Defense Tech’s New Contract With Washington

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TRANSCRIPT

The following transcript of this discussion was edited for clarity.

Bob Mertz: Hi everyone, I’m Bob Mertz, and this is “Forces of Law,” Goodwin’s new podcast on the big forces shaping business. Today, we’re talking about a big change underway in the defense industry. Whether or not you work in this space, what’s happening here is really interesting. The Trump administration has been trying to get more tech startups to work with the Defense Department (Pentagon), and to do that, it’s been pretty dramatically overhauling how contracts get awarded and how the government invests in those businesses. 

Bob: Here to explain is Liza Craig, a partner who leads the Government Contracts & Grants team at Goodwin. Liza, thanks for joining. 

Liza Craig: Thank you, Bob, for giving me the chance to be here.

Bob: You spent most of your career before coming to Goodwin in the Navy’s Office of the General Counsel. What kind of companies would typically work with the Defense Department? 

Liza: For a long time, the defense contracting sector has really been dominated by the big dogs everyone knows — Lockheed Martin, Northrop Grumman, GDIT (General Dynamics IT). These are the companies that, traditionally, you think of when you think about the US military-industrial complex.

Yes, they worked with smaller subcontractors that were innovative, but really, they were driving the market, driving the technology, driving the deliverables, and driving the systems.

Bob: But now what? 

Liza: Well, we’re now seeing a huge war that’s being waged on the cyber battlefield, so technology is becoming more important. Unmanned systems are becoming preferable to deploying troops on the ground, and we don’t expect that to ever go back to the way it was. We’re only going to see more innovation as we look at warfighting. 

And the traditional heavyweights in this space aren’t always the ones that have the fresh, cutting-edge ideas and perspectives. 

Bob: Got it. So that’s why the government is now trying to bring in more tech startups focused on things like AI (artificial intelligence) and quantum computing. 

Liza: Yes.

Bob: Are you already seeing signs of that shift? 

Liza: Absolutely. I see this great emergence of defense tech startups centered on the West Coast, but we’re seeing it on the East Coast in areas like Boston and in areas like Connecticut and New England. There just seems to be an electric environment in which folks with great ideas are being encouraged to really come together and provide these critical and innovative goods and services. 

And certainly, some of these policies and the current climate are so supportive of it. 

Bob: OK, so let’s talk about these new policies and this new climate. What has the Trump administration been doing to make it easier for these startups to move into defense contracting? 

Liza: A couple of things. The Federal Acquisition Regulation (or the FAR) — the regulatory framework by which the government awards contracts — is being completely overhauled. 

The FAR is this huge book. Huge — throw it at someone’s head and maybe take them out. For years, people have complained that it’s too dense, it’s too complicated, and abiding by the rules and regulations set forth in the FAR takes way too long to get federal money on contract. One of the biggest things the Trump administration is doing is trying to slash the timeline by reducing redundant and repetitive regulatory requirements that make it harder for contracts to be put in place. 

So that’s one area — the change in the regulation. It was these very small startups that oftentimes struggled with getting that first contract. 

Bob: So they’re changing regulations, making it easier for startups to comply and to secure contracts. What else? 

Liza: Let’s talk a little bit about what’s known in the government and in contracting spaces as the “valley of death” — the time period between when a company comes up with a great idea and ultimately full deployment across the government.

A lot of small companies have struggled making that jump and often die in that interim period simply because there hasn’t really been the funding there for them. One thing I will say about the valley of death … for the first time, I think, in my career, I’m really seeing that it’s getting a lot of attention, and they’re looking for ways to harness federal capital as well as private capital to help these companies bridge the gap.

So the government is investing in certain companies, taking, in some cases, an equity stake, and using that infusion of cash to support the growth of these companies in a manner that is consistent with our national security.

Bob: This move you’re talking about — the government investing in companies, taking an equity stake — it’s been controversial. What are you watching there?

Liza: I think one of the biggest areas of focus for my clients, and then obviously for myself and my team, is we’re really looking to see what this looks like in practice — having federal investment, private investment, and private funding all coming together on a company’s cap table.

What happens when the company wants to undergo changes in its size? Changes in its focus? Does having the federal government as a stakeholder change the decision-making process or even change the possibilities for that company? How passive will that investment be? And will that federal investment ultimately be something that concerns private investors in a manner that they’re, you know, a little unwilling to mingle funds?

Now, I’ll say, I haven’t seen that. I’m really optimistic that this will work out well. But these are questions that people are asking now, and I think it’s because many of us haven’t seen this type of funding in our lifetime. And so it’s just a little bit unclear how it’s really going to shake out.

Bob: Defense companies typically haven’t had private investors the way startups do. Does that raise any issues?

Liza: I would say an area that is particularly challenging relates to foreign ownership, foreign investment, and foreign involvement. It used to be that we’d really be concerned about foreign ownership, control, and influence when we’re talking about classified work — the stuff that is in the folder with the red sign over it that everyone gets in trouble for bringing it home. But the federal government has acknowledged that there are challenges related to foreign ownership that extend beyond classified work even to unclassified matters. So we’re starting to see the government inquire into a company’s foreign ownership, their investments, and their ties, even at the very beginning stages when they get that first government contract or grant.

So it can now become an issue at any point in time in a company’s life cycle, and it’s one that we often tell our clients: “You need to start thinking about it early.” If that is your intended market, you cannot go wrong with thinking about your fundraising strategy, your growth strategy, in light of where that fundraising is going to occur around the world.

Bob: And these concerns are not new, but some of the rules have changed recently?

Liza: Not new. Not new at all, but more at the forefront. So as we are doing more to open the doors and to bring more of these entities into the ecosystem that haven’t existed before, there necessarily has to be a little bit more scrutiny as to where these folks are getting their capital from, where the IP (intellectual property) that might be generated under these contracts is going to flow, and who’s going to have access to it.

So these have always been concerns, but again, when we were in the era of simply the big dogs, they had that locked down.

Bob: Final question, Liza. A lot of these changes we’re talking about are the result of executive orders. So is all of this ultimately temporary, or is this a permanent shift?

Liza: Should the next administration’s priorities be different, we certainly could see the repealing of President Trump’s executive orders and the implementation of new presidential executive orders that reflect a completely different path forward.

However, I don’t think, from a national security perspective, there will be much difference in terms of the priorities of the administration. So some of the things that are being put in place now may be difficult to turn off once the administration changes.

What we’re seeing now are efforts by the federal government to increase competition, to increase access to talent. I believe many would argue that any changes that would shrink that talent pool would be to the detriment of the nation’s national security.

Bob: This has been really interesting, Liza. Thank you so much for taking the time.

Liza: Appreciate it, Bob. Thank you.

Bob: Liza Craig is a partner at Goodwin who leads our Government Contracts & Grants team. You can find links to more about this topic in the show notes, and you can check out all of our analysis at goodwinlaw.com. If you haven’t already, please subscribe to “Forces of Law” on any of your favorite podcast platforms. New episodes come out every other Monday — and the next one will be a really interesting conversation about AI laws. Don’t miss it.

Thank you so much for listening. I’m Bob Mertz, the editorial director at Goodwin, and this is “Forces of Law.”