How Has the Pentagon Shaped Innovation?

What are the key drivers for technological innovation in the U.S.? In a time when Silicon Valley, venture capital, and high-profile entrepreneurs offer glittering examples, Yale SOM professor Paul Bracken argues that a very important player is often overlooked. “The Department of Defense is one of the biggest sources of innovation in the United States, and it has been since the early part of the Cold War. It's referred to in Silicon Valley and in Washington, D.C., as the ‘mother of all venture capital firms,’” he said.

Bracken explored the ongoing links between the Pentagon and the technology industry in a talk on December 2, 2014, titled “Silicon Valley and The Pentagon: An Analysis of the Dynamic Relationship among Silicon Valley, the Department of Defense, and the Intelligence Community: Past, Present and Future.”

Silicon Valley’s early growth in the 1950s and ’60s came largely through Cold War defense spending, well before venture capital developed as an industry, Bracken noted. Nuclear arms are the iconic weapons of the Cold War, but, Bracken emphasized, it was the need for electronic intelligence that drove much of the R&D work. That led to a range of technologies including the integrated circuit, which opened the way for computers, satellites, and effectively every piece of electronics in use, whether military or civilian.

The end of the Cold War coincided with the information technology boom. As the big defense contractors consolidated, the Pentagon grew concerned about reduced competition and reduced innovation. As Bracken explained, a new focus on channeling some spending through startups and smaller firms coincided with a realization that neither the large defense firms nor the Department of Defense had the full range of in-house skills and expertise required to do the R&D and testing of the complex, interlocking systems moving through the pipeline. “The role of the primes—the big defense companies—is changing dramatically to being hubs for this ecosystem of satellite smaller companies that live around it and that feed off of it,” Bracken said.

That change accelerated after the attacks of September 11, 2001, when both the funding and sense of urgency grew tremendously. Thousands of small defense-funded firms popped up, many of them clustered in a new hub. “Without anybody really noticing it, the United States built a second Silicon Valley. A Silicon Valley of defense has been created in northern Virginia—the Dulles Corridor,” Bracken said. “It's very unlikely you would have heard of them, and they're not in the business of advertising what they do.” Some of these firms produce weapons; others contribute a single component or algorithm. Some focus on services or processes.

One example of the effort to drive innovation by working with smaller firms is the National Security Agency spying program revealed by Edward Snowden. The program “clearly creates a lot of concerns about personal privacy and all kinds of issues,” Bracken noted. “Having said that, if you look at how NSA pulled this technological conquest off, they did this by not working through big contractors. They set up a management system which could deal directly with lots of small companies. And this paid off very handsomely using the metrics of NSA.”

The evolution of the Pentagon’s approach has led to changes throughout the technology industry. “The locus of innovation in the United States, in a relative sense, has shifted to small- and medium-size enterprises,” Bracken said. This networked approach is ideal in creating competition and innovation, he said, but it also creates challenges for those making decisions on allocation of defense dollars and the application of the resulting technologies. Choosing winners and losers among smaller technology firms is difficult—Bracken noted that Warren Buffet doesn’t invest in technology companies because it’s too difficult to predict the results. But from a national defense perspective, Bracken said, “we can't simply not play the game.”