Steve Blank, national security, and the dilemma of technology disruption. (Part 2 of 2)

Brandon Karpf: Welcome to Part 2 of our special edition series with Steve Blank, Adjunct Professor at Stanford University and Co-Founder of the Gordian Knot Center for National Security Innovation at Stanford University. Now, if you're just joining us and you haven't yet listened to Part 1, I strongly recommend you go back and check out the first episode. There is a link in the show notes. Steve Blank dives into the complexities of national security technology innovation. In that first episode, he begins by highlighting the fundamental mismatch that while the U.S. used to dominate cutting-edge tech development, much of what was once considered proprietary can now be bought commercially, including cyber tools. He emphasizes that the DoD is still structured for a world that no longer exists, with ultimately what are considered outdated processes, outdated acquisition systems that just can't keep pace with the rapidly changing world of cybersecurity and global threats. So it's a great episode, a great intro to the second part where we dive in deep on what the opportunities are and ways in which the community and the technology industry can match critical capital to technology opportunities and his recommendations for how the DoD and ultimately the federal government can change to help increase the clock speed of technology adoption. So here is our Part 2 with Steve Blank, Adjunct Professor at Stanford University. [ Music ]

Steve Blank: If you really think what SpaceX is doing, it's this. They have execution and they have innovation going on simultaneously. By the way, when you do both, both execution, that is, sustaining innovation, disruptive, that's called an "ambidextrous organization." That's a $20 word for being able to chew gum and walk at the same time, right? That's just --

Brandon Karpf: I don't know anyone who can do that.

Steve Blank: Right, no, chew gum and walk at the same time, and what I mean by SpaceX is, think about this. They were launching Falcon 9s every two and a half days from three launch pads, operational excellence. No deviation from the checklist because there are human beings every once in a while on top of those, and they're launching Starlinks, and they had, what, 300 or 200 before they had a failure in the second stage. I mean, just an incredible track record. But at the same time in Texas, they have crazy people. They're building the next generation called "Starship," and Elon's model was, if you're not blowing things up, you're not innovating, and more importantly, if you're not blowing them up on a regular basis, you're not innovating fast enough. They've now been through three generations of Raptor engines. Now, everybody understands in that company that today's paycheck is Falcon 9, but tomorrow's paycheck is going to be that Starship, and no one is jealous of each other because everybody understands execution pays your salary, but innovation pays your pension, and more importantly, those two groups are not standalone silos. They're talking to each other. The Falcon 9 people are reminding the Starship people, man, did we screw up where we put the ground service equipment plugs? You know, when you build the next one, make sure their access panels are over here. And even though I said the Falcon 9 can't change much because it's operational excellence, the Starship people are reminding them you can crank up that chamber pressure by another hundred pounds and people haven't paid attention, but the payload capacity of Falcon 9 has actually gone up a couple thousand pounds.

Brandon Karpf: Well, taking the example you shared about an organization doing this well, which was SpaceX, looking at that from first principles, I see two core components, and I'm curious your thoughts on how DoD can incorporate these components. The first that SpaceX has is a talent strategy, right? Understanding that there are different types of people needed for these two different modes of functioning, one being the sustained operations of a highly reliable system, and the other is the sustained innovation of disruption, and those are two very different talent models. The second is, you also brought this up, an information strategy of intentionally sharing information between these two parts of the organization and communicating both lessons learned, but also capability. And so from a first principles lens, first of all, what am I missing there in terms of those two components of the strategy, and the second, how can DoD actually implement those two aspects of the strategy?

Steve Blank: And remember that DoD has some enormous obstacles in that it has Congress, it has service secretaries, it has primes, it has -- right? So where SpaceX, a single individual like Elon could say, "Here's what we're doing," and Gwynne Shotwell is a great, well, probably the best operating executive in space we've ever had, manages to translate those visions into, "Okay, guys, this is what we're doing." That command and control, while in theory belongs to the secretary of defense or assistant secretary, really is a lot more diffuse in a three-million-person organization with lots of stakeholders. But we've had two -- I just want to go back to -- and again, I might be naive, but we've had two service secretaries who basically figured out how to use advanced technology, private industry, as well as the primes to do this. One was Bill Perry and the other was Ash Carter, who actually had a vision about how to use both a whole-of-nation approach and to get the DoD to start moving. So part of this is -- I'll go back to -- the role of a secretary of defense is maybe, number one, letting everybody know what's the state of the world that we're operating in and what change needs to happen from where we are today. Maybe I've missed it, but we've really not articulated that to Congress, to the services, to whatever, and that they're not going to accept the status quo and that there needs to be changes in force design. There needs to be changes, substantive changes about what we're buying and how we're buying it, less so, "Here's what we should do with shiny object X or Y." But it's pretty obvious that things need to change, and not like we need to divest of carriers or manned bombers or etc., but we certainly, at minimum, need to be not just designing but deploying hybrid things yesterday, and the problem with that is that the new things are almost always worse than the existing things on day one.

Brandon Karpf: Of course.

Steve Blank: That's a big idea.

Brandon Karpf: That's an MVP.

Steve Blank: Yeah, but that's not clear to congressmen or their staffers. It's not clear to RD and T&E organizations that are designed to test things for 30-year and DOTMLPF and we need whatever. Go ask the Ukrainians about their DOTMLPF plans, right? And I'm not suggesting we -- but think about it. Ukraine had like five drone manufacturers at the beginning of the war, they have over 200. The cycle time between putting up a comm-link and the Russians jamming it is probably less than 10 days.

Brandon Karpf: Oh, yeah, most definitely.

Steve Blank: So they're operating at a cycle time that is not impossible to imagine, but you ask us, well, what have we changed to match what that's going to look like? And then you get these five-page reports and you get a 2045 plan. So what I mean by this, it's not like "Let's go buy shiny object X or Y," meaning let's not buy a million drones that look like X, but the smart people once given a mission that said, "I don't want to see the same thing again, and we know you're capable of coming up" -- I mean, we have the smartest people in the world in the services. We just need to unleash them on a new strategy, and they are capable of doing that, but at the end, it really comes down to leadership saying status quo is not acceptable, and if you show up with that again, you're not going to be promoted, or maybe we're going to, in fact, convince you, you ought to retire if you can't adapt to the world as it is. We still have a lot of senior leaders who want the world to look like when they were in the academy, whether it was the Naval Academy or West Point or whatever. It's not going back there anymore, and the longer we stay in the past, the worst our future is going to be. In fact, that's a pretty good quote.

Brandon Karpf: It is, it is. We'll pull that. We'll pull that one, yeah.

Steve Blank: I just made that up right now. But truly, and again, it's not a lack of -- it's not stupidity or malice. It's just that it's normal human beings who have done things for years or decades, because this is the way it was done, without realizing we're trapped by our own successful legacy. You know, the Western Pacific was our lake for 75 years. It's no longer our lake, and what's really interesting is, of course, I'll just pick on China because China is replicating a lot of our systems and whatever, the same offsets --

Brandon Karpf: And force structures, yeah.

Steve Blank: So we should be the one coming up with asymmetric -- I mean, just like they did with DF-21s and other things and islands in the South China Sea and whatever. So our asymmetric things should be at scale, not like, "Oh, we got free black programs and we got X or Y." They should be showing up as like force design and in a massive number that -- like imagine China woke up and went, "Oh, crap, everything we put in the water is now obsolete," or, "Oh, my gosh, look what's in the water between us and Taiwan."

Brandon Karpf: Or there's no way we could build enough DF-21s or DF-26s to sink all of these ships or drones.

Steve Blank: And listen, I'm not picking on the Navy. It's the same thing with the Army, given the Ukraine situation. There's a ton of lessons learned here. But if it doesn't show up as a substantive change in the budget, then they're one off whatever, meaning, we're still focused on spending money doing X and Y because we know how to spend money on X and Y, and everything else is kind of like, yes, but we have this secret sauce over here. I'm not sure that's going to be the determinant in deterring a war.

Brandon Karpf: Well, I want your thoughts on the money side of this, because all of these capabilities, it's not just about buying capabilities, but the invention and creation of capabilities requires resources. We acknowledge that the DoD budget cycles where we're planning five years in the future and beyond does not lend itself well to creative destruction and disruption, but then we also look at these grant programs, the SBIRs and the STTR programs, and a significant amount of capital is being deployed in the form of non-dilutive funding into private companies. I'm not sure, though, that we actually understand the ROI of those types of awards. I mean, have we actually really figured out how to measure that success? It seems like the government is deploying a significant amount of money to try to stimulate this innovation. I'm not sure that the other side of it's actually delivering innovation that's measurable.

Steve Blank: Well, I'm not sure it's innovation that's measurable. I'm not sure there's an acquisition budget that's connected to those innovations, right? So I mean, listen, you point out something pretty important, but I'll say we've built a dam across half the river.

Brandon Karpf: Good point.

Steve Blank: Meaning we have the front end of the funnel, but unless you've figured out, well, how does this stuff get deployed at scale? So when we teach a class called "Hacking for Defense," everybody comes in with a shiny object, they're taking problems from the DoD and IC, and great, we've got this great demo, and our point in the class is, no, figure out how you're going to get -- what color of money is going to fund this thing. Who's the saboteur from the prime who's going to say, "Over our dead body"? How does this get in? Is this an OTA or does it go through the pump? And it's not that we're not figuring that out, but the whole programs need to be oriented on deployment, not just demos, and it's a funnel, not a pipeline, so most of them will fail, but unless you have an -- this is what I see in the commercial world all the time, and your DoD example is just a point to this. In the commercial world, every CEO wanted an accelerator inside their company, and great, you bring your dog to work and you get beanbag chairs and lots of posters and coffee cups. In the military, you get lanyards and challenge coins, right? That's the only two differences. But then in the commercial world now, and map this to the DoD, I go ask, "So how does this get fed to the sales force?"

Brandon Karpf: Right, yeah.

Steve Blank: And how do you deal with channel conflict because this competes with their -- oh, yeah, sales agent or marketing says it screws up the brand, and then you say, "Well, how many of these have actually increased revenue or profits or market share?" And they go, "Look at the beanbag chair and the whatever," and so --

Brandon Karpf: Oh, yeah, and they love it. They're over there doing innovation.

Steve Blank: They're doing innovation. And so this is -- the sum of this is innovation theater where you kind of forget the goal is not demo but in -- whether it's the commercial or military, the goal is deployment, and if you haven't figured out --

Brandon Karpf: And the goal should be accomplishing a certain mission for a commanding -- for the decision-maker.

Steve Blank: Right. And so if you haven't figured out that end to end, the problem is -- and in the military it's worse. In the commercial world, a CEO and the exec staff can make a decision about how you get that plumbing correct, but if you think about where all these innovation activities -- and out of Heidi's Shyu's R&E group, there's a great diagram of the hundred or so innovation activities, truly, that she -- she came in and asked the right question. How many of these things do we have? Is that --

Brandon Karpf: Too many.

Steve Blank: Think about this, R&E and A&S are two separate organizations just in OSD, let alone in the services. So how are these connected to a budget and problem sets, etc.? Some of those innovation activities clearly are. Most of them are not, and that's the problem. And again, that's not hard to fix, but it starts from the other end of the telescope. It doesn't start with a shiny object. It starts with what problem sets do we either have or what things can we come up with we haven't even thought about that would be a force multiplier or be an offset strategy against an adversary. Great, how does that get into the hands of the warfighter, and when?

Brandon Karpf: Sure, and how do you actually allow an organization who's building a technology and innovating to survive long enough to even get it there? Which kind of relates to your damming half the river, which is they're either going to swim and they might drown trying to get to the other side. Now, something that I think is --

Steve Blank: Before I forget, and I'm sorry to interrupt. We built something inside of one of the national security agencies called "Hacking for the" -- actually, it was called I-Corps inside of Agency X, and it basically allowed innovators to take almost a TDY internally and work on some of these problems, and they would build and take six weeks and work on some real problems they had encountered but their organization wasn't working on and build MVPs and have great demos, and they'd go back to their organization and their mid-level managers would go, "Well, that's not on my budget or schedule, get back to work," or even if it actually got to a senior leader, it would have to go across the transom to a capability organization who would say, "Not only this is unbudgeted and scheduled, but because you're throwing these over the transom, you're actually a denial-of-service attack on my core capabilities." So the system had not been designed for a parallel process other than those requirements that were coming down from the top. There was no process that was end-to-end. We built a great process for the innovators, but we forgot that without the leadership understanding how this tied in to actually creating new capabilities, it truly -- it was a denial-of-service attack and was a waste of time, but we put thousands of people through the process, and I think at the end, we created probably a couple of hundred startups because those innovators left frustrated, seriously. But it was a great experiment for me to understand that unless you have an end-to-end understanding, having these innovation activities and getting these innovators excited without some path to actually see it deployed or some criteria of what an innovation pipeline should look like, it's a waste of time and talent.

Brandon Karpf: Right. The analogy that -- I recently had a conversation, and we published this with Justin Fanelli, and the analogy he used for this situation was, we have someone throwing a ball, but unless we have someone set up and ready to catch the ball --

Steve Blank: Perfect.

Brandon Karpf: It's just going to fall on the ground, and that's really the problem that he's trying to solve. So in terms --

Steve Blank: And Justin is one of the Navy's greatest assets. I mean --

Brandon Karpf: Amen.

Steve Blank: The organization he built is competitive with anything in the private sector, and to do that inside of the DoD is just a miracle. I mean, you look at some of the zero-trust architectures he's built, I mean, he truly gets it, and you kind of go, "How did you pull this off?" And for your listeners who haven't spent time looking at some of the Navy innovation efforts in software and digital, should really pay attention to this.

Brandon Karpf: We'll be right back. [ Music ] So shifting a little bit, and I want to talk a little bit about access to capital and funding sources, because we are in a little bit now, looking from the private sector side, we seem to be in this renaissance of defense tech investment where numerous VCs and private equity firms are now interested and deploying, actively deploying capital. I mean, over $9 billion already this year alone has been deployed in defense tech and dual-use technology companies. Now, looking at kind of the structure of a venture capital firm, I'm a little concerned that they might not be the right people to actually invest in this, and the reason being, I see VC models and VC funds as having a 10-year horizon, right? They're looking to return capital to their investors within 10 years of making an investment. Defense technology, some of these companies, some of these contracts with the existing system take much longer to come to fruition than 10 years. Do you see a problem there, or is that kind of, "Okay, capital's capital. It's going to continue to find its way through the system"?

Steve Blank: So the last time this happened was the beginning of this century when VCs decided that not only climate tech but industrial climate tech at scale was a great area to invest in, and this whole green tech wave, and what they discovered was that, unlike software ventures where you could find startups getting profitable within years or at least getting acquired, industrial-scale stuff took decades, which is, back to your point, didn't match the life cycle of their funds, and a good number of them, in fact, almost all of them got burned and basically pulled back for a decade or two on green tech investing. The good news and bad news is a lot of the VCs that are starting up in defense investing are doing it not just for returns but for the sake of the country. A good chunk of them are ex-veterans, etc. But at the end of the day, they still need to make money, and how they make money is their companies generate revenue, meaning getting orders and are profitable and/or go public or nowadays get acquired at a multiple, meaning at a, literally, multiple times the revenue that make the VC's investments profitable. Well, we kind of laugh if we just think about this. What's the acquisition cycle of the DoD? In the commercial world, you shake a hand and you get an order maybe six months later or maybe three months later. I mean, when I ran an enterprise software company, it was somewhere between 3 and 18 months, was kind of the -- and the average was about nine months to get a multimillion dollar order or sometimes tens of millions for the first orders. That's not the DoD innovation cycle, and that's why I talk about there's a huge impetus mismatch, not only on initial orders, but again, getting startups and scale-ups to be part of the DoD acquisition process. Remember, it took lawsuits from SpaceX to get the Air Force to adopt them. It took lawsuits from Palantir to get the Army to kind of stop what they were doing on their existing system and deploy it to Iraq. You know, we're seeing the same thing with -- and so think about it. Palantir, SpaceX, and Anduril required a billionaire, each one of them, to kind of bridge that gap between spending and revenue. We're now seeing -- good news is companies like Vannevar Labs and others are getting orders, Capella Space, all of them, which, by the way, started in my class.

Brandon Karpf: Nice.

Steve Blank: But we're seeing the nature of DoD acquisition finally paying attention so that there are resources and assets outside the building. The question I think is unresolved is the one you just asked, is this going to happen fast enough with enough revenue and profit to keep VCs investing in startups, or are they going to go, "Well, that was great, glad we did that, but these funds themselves are unprofitable," and they won't be able to raise money for the next generation just when we need them, or more importantly, won't be able to fund them to the next series, right? You go from a C to series A to B with increasing dollars because the startups need them because they're burning cash to build capability. The DoD, there are acquisition people who kind of understand that, but they've not understood it at scale. We've still not changed how we deal with this part of the ecosystem. This goes back to my thing about whole-of-nation approach, is that China and Russia have integrated -- I mean, Russia just appointed an economist, for God's sake, as the head of the DoD. They're operating with their entire economy. We tend to think of DoD budgets as zero-sum games. Frank Kendall's line is like, "Well, my biggest problem is lack of money," and my line is, "No, the biggest problem is lack of imagination of where to get the money." Well, think about it, the largest satellite manufacturer is no longer a prime. It's SpaceX. The largest payloads to space is by 100X, is SpaceX, right?

Brandon Karpf: Sixty-five, 70% of every satellite operating in orbit is SpaceX.

Steve Blank: The amount of DoD investment in that versus the amount of commercial investment in that is just negligible, not zero, but negligible. Literally, they're probably recouping their lawsuit costs right now. But the point is, is that if we had a little more imagination, it wouldn't just be VCs we'd be getting in the game, how do we get hedge funds who write checks of tens of billions or hundreds of billions of dollars to build the next-generation shipyards or drone factories or some of the other industrial infrastructure that we need for the military? How do we build them? You know, we're depending on TSMC and others to build semiconductor plants. How do we get other plants and things that we need by -- I just keep asking the question, how many economists do we have in the defense department working on that problem?

Brandon Karpf: That problem, right.

Steve Blank: Not how many do we have in Cape -- we have plenty of economists with green eye shades and arm bands, and I don't mean that as a pejorative, but they're inward-focused. That is, how many of -- I mean, the most innovative thing we did with an economist was when Jason Rathje and Eric Volmar created the Office of Strategic Capital, right? You know, they came out of AFWERX and then said, hey, could we create something with SBA that allows the DoD to have a loan authority of a couple billion dollars to venture capital firms and companies? That was one of what I think should be a hundred activities, because my goal would be, how do we create a hundred billion dollars of virtual DoD funding that doesn't show up as a line item? Well, that might seem insane, but at least that's how Silicon Valley thinks. How do we use the whole of nation rather than operating with one arm tied behind our back? And you know what? Even if it's a crazy idea, it's like it would cost us 5 or 10 economists. I mean, that's it. Why don't we run the experiment, talk to CFOs of hedge funds, and go, what tax breaks would you like Congress to give you to invest in X, Y, and Z? How would we make that happen?

Brandon Karpf: Well, looking at the situation we have now, which is early stage investors investing tremendous amounts of capital and dedicating funds right now, starting probably about two years ago, and today, so in six, seven years when most of those companies probably, given the state of DoD funding, haven't delivered the type of returns those investors are looking for, we'll need something to close the loop. Maybe that is the hedge funds.

Steve Blank: Right, or maybe that's when primes go in and scoop up all these undervalued things and the country loses. But imagine there was an incentive for primes that says, no, if you buy something at multiples X, multiple X, and deploy them within three to five years, not just buy them, but the incentive is to deploy them, right? So think about creative incentives, right? Rather than perverse incentives, why don't we think of positive outcomes that, again, I keep going to, listen, I love the shiny object thing, but I also think the outcome should be what we're focused on.

Brandon Karpf: Commander's objective. Commander's objective, right? What are we trying to get done and accomplish? We start with the end state in mind.

Steve Blank: There we go, and so if you just start thinking about, okay, well, what would we need in a -- and by the way, what I remind my students, if your ideas don't make you giggle, they're not big enough.

Brandon Karpf: Right, right.

Steve Blank: And I don't see too many people in the Pentagon giggling enough.

Brandon Karpf: Giggling, yeah. Amen.

Steve Blank: You know, both, not only what could we do to accelerate our stuff, but what could we do that an adversary wakes up in the morning and goes, "Fuck, not today." That's the thing. General Mattis lectures in a class every year, and that was the thing that, of all the things he said that has stuck with me, his job was to make Z wake up in the morning and go, "Not today."

Brandon Karpf: Not today.

Steve Blank: It was that classic line out of "Patton," the opening scene where he basically says people think that the greatest thing you could do for your country is die, and he says, no, the greatest thing you could do for your country is make the other son of a bitch die for your country. And I now go back to say, no, actually, I would say the other thing is to make sure that no one dies, is that we figure out how to deter, because winning a war is kind of the last objective, and even though as a 19-year-old you might think that the thing is the heroics, no, the thing is actually to make sure we could preserve the peace and preserve the Western democracies in a way that lets us sleep safe in bed, and that's just -- we're not heading in the right direction.

Brandon Karpf: Well, from your voice to God's ears. Steve, I could talk to you about this literally all day. We will have to have you back. I want to be sensitive for your time, so I would just like to say thank you for spending this time with us, and we will definitely have you back on.

Steve Blank: Well, this was fun. Thank you very much. You asked great questions, Brandon, and I'm happy to help any way I can. [ Music ]

Brandon Karpf: And that's our show, brought to you by N2K CyberWire. We'd love to know what you think about this podcast. Your feedback ensures that we deliver the insights that keep you a step ahead in the rapidly changing world of cybersecurity. Now, if you like the show, please share a rating and review in your podcast app. It helps other people find the show. We're privileged that N2K CyberWire is part of the daily routine of the most influential leaders and operators in the public and private sector, from the Fortune 500 to many of the world's preeminent intelligence and law enforcement agencies. This episode was produced by Liz Stokes. We are mixed by Elliott Peltzman and Tre Hester, with original music by Elliott Peltzman. Our executive producer is Jennifer Eiben. Simone Petrella is our president, Peter Kilpe is our publisher, and I'm Brandon Karpf, Executive Editor of N2K CyberWire. Thanks for listening. [ Music ]