customer base and diversify the risk.
If you’ve got only one customer, for whatever reason, they move on to a different technology or a different provider – you’re toast. So at least if you do have that additional channel within the commercial market, then you can have many customers and the loss of one is not necessarily going to sink you.
22:53 – 25:03
(BB): I concur. And I keep going back to the theme of risk management, in order to get to, Roger, where you described as, you know, having the commercial TAM and then realizing that path and growth, which is good, right?
Because the more that we can grow small businesses and the more the small businesses are successful – the greater our economic security, which is part of our national security. So, I mean, it all kind of feeds into that broader good.
But it’s that difficulty with managing the risk upfront that organizations, commands like AFWERX, SpaceWERX can assist the small businesses in meeting. If you can’t manage that risk period upfront on your own and the technology has a Department of Defense purpose, a market there, then an organization like AFWERX or SpaceWERX or NavalX, SOFWERX, etc. can help to fund that risk gap so that the small business can continue to develop it, en route to an intended commercial TAM, that, you know, can take off.
And now the risk-reward payoff for the Department is the investment early – some which won’t pay out – but that investment early then leads to a commercialization of a capability that, rather than paying bespoke prices per unit, as we would, say, with buying a B-52. The government, the DOD can instead buy a commercial end-use item at a much lower unit cost because the marketplace is really a commercial marketplace.
Think about how much the DOD would pay for Office 365 if the DOD had developed Office 365. How much would each member of the Department’s license be for that capability? Now, obviously that’s not the case. It’s a commercial product and we buy it like anybody else. Well, that’s the point.
How to get to that point where it’s a commercial product, take the risk upfront, help the small business manage that risk, help that small business fund that risk. That’s where organizations and commands and incentives, compelling use cases for the XWERX programs begins. Over.
25:04 – 25:25
STRATFI/TACFI were introduced by Air Force acquisition officials in 2020 and 2021, respectively, so these programs have been around for a few years.
But this is the first time they’ve been leveraged specifically for space. What does that demonstrate about the emerging demand for space capabilities, both from a defense perspective and from a commercial perspective?
25:26 – 26:52
(BB): The ubiquity of space. I think that’s what it speaks to. Space is a fundamental engine of our economy, across multiple sectors, and it is a fundamental capability for our national defense. Without the capabilities that pass through, or originate in space, we would not be able to execute the missions of the Department below, on or above the sea that we do today.
And while that doesn’t mean that we can be sanguine about those capabilities, it certainly indicates that we are completely tied to those capabilities. And therefore we need to defend those capabilities, the same way that we defend our use of, and freedom of navigation on the sea.
Because, after all, space is the new maritime and just as we explore in the maritime, just as we conduct commerce on the maritime, as we have to defend and occasionally, transition from conflict into combat in the maritime environment. So we have to be ready to do so in space and that is the compelling reason why whatever successes we have in acquisition and operations and maintenance among the services, we need to recreate those capabilities, those missions, those operations, in space.
26:53 – 28:00
(RT): Scott, I would only add to Boris’s outstanding comments that just that it’s encouraging to see that the Department of Defense is following through with specific investment in space that they recognize – I think the world recognizes the explosive growth that the space domain has realized. And is seeing – some estimates upwards of $1-$1.5 trillion market opportunity over the next 15 years or so, 10 or 15 years, just explosive growth and tremendous opportunities.
And the fact that the Department of Defense is laying in this seed corn deliberately and trying to mature technologies and capabilities as much as they can, within the designed and currently known and developed space mission areas of interest for the Department of Defense. It sends a really important message.
And, SSC, in particular, deserves a lot of praise. And the Department of the Air Force and certainly the United States Space Force, with their efforts to continue to mature this. It’s making a difference and they are bringing important capabilities consistent with their objectives.
28:01 – 28:41
(JS): It really goes to helping to foster direct communication between the government and industry out there, ensuring that innovation really aligns with the DOD and what the requirements are.
Look, a coordinated funding strategy really ensures a strong partnership where all sectors share the risks and benefits. You’re all rowing in the same direction. It demonstrates the government’s commitment to this innovation and really sends strong signals to the private sector and the investment community of their confidence, and the need for the resources to invest, to develop cutting edge technologies.
28:42 – 29:01
(RT): Yeah, I would just emphasize it really drives home the idea of transparency and trust and that’s what’s so sorely needed here. Where there’s risk and uncertainty, these kinds of investments and these kinds of actions help dispel those notions and mitigate risk and really, build trust and transparency across the enterprise.
29:02 – 29:22
So all things considered – how should new and emerging commercial space companies, particularly those seeking DOD contracts – view funding opportunities like STRATFI and TACFI?
And to take that one step further, how can Elara Nova – with its team of military, industry and financial experts – support all of these stakeholders looking to overcome Valley the Death challenges?
29:23 – 30:00
(JS): This is what Elara Nova does day in and day out. They really should see these programs as vital opportunities to gain the financial support, enlist partners on the strategic guidance, and really to carve its pathway to a successful deployment within the DOD.
These programs can really enhance their credibility. And as we’ve said throughout, provide the necessary resources to scale, and facilitate entry into discrete markets, in line with what their mission objectives are. This is why a firm like Elara Nova is so well-positioned to guide these companies through the maze.
30:02 – 31:17
(RT): Well, Scott, I think that, first and foremost, Elara Nova serves a critical role as an interlocutor and that by that I mean that we help bridge the conversations across industry, across the government, across investment circles that allow us to better enable and position national security space and space at-large, for success.
And it’s a critical role in that, as Jim just previously alluded to, we have a number of consultants and advisors within our team who have served at very senior levels across industry and across government and in the financial community who understand these challenges first-hand because they’ve lived them and they understand what it’s like to take small businesses and try to grow them personally and try to secure government contracts and try to contribute to broader space capabilities and architectures at-large.
And so I think Elara Nova is uniquely positioned as really the only space consultancy in the world who has this kind of background, who has these kinds of experiences and can certainly advise and help better enable the future of the space economy and businesses to succeed.
31:18 – 31:55
This has been an episode of The Elara Edge: Expert Insights on Space Security. As a global consultancy and professional services firm focused on helping businesses and government agencies maximize the strategic advantages of the space domain, Elara Nova is your source for expertise and guidance in space security.
If you liked what you heard today, please subscribe to our channel and leave us a rating. Music for this podcast was created by Patrick Watkins of PW Audio. This episode was edited and produced by Regia Multimedia Services. I’m your host, Scott King, and join us next time at the Elara Edge.