What does the Big Beautiful Bill mean for national security startups?
Transcript
SUMMARY KEYWORDS
Defense budget, NDAA, Appropriations Act, President's budget request, Big Beautiful Bill, defense spending, startups, commercial technology, unmanned systems, AI, cybersecurity, space technology, defense acquisitions, venture capital, dual-use technology.
SPEAKERS
Mike, Akhil, David, Maggie
Maggie 00:04
Maggie, welcome to the Mission Matters Podcast, a podcast from Shield Capital where we explore the technical opportunities and challenges of developing and deploying commercial technology to national security customers. I'm Maggie Gray.
David 00:16
And I'm David Rothzeid,
Maggie 00:19
And we are your hosts from the investment team at Shield Capital. In this episode, we're joined by Mike Brown and David Rothzeid, two of my teammates from the Shield Capital investment team. Mike and David, are extremely knowledgeable about the state of defense budgeting and acquisitions and contracting. They both hail from the Defense Innovation Unit. Mike was actually the head of DIU for a few years, and David led a lot of their work on acquisitions for many years at the beginning of the unit itself. So in this episode, we're really going to break down what a lot of the news that's coming out about defense budgeting actually means for startups. There's a lot of terms flying around here. You have the NDAA, the Appropriations Act, the President's budget request, the Big Beautiful Bill, reconciliation. So we're going to talk about what that actually means and where we are really seeing opportunities for cutting edge startups. So to start out, I've been seeing all these headlines. They say that there is a trillion dollar defense budget this year. It's a big number, but what if that has actually been passed so far? Where are people getting that number from? Mike? Yeah, over to you.
Mike 01:47
Yeah, there's several different components, and it is complex, because some have been passed and some have not been passed. So there is a normal defense appropriations process underway where we will get a National Defense Authorization Act followed by a defense appropriations that is based off the President's budget request and the targeted amount there is 831 and a half billion dollars, which is pretty close to fiscal year 25 that we're in right now, not passed yet, and that will depend On an appropriations bill funding the entire government for the fiscal year 26 that begins next October, 1. The part that has passed it's a bit unusual, is the Big Beautiful Bill that's a reconciliation bill for the budget of $150 billion for defense. And the unusual feature about that is it can be obligated anytime between now fiscal year 25 and the end of fiscal year 29 usually these appropriations are year by year. And this one has that unusual feature of could all be obligated in the next few months, unlikely or spread out over the next couple of years. And there's been some criticism from Congress that, gee, we'd like to see an amount like that added to the defense appropriation every year, rather than something spread over so many years. With the recognition that we live in a dangerous world, we probably be spending more on defense than we are.
If you add up that trillion dollars, it's actually only 3.4% of GDP, which over the historical time period last 75 years, is really at a relative low point. We've spent as little as 2.9% but if you go back to the Reagan buildup, we were spending 6% of GDP. The additional component, if you took the 831.5 plus 150 billion, Big Beautiful Bill, it leaves a little bit 20 or 30 billion, and that actually is money that is executed by Department of Energy part of DOD stop line for our nuclear program. So that has things in it, like more plutonium pits for nuclear missiles. So that's an additional point that gets you up to the trillion dollars, which in itself, is a record level of nominal spending for defense. So the only part that's been approved would be the 100 and 50 billion so far, DOD can start spending that. The rest still needs more work by Congress.
David 04:14
Mike, I think that was exceptionally well said and well articulated. The only caveat that I would like add into it is what makes this year a little bit more confusing than most the reconciliation, Big Beautiful Bill notwithstanding, is traditionally the President's budget comes out in the February timeframe so that Congress can use it to really help understand where they want to go with both the NDAA and you know, its funding tables, as well as the defense appropriations bill, or as a part of the larger appropriations bill. This year, because of the new administration decided not to use the previous administration's budget build up for fiscal year 26 which will begin one October. Sure, and they just recently submitted it to Congress, not too long ago. So about five months behind schedule, and what would generally really help educate or inform the NDAA and the appropriations bill? So things being happening in parallel, more than usual.
Mike 05:20
One of the things I know we're going to want to talk about Maggie is actually what's in the bill beyond the top line. And I think one of the things we can probably easily agree on is that one, if you add these together, more defense spending than we've seen recently, and there's a lot aimed at what will be beneficial for startup companies, venture backed companies that are focused on new capabilities for the Department of Defense. So that's top line. What's really exciting about, about what's happening with this spending?
Maggie 05:52
Okay, so it sounds like, right now, the one thing that's actually set in stone is this, $150 billion for the Big Beautiful Bill from reconciliation. So what are we actually seeing in both that amount that is actually set in stone and then also from the President's budget? What does all this actually mean for startups, for this next generation of technology? Why did we decide to have a podcast breaking this down in the first place?
Mike 06:20
I think we are seeing the recognition, and it's because of world events, it's what we're seeing in Ukraine that commercial technology is having a very big impact on the battlefield. Is going to be critical for enhancing the capabilities of our military, meaning we're recognizing we need more than the ships, tanks and planes we've had historically, and this means a lot of additional spending for new capabilities, specifically sensors from space, unmanned systems, additional software, cyber and AI, and we're seeing funding lines for the first time dedicated to these items that go beyond research and development. So typically, the department has spent money in what's called RDT&E research, development, test and engineering looking at these, but that hasn't been the same as ongoing funded programs. Now we're seeing dedicated lines for these types of capabilities, and a perfect example would be Golden Dome, which will at 25 billion, is kind of a down payment on what will be 175 billion expected to be spent over the next three years, which really will benefit from sensors from space, a key part of the shield portfolio. David, you might want to talk about how that's going to affect some of the space portfolio companies.
David 07:41
Absolutely so when the first Trump administration broke out the Space Force a lot of it was to ensure that prioritization of space capability, which was more than just a force multiplier for air, land and sea, it was becoming its own contested domain. And what we're seeing with Golden Dome is a significant recognition and an increase in Space Forces funding to get after more novel technology capabilities like advanced mobility in space, additional communications, rendezvous, proximity operations, you know. So these are elements of Golden Dome and a larger emphasis on Space Force and their budgeting capability beyond what was otherwise going to be appropriated in previous presidents budget, which, despite breaking out Space Force from Air Force, you know, both underneath the Department of the Air Force, you kind of saw starting a bit of a flat line in Space Force capability. And so this really does ramp it up.
And for Shield Capital, where we've been investing in several different space technology companies that have good application for the national security apparatus, as well as building bridges to larger and better commercial opportunities. You know, this will just be an acceleration of some of those capabilities, but with Space Force and the national security apparatus really helping bring this to bear, and I think a lot of it is the pressure being put on the space domain, as our adversaries are also exploring, you know, these novel technology concepts and really starting to undermine the United States's dominance and in that era, in that area,
Mike 09:31
And if we look at unmanned systems, there's about $20 billion in total that's being added in a category called expediting innovation to the warfighter. So a number of different initiatives within that 1.5 billion, specifically for small unmanned aerial systems. So the smaller drones that we're seeing to such great effect in Ukraine, we're seeing the Defense Innovation Unit budget doubled again from 1 billion to 2 billion. One, a particular program called APFIT, accelerating the production and feeling of innovative technology has been tripled now up to a billion. All of these, I think, will have a focus on unmanned systems, for example, expanding what DIU has done with a Replicator program over the last couple of years that only had a half a billion dollar budget for the last two years, and now tremendous increase in what we're seeing as a recognition of the importance of unmanned systems in the air, on the surface of the sea, undersea, all of those together.
David 10:34
And I think you know, really what this amounts to is a recognition by the Department of Defense, as well as Congress, in seeing the innovation that's happening in the commercial sector being, you know, underwritten in large part, by the venture capital community that has really moved significant resources to this industry space. And you know now the Department of Defense is starting to buy in quantities significantly larger than in the past, though, Mike, I don't know if you would disagree with me. Probably agree that it's not quite enough, so heading in the right direction. But you know, when you think about the size of the overall defense budget, it's still, you know, almost budget, maybe not quite budget dust anymore, but something larger than that, but certainly not the lion's share.
Mike 11:26
Yeah, I totally agree with you, not dust, because now we're talking about billions of dollars. We used to be talking about 10s of millions, but yeah, we I think there's in the Pentagon, I think there would be general agreement that we are behind with these new capabilities, not yet taking advantage of the tremendous investment that's already been made in the private sector, in unmanned systems, in AI, in cybersecurity and sensors from space. So pitch book says that there's been 150 billion in venture money that's been spent in defense tech since the year 2021 so that gives the Defense Department, the taxpayer, tremendous options in terms of choices of what the different technologies from multiple vendors to go test and see what can be put into production. So it's really incredible opportunity for the military to be able to take advantage of all of the spending that's been done, all the investment and great ideas that entrepreneurs have put into practice.
Maggie 12:29
So we covered space sensors. We covered unmanned systems. What about artificial intelligence, of course, the holy grail of Silicon Valley right now. And cybersecurity. Are we seeing any trends in those tech domains?
David 12:41
Well, I'd say, you know, on the AI side, this is maybe where the Department of Defense still has significant catching up to do, as far as applying AI as part of their fundamental operations in ways that you know are far from this, the fear mongering around killer robots, you know, just thinking about how different enterprises are using AI in their you know, business decision making to help understand the data and increase their decision velocity. You know, if you look at the private sector, you know, over 66% of all venture capital funding in the first half of 2025, has gone to artificial intelligence. There's hundreds of billions of dollars. You know, I would say on the DoD side, we're really still in the single billions of dollars as far as spending on AI capability. Again, a remarkable increase from the days when, you know, you could only look at Project Maven as like the one artificial intelligence program that was doing anything of operational relevance, but still, you know, far, far lagging behind adoption on the size of, you know, commercial trends that we're seeing, and certainly, you know, our adversaries are incorporating this type of technology into their use cases. I would like to highlight, you know, that the Chief Digital Artificial Intelligence office, CDAO, has been releasing several contracts to some of the largest, large language model companies. And I think that is moving in the right direction. But if we're going to actually integrate these types of capabilities, you know, across various components of the DOD, whether it's in supporting a budget build up, or if it's in pre positioning, where assets ought to go, still a lot of green space for the department to lean into these technologies. And that's going to take a lot of training, a lot of you know, a lot of understanding, from a culture standpoint, of like, how to incorporate these technologies in meaningful ways. And then, of course, you know, I think what really needs to occur is more investment in the infrastructure to enable these various data silos to actually communicate in in modern ways that the private sector has enjoyed a. Have since the inception of the internet. I don't like anything else to add there.
Mike 15:04
Yeah, David's absolutely right about this. Data from Obviant, which is a SHIELD portfolio company that is actually bringing a single source of truth to the defense, acquisition, procurement and contracting data shows that artificial intelligence, dedicated spending has actually increased 50% year on year so but it's only gone from 1.5 to 2.2 billion to David's point still a relatively small number, not being adopted by DOD as fast as we see it being adopted by enterprises across the economy, and the still the largest AI project that David mentioned, Project Maven, which is about a decade old now, is really about computer vision. How do we make sense of satellite data? So that means that we're not spending significant amounts either on improving back office operations, which tremendous amount of the Pentagon manpower is spent on, or some of the more forward leaning applications which would be targeting, as well as Decision Optimization. So there's still a long way to go in terms of additional capabilities that we can bring. David is right. It requires also an investment in the infrastructure, because data has to be available, and you've got to have compute and networking capacity to take advantage of AI.
Maggie 16:29
So which technology domains are we seeing still lagging from Department of Defense signal?
Mike 16:39
I say electronic warfare is one of those, because we've seen a $300 million research and development increase in the budget for EW. But given the importance of that and what we're seeing in Ukraine, I'd say we're not spending enough in that area. We saw a lot of us vendors of drones basically be ineffective in Ukraine because we hadn't properly incorporated what we needed to withstand the effects of jamming and have those, you know, small UAS systems be survivable. So I'd say that's one area where we were behind David. What else would you add?
David 17:18
I would still venture that like, you know, autonomy, you know, despite Mike, you are, you know, riffing a lot of different areas where we're seeing an increase, you know, these are force multipliers, where our manpower, you know, we just have these natural shortages. And if we think about the ability to incorporate mass on the battlefield as a form of deterrence, you know, it's not going to be through manned systems. It's really through autonomous capabilities, whether that is for undersea all the way into space, and I think that's an area where significant more investment needs to occur. You know, on the Air Force side, you've got collaborative comrade aircraft. This has been a program kind of in the making for a decade, and we still really haven't started to field anything. And I'd say that there's almost this fear of, you know, perfect testing that is not allowing these assets to sort of showcase their capability. And what that has led to, you know, is the pushing forward of the F-47 NGAD 6th-Gen aircraft, that's still going to be a man piloted entity, as they say, hybrid, right? So, some will be manned, some will be unmanned, but you know, that's going to be several billions of dollars in development and production. And you know, only becomes an opportunity cost to where you could be pursuing more autonomous solutions that, again, are going to be significantly cheaper and increase the overall mass of your force structure.
Mike 18:53
I think David was really making this point. But I'll just emphasize that the lesson from Ukraine that we should be learning, in addition to agility, how fast technology was adopted on the battlefield is cost. Cost is critical. So as we continue to pursue ever more expensive, large defense platforms like f 47 the opportunity cost is to have that we're not being able to fund large volumes of attritable capability. So this is something we're going to need in a future conflict, high volume attritable systems that can be put in theater, and that those are going to be unmanned systems, not manned systems. So I would agree with David very much on that we're behind there, and that's going to be very important for the military in the future.
Maggie 19:51
What were some of the biggest surprises to you both from the recent bill?
Mike 19:56
Well, I'd say one of the areas of decline. Planes, aircraft. So the F-35 the most capable fighter has the procurement would go from 74 aircraft down to 47 so that decline was a big surprise for me.
David 20:13
Yeah, I would say I am keenly watching the battle for the E-7 Wedgetail radar plane. So again, this is a manned aircraft that's supposed to be able to provide command and control, by some estimates, not super survivable for areas of conflict. That would be of relevance for needing such a capability. The Air Force has come out and said they don't necessarily want this asset. Congress has said, “No, you do want this asset.” And it wasn't too long ago, the Air Force said, “No, we do need this asset.” So, you know, this kind of changing position, this is an area that that I'll be watching from a budgetary standpoint. It also doesn't hurt that when I was my last time in the Pentagon, you know that this was a program of sore contention around the modernization we were trying to do and moving away from some of these legacy wide body aircraft to provide command and control in the air for ground forces and air forces, and whether or not that type of capability could be provided through space assets or other means.
Maggie 21:22
So, it sounds like there's really a lot of opportunity for new players to tap into some of this new budget, $150 billion that maybe was not there in the past. What does it actually take for startups to access that budget? What’s your advice for startups to actually get some of that $150B or more?
David 21:46
I mean, I think first and foremost, you have to have a great ground game and know who are your stakeholders and champions. So, you know, the best way to be able to put funding for your capabilities is to have access to available contracts, right? Because when you think about the overall acquisition system, yes, you do need a requirement or a need. You do need a budget, but you also need the little “a” part, little acquisition, the contracting piece of it. And so if you have those available to you, whether it's through an SBIR Phase II with, you know, additional ceiling, or some sort of a production other transaction agreement, which is another sort of innovative contracting tool, among other types of contract vehicles, you know, having available ceiling and the right amount of scope that's targeting these areas where both the Department of Defense and Congress have said, are areas of need. This is the way that you help, then your stakeholders quickly execute funding against these lines of effort.
The other thing I would advise the startups to do is to make sure that they do have a good government relations entity, and that they are engaging with Congress and the professional staff members to artic to help articulate the need and how they solve a near term problem quickly with the capability that they're bringing to bear, and being able to quickly then inform their investors about how they're going to leverage that venture capital funding to accelerate adoption for the Department of Defense with this $150 billion. Because I recall that you know, some of the some of the concern on Capitol Hill as the reconciliation bill was being pushed was the lack of of detail around where this funding was exactly going to go and you know, so what does that mean? I guess it means that there's a lot of flexibility for the Department of Defense to be able to execute it in areas that they think are of greatest need. And I think it's then incumbent upon the startups, you know, to then help educate and inform their stakeholders about how they help solve the needs that are critical priorities, whether it's to Indo-Pacific Command or European Command, or just general service requirements that have been challenging for a long time.
Mike 24:12
Maybe one way for startups to think about approaching the government is to think about two dimensions. One is, are you a component going into a bigger system, or are you a system that the Defense Department would buy? The Defense Department does not like to buy and assemble things. They like to buy things that are ready for use. Good news is the Defense Department now has a lot more flexibility to buy things as a service, which means you can now sell the data if you're a company that has sensors in space, meaning the government doesn't have to own and operate the underlying asset. So that gives more flexibility. But if you're a component, you probably need to think about, how do you get into that in system? Which may mean I need to be thinking about one of the prime contracts. Actors who will have access to a large government contract versus selling yourself or I might have access to Office of Strategic Capital's loan capability, over a billion dollars, with very flexible loan terms, meaning you might have to, might not have to repay that until you have a liquidity event, could be available to you as a component supplier.
The other dimension, besides component versus Am I system ready to be used by DOD, is kind of what my technology readiness level is. If I'm an idea or I'm early on in developing the technology, I might look more to the Research and Engineering budgets, DARPA, AFWERX, all the other “WERX” that that have budget to provide grants that help you develop a capability. If I already have something that's developed and ready for testing, well now I might be looking to an organization like DIU that could help me help you put something into test and see if you can get on contract much sooner through the mechanism that David talked about, and Other Transaction Authority. So I think spending some time up front, kind of seeing where you fit in the landscape can be very helpful to determining what's the most productive path to getting a government contract
Maggie 26:16
Within these new budget lines, where do we see or where do you see the most opportunity for startups versus where do you think the defense primes legacy players are really going to continue to dominate?
Mike 26:31
Well, the large primes are going to still be putting together larger systems. So if you think about Golden Dome, there's probably going to be a role for, you know, putting together a complete package of sensors and integrating that together, fusing that data together as an example. So that means, is there an opportunity for individual providers of capability? But that might be as part of a larger program. If you're talking about unmanned systems, there's going to be more of an opportunity to be selling those directly to different branches of the military. So still going to be bottom line role for both. We're going to need the primes to be successful on programs they win, and we're going to get a lot more capability from startup companies that the primes can't offer on their own.
David 27:24
Yeah, I'd say, you know, with like, Group 1 drone, so these are, like, kind of small handheld, this seems to be an area where this budget actually starts to put some real funding behind and that might help separate some of the winners who have been building really good technology, which has by and large been coming from sort of the non traditional defense ecosystem, a lot of these venture backed startups. So we've been seeing a proliferation of this type of capability, and the effects that they've had, both in Ukraine and the Middle East over the last few years. And it finally seems as though the government, through a number of different initiatives, is recognizing that that value proposition, and so there's going to be some pretty good opportunity to win significant capital or fund procurement money to sort of advance your technology,
Mike 28:17
Drone and counter drone technology are going to needed by all the services. So you've got, you know, the ability to approach the Marines, the Navy, the Air Force, Army, they're all going to need it.
Maggie 28:27
A big debate in the broader defense tech community is over whether it makes sense to be a defense only focused startup versus to focus more dual use that is, you know, pursue customers within the US government, but also pursue customers outside of the US government. Do you think that this additional $150 billion of budget for the Defense Department should change the calculus for startups to focus either dual use or to go defense only now that the budget is so much larger?
Mike 29:01
Yeah, personally, I don't I think whether you can be dual purpose versus single use is really determined by what technology you're offering. You know, if you're a drone company today, there's not a large commercial market for drones. Now, the President's Executive Order now requires the FAA to do its homework and figure out what capability drone providers can offer this beyond line of sight. So there could be some regulatory changes underway that could accelerate the adoption in the commercial market. But by and large, it's been very slow to develop. So if you're a drone manufacturer, certainly what we've seen with the demand in Europe, based on what's happened in Ukraine, means you're primarily military. If you're AI software, there's no question you should be doing dual purpose. You might need expertise on what does the military need, but you should be pursuing the tremendous market that's out there for AI software, same with size. Uber, I don't know what you say about space. That's probably also a dual use area.
David 30:06
I think that space is, you know, not only the ultimate high ground, but the ultimate, you know, example of how dual purpose technology can really inform both industries. You know, I think one thing to recognize about the national security apparatus is, you know, space is very expensive. There's, if you're going to put something up there, you're going to have to spend money. And by and large, you know, a lot of the use cases are still, still significant needs of the national security environment, and unlike the commercial sector, the DoD is willing to provide non dilutive research and development funding to help you get over some of those costs. So, you know, I think the conglomeration of private capital and non dilutive research and development funding to help put assets in space that are addressing national security needs while also driving down the cost to accessing future commercial markets, creates a really interesting flywheel effect.
In fact, I'll just take this moment to highlight Maggie's recent blog on this very topic that she co wrote with First Lieutenant Nestor Levin, a Space Force officer, as they sort of highlight the historical elements of how the space economy has evolved and the more recent utilization of venture backed startup technology and how it's had An effect on, you know, the war in Ukraine and how it's been used, even to image what happened in Iran with the Florida nuclear blast site, right? And how space technology is really being leveraged by lots of different entities, still predominantly the domain of nation states and national security needs, but more and more with the advent of SpaceX and driving down cost of launch, providing more and more business opportunities for different commercial markets. So to me, I think the rest of the DoD could truly learn from Space Force and their approach to leveraging venture backed commercial technology and incorporating it into their concept of operations. And Mike, something that you had highlighted earlier in the conversation, buying something as a service. You know that is part and parcel to how a lot of these data providers, whether you're Hawkeye 360 whether you're Maxar, Black Sky, Planet Labs, and in the future Albedo, with their first satellite in orbit. Now, these are really great opportunities for the DOD to not have to spend as much money, but get just as exquisite capability,
Mike 32:52
And importantly, be able to continue to improve the capability as those vendors improve their solution. So something we're not used to seeing in the Department of Defense, because we typically buy off one specification and from one vendor for 30 or 40 years with large defense platforms now, buying things as a service means the military can upgrade the capability as the private sector upgrades that solution. That's a that's a huge benefit for us.
Maggie 33:21
Thank you for the shout out. David. So David and Mike, I know there's a few kind of interesting bills moving their way through Congress right now, the FoRGED Act, SPEED Act, are some of the ones that come to mind that have some policy changes that we believe could really be beneficial for startups. David, maybe could you talk about some of those actions that you think are going to be the most impactful that you're most excited about?
David 33:50
Sure, thank you, Maggie, you know, first off the off the top, I'll say, I think this might be the most consequential NDAA since the Nunn–McCurdy Amendment of like, the late 80s, and what that meant for the Department of Defense and reforming acquisition in certain cases, that got us into a little bit of trouble. But I think you know, directionally, it was going in the right, right way, and now we do need, like, kind of a wholesale new approach to recognizing the way that the economy and economic security tied to national security can create, you know, really good opportunities for entrepreneurs and for, you know, America's businesses writ large and so, you know, maybe a little bit wonky, but I'll just highlight two things.
One is this desire to move to, in certain cases, consumption based contracting. So if you think about your energy bill, or the way that startups or large companies pay for compute, you pay for it in the rears, right, as in, you get your bill, and then you pay for it. And for the most part, you know the DOD has to pay ahead of time, and so you need to always be estimating exactly what your spend is going to be. And it's really challenging to do in these dynamic operational environments where your compute costs can scale up or down depending on real world activities or real world needs. And so now having an ability to pay in the rears or based on consumption, I think is a pretty novel thing that Congress is allowing the Department of Defense to do, but it's going to be something that requires a bit of training for the acquisition community.
Okay, so that wasn't nerdy enough. I'm going to get even a little bit deeper, but the other one is the I'm seeing a distaste from Congress around cost accounting standards. And so just a really quick primer, if you operate in the normal world, you are held to GAAP, generally applied accounting principles, and that is how you do a lot of your accounting for business operations in the government, they have a different system. They have cost accounting standards. And for pretty much any large major contract, it is going to be subject to cost accounting standards, which forces you to break out costs between your labor, your overhead, and your GNA. And that can be really challenging from a profit margin when you think about building a piece of software and having to account exactly how many labor hours went into building a piece of software, because for those of us that have been in the venture capital community for a long time, you recognize that you build it once, and then the marginal cost for distributing it goes down to zero, and this is how you get fabulous returns, or fabulous multiples on revenue and EBITDA. But that is sort of anathema to how the government does their accounting, and it sort of is forcing these startups, in certain cases, to measure things that don't make sense for how their businesses operate, and in both the SPEED and FoRGED Acts, they sort of take to task this idea of cost accounting standards, and they want to make it even easier for non traditionals to apply commercial standards to their contracts, so that they don't get forced to comply with something that really was built for government when they were the only buyer in town of any technology that mattered.
And, you know, happy to go into more detail with anybody that wants to after this podcast gets released, but I'll just leave it at that. Those are two things that I thought were pretty compelling coming out of the forge and speed act, among many others. But Mike, maybe over to you for something that you thought was really useful.
Mike 37:48
Yeah, you talked about the cost accounting systems as if they're arcane, and probably the way you implement them are, but it really in layman's terms, is you have to keep two sets of books if you're a company, because I need GAAP for all of my investors and from a public company, that's what the SEC will require. And now I get to keep a separate set of books for the government. And if I'm a small company, that's can be cost prohibitive. So I think that's a major barrier today for many small companies thinking about doing business with the government. Yeah, yeah, in terms of the SPEED and FoRGED Acts, I'll just add one more, which would be the idea that we could aggregate up budget categories into a portfolio or a capability based approach. It another thing that sounds arcane, but is pretty important. So the defense appropriations are basically allocated into 1700 different line items, and those are further divided into what's called colors of money, meaning I can't take procurement money and mix that with R&D or mix it with operations and maintenance money. So you get a very granular system which allows for very little flexibility if I have an urgent need and I need to move money from one category to another, one line item to another, and if I see some exciting new technology I want to leverage, again, I am still hamstrung by the budget process here. So this idea of a portfolio approach is maybe I don't have to specify exactly what I'm buying by vendor by specification, but I might have an entire category, like small drones, and I don't need to upfront specify which spec and which vendor. I could just say I've got a pot of money for that portfolio. And now, as needs change, and as technology changes and different vendors leapfrog each other, I have the flexibility within the Department of Defense to say, okay, Congress has given me money for small drones, but now I can move flexibly from one category to another. I think that's going to be a very key innovation, and it was recommended by the PPB&E Reform Committee on Innovation, which our partner Raj served as a member on.
David 40:05
Yeah, I think that's great, Mike. And you know, when I do reserve time in the Pentagon, we talk a lot about this and one topic that comes up is like, if we could have this portfolio approach, let's take, you know, aircraft modernization, or fighter aircraft modernization, and what you would do is you would pool the F-15, the F-16, the F-22 and the F-35 and all of their modernization money into one portfolio, versus it being broken out by aircraft and as one aircraft, you know, vendor starts to do really poor. Say, still, I don't mean, I don't remember who builds the F-15, but say the F-15 modernization program, for whatever reason, it's just languishing. Well, instead of, you don't have the ability to move that money to maybe the F-16 vendor who's doing exceptionally well and accelerate some of the timelines for modernizing that aircraft. Instead, what you have to do is a mea culpa and hope that through these arcane budgeting processes called below threshold or above threshold reprogramming, BTR and ATR, that somehow you're able to move the money across to something that like at the end of the day, what we're trying to do is have air superiority in the Air Force, but the program executive officer who's in charge of all of the advanced aircraft does not have the ability to move the money across his or her programs to maximally affect readiness in the departments. And that is just like, I think, one good snapshot of how this portfolio approach, still, you know, it's focused on these capabilities, air superiority being one, but allows you to move across these different platforms.
Mike 41:58
Yeah, the way I think about that is, we're asking our military to really achieve, up to now, higher levels of speed and flexibility in what they're doing, but the budgeting process doesn't manage match that. We got a process that basically takes three years to get $1 of spending approved, and now I can't mix and match, as you said, David, from where it was allocated a year or two ago to where it's needed now. So we need the budgeting process to embody that speed and flexibility that will match what we're asking our warfighters to do.
Maggie 42:34
So we've talking a lot about what Congress is doing with the Big Beautiful Bill, with appropriations, but what are we actually seeing coming from the executive branch? I know there have been a couple executive orders that have come out over the last six months or so that are really pushing the needle forward on how innovative startups and non traditional contractors can work with the Department of Defense. Maybe, Mike, could you talk us through some of the EOs that you are most excited about?
Mike 43:02
Yeah, really, a lot of what we've talked about here in this podcast is the “what” of the budget, what would we be spent on, versus what we've spent on in the past, and the recognition that we're now going to be buying some new capabilities, and that will mean new vendors, but there's an equal emphasis from the administration, very positively, on “how” we will buy those things.
So four presidential executive orders so far, and some directives from Secretary Hegseth on the “how” of buying things, which are really if you put those all together, it's how do we reform Federal Acquisition Regulations. 2000 pages of documents that's longer than war and peace, and there's a similarly length, 2000 page document on how to use it and apply it, kind of a guidelines for you. So no one person could comprehend that. And there's a recognition that that should be simplified. I heard that simplified down to 100 pages. I hope that's true. We'll wait to see what that looks like, but the President has basically mandated that the Federal Acquisition Regulations should be rewritten.
There's also an emphasis on more commercial methods, things that we pioneered at DIU, something that David really pioneered, the Commercial Solutions Opening, which is basically how to buy things in a more commercially oriented way, which brings in more competitors and actually test these things before we would agree to buy them. So that process is now well documented and used well beyond DIU an emphasis on commercial first, which the Congress has asked for the last 30 years. Let's not look to how we can make something custom by the military, but as we look at these new technologies that are being developed commercially, how can we use those first, rather than asking for something custom by the military, that's going to result in much better value for taxpayers, and a recommitment to something called modular open system architecture, or approach. Image, which really is the way the commercial world operates. You think about the computer, computer world, where we have interchangeable parts, and if I buy, you know, a operating system from Microsoft, and that goes on a computer, we know that's going to work on multiple pieces of hardware. That same idea applied to the military, I need a modular architecture so that I can mix and match and buy from different vendors and have things working together. So all of these are aimed at more speed and flexibility, more commercial use of technology by the military, which I think can only improve our capability and at lower cost.
David 45:42
Yeah, I think that's well said, Yeah, over my I guess now, over 16 years now, between active duty and reserves. You know, rarely have we seen the executive branch move out ahead of Congress, mandating through something like the NDAA, yeah, the only example really that I can think of is Ash Carter. When he was, you know, the undersecretary of what was then Acquisition, Technology and Logistics, AT&L, then his time as DEPSECDEF, and then his time as Secretary of Defense, he was one of the few that would go ahead and, like, push forward for what made common sense, maybe sometimes just in advance of legislation, or helping, you, know, inform legislation to then sort of reinforce what they what the executive branch was trying to do. I think this is a pretty rare moment where you do have an executive branch highly inclined to do things that would, you would traditionally see in in the business world, right? And trying to apply those good practices to the Department of Defense. So we're all for that, because a lot of it does focus on commercial capability, leveraging private capital markets, you know, providing opportunity for entrepreneurs, all things that are part and parcel to our investment thesis.
Maggie 47:06
So turning back the focus to Shield Capital, where we all work, we are a firm, we're predominantly focused on four technology areas: AI, autonomous systems, cybersecurity, and space. And at least historically, we have primarily focused on investing in more dual purpose companies, companies that have the potential to sell both to the US government but also to the commercial sector. So Mike, do you think that this investment thesis still makes sense? Are there changes that we should be making, in light of both new budgeting and appropriations data, as well as some of these new actions coming out of the administration, and other just trends we're seeing in the market?
Mike 47:53
What I think the changes in administration so we just talked about some of the executive orders on and directives from Secretary Hegseth on how things will be bought, and then most of the podcast on what will be bought, I think, reinforces that thesis we have at SHIELD. So those four domains are all going to directly benefit from the appropriations in FY 26 and probably do a more significant degree than we would have seen in any subsequent year over year change. And I think we're at the start of maybe a decade long trend of where we're going to see investment in these new capabilities to complement the traditional investments we've made in defense, in large platforms, ships, tanks and planes.
So what we're seeing around the world is becoming more dangerous, the need for more defense spending and the need for these new capabilities, because they've already proven themselves on the battlefield. So that makes me feel even more comfortable with the thesis that we have. I think those four domains are ones that are going to continue to be multi billion, in fact, multi 10s of billions of dollars in their market size and grow at double digit rates, meaning there's going to be tremendous opportunity, and they all have significant impact for national security. So to me again, reinforcing the thesis we have at shield, and what we will continue to do is look for companies where we can or technologies too, where we can add value to bringing those technologies into national security establishment. And nobody's better than that at shield than David, who really understands the acquisition process in depth and has worked with a lot of our portfolio companies to make sure that they know what are the mechanisms to get on contract and how to most effectively work the process so that it can be in the best position to be on contract. So I think we're at the very beginning of seeing that strategy really pay off at SHIELD.
David 49:54
Thank you for the compliment, Mike, and I think you covered that exceptionally well. It's true.
Maggie 50:00
Well, Mike and David, thank you guys so much for coming on the podcast and breaking down the very complicated world of appropriations and defense acquisitions, I certainly learned a lot, and I think our listeners will as well.
David 50:15
Thanks so much for having us. Maggie, thank you, Maggie, always a pleasure.
Akhil 50:20
Hey everyone, thanks for listening to the Mission Matters Podcast from Shield Capital. Tune in again next month for another conversation with founders building for a mission that matters. And if you yourself are looking to build in the national security space, please reach out to us.