While flexible Other Transaction Authority (OTA) contracts open doors for startups, they create revenue uncertainty that worries venture capitalists. The Navy CTO's perspective is clear: the goal is to keep companies competitive. The best performer gets rewarded, creating an inherent tension with the VC model that prizes predictable, long-term revenue.
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To attract innovation, the DoD is shifting its procurement process. Instead of issuing rigid, 300-page requirement documents that favor incumbents, it now defines a problem and asks companies to propose their own novel solutions.
The Department of Defense is moving from rigid, program-specific contracts to a portfolio model. New Portfolio Acquisition Executives can now reallocate funds from underperforming projects to more promising startups mid-stream, rewarding agility and results over incumbency.
To prevent promising startups from failing from funding gaps—the "Valley of Death"—the DoD actively "crowds capital" around them. This stack includes rapid R&D contracts, manufacturing grants, and low-cost loans from a $200B lending authority.
Navy CTO Justin Fanelli advises founders to stop asking to be paid for their time and instead price their solutions based on the outcomes and value they deliver. This aligns incentives with the government buyer, rewards impact over effort, and demonstrates a modern, software-defined mindset.
The Under Secretary of War's primary job is not just to fund technology, but to actively cultivate an ecosystem of new defense contractors. The stated goal is to create five more major companies capable of challenging established primes like Lockheed Martin, fostering competition and bringing new capabilities into the defense sector.
A major shift in government procurement for space defense now favors startups. The need for rapid innovation in a newly contested space environment has moved the government from merely tolerating startups to actively seeking them out over traditional prime contractors.
Private capital is more efficient for defense R&D than government grants, which involve burdensome oversight. Startups thrive when the government commits to buying finished products rather than funding prototypes, allowing VCs to manage the risk and de-burdening small companies.
A major upcoming change in the National Defense Authorization Act (NDAA) is the removal of "past performance" as a key criterion in procurement. This rule has historically favored large, incumbent defense contractors over innovative startups. Eliminating it allows new companies to compete on the merits of their technology, representing a significant unlock for the entire defense tech ecosystem.
Startups obsess over "Programs of Record," but what they're actually seeking is a stable, multi-year indication of demand from the Department of Defense. This is functionally equivalent to a large enterprise SaaS company securing a three-year contract to justify long-term R&D investment and de-risk the business.
The most likely exit for a defense startup isn't necessarily being acquired by a large contractor. By developing a capability that can be adopted across multiple service branches (e.g., Navy, Army, Marine Corps), a startup can significantly expand its market. This "joint solution" approach creates more runway and strategic options.