DIUx going broke, but that might not be bad

The Defense Department’s gamble in tech-rich Silicon Valley is almost out of money.

The Defense Innovation Unit Experimental [DIUx] is about to go broke, but DoD is coming in with reinforcements soon, says Vice Chairman of the Joint Chiefs of Staff Gen. Paul Selva.

“We actually put tremendous demands on [DIUx]. In the programs that they are working for us, we were notified early last week by Director Raj Shah that they had been cash flowing into two programs,” Selva told the Senate Armed Services Committee July 18.

DoD is working on a proposal to reprogram money from other places in the department to DIUx for the balance of its requirements for this fiscal year and for programs that will extend into some of next year.

DIUx’s cash problem may actually be a good thing. The office was created by former Defense Secretary Ash Carter to court innovative and traditionally non-defense companies to enter into contracts with DoD.

DIUx was given $30 million in 2016 and $10 million in 2017. DoD requested $45 million for DIUx for 2017. The organization has been able to obtain private investment to fund some programs. Shah stated previously that it receives $3 in investments from customers for every $1 it invests.

Selva’s staff was not able to immediately provide the reprogramming amount at the time of the publication and this story will be updated to reflect their response.

DIUx’s cash usage means it’s actually entering into contracts and spending money. DIUx’s reticence to spend money in its first few months led to Carter revamping the whole organization.

“DIUx right out of the gate was really trying to get its legs under it, really trying to figure out what it was,” said Stephen Rodriguez, partner at Sinewave Ventures. “It had a tough mission because it immediately had metrics imposed upon it for success and for execution. … It was also compounded by the fact that when you engage these startups the best way to have credibility is to have your own balance sheet, your own capital fund, so people actually know you have money to invest.”

That’s not DIUx, at least it wasn’t then. But companies were excited by the idea and inundated DIUx with meetings.

But when they found out there was no money to be invested the calls dropped off, Rodriguez said.

“[DIUx] just sniffed around, they’re not an actual serious customer,” Rodriguez said.

DIUx now has buying power. In the last two quarters of 2016, it spent $36 million on contracts.

In the first two quarters of 2017, it awarded 13 agreements totaling $12.3 million. That was the last update on DIUx’s awards.

It seems now that things have ramped up.

DIUx is now juggling 25 contracts that range from a communications device called Sonitus that warfighters can put in their mouth to use for communication in noisy areas to unmanned sailboats for collecting intelligence.

“The awards this year have ranged from $26,000 to $2.6 million and with our outreach using reservists and new offices we’ve had 356 companies from 36 states compete for DIUx contracts,” Shah said during an April 20 conference call with reporters. “More importantly than just the numbers is what it represents in that key leaders in the department continue to see the importance of our efforts. We are moving forward on our mission with the new DoD leadership as well as support from the Hill.”

Selva told Congress he thinks DIUx is far enough along to determine it’s working. He mentioned it has expanded to Austin and Boston.

Lawmakers haven’t been as convinced. The 2017 defense authorization act  fences off funds from DIUx until DoD can provide Congress with a detailed report on the hub.

The bill withholds 20 percent of DIUx’s total funds, 25 percent of DIUx’s operation and maintenance funds and 75 percent of its research and development funds until the report is filed.

Fencing off funds is “always used as a tool either to get information from the department or you are trying to get their attention that you have concerns that you think [DoD is] not fully satisfying and it’s a way to highlight it to senior leaders’ attention because presumably if there is a fence on money, the leadership of the department becomes aware of that … in the case of DIUx, it’s going to go to the [defense] secretary,” said Andrew Hunter, a senior fellow at the Center for Strategic and International Studies.

DoD’s homework for Congress in order to free the funds consists of a charter and mission statement for the unit. Congress wants to know staffing requirements and the number of military and civilian personnel provided to support DIUx.

The bill also asks DoD to provide policies and practices that show how DIUx best supports the Pentagon, that includes metrics for effectiveness, the treatment of intellectual property and justifications for expansions of the unit.

Congress’ request for a report stems more from concerns over DIUx’s organization than its progress so far.

Congress “expresses a significant hesitation and reservation about the impact of DIUx and whether it’s structured to actually effect what it says it’s going to effect. There has been a considerable strain of skepticism among members of Congress that DIUx is organized and structured and has the right plan that it promises can bring new entrants to the defense market to the table and then most importantly that it can actually deliver on bringing new technology where it matters, which is to the warfighter,” said Katherine Blakeley, a research fellow at the Center for Strategic and Budgetary Assessments.

The 2017 NDAA conference report stated the “conferees remain cautiously optimistic” about the structure of DIUx.

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