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How a VC model can help government 'spin in' commercial innovation

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Historically, government has fostered technological leaps, from space flight to GPS to vaccines. Now, however, leading capabilities are often already commercial: Consumer facial recognition may be sufficient for law enforcement, commercial mapping tools have become part of the arsenal used by military special forces and commercial genetic testing could offer public health data and insights beyond what research studies are likely able to recruit.

More and more, government access to cutting-edge technology, skills and business models involves tapping into the advances being made by outside players. Instead of spinning off government innovations into commercial products, governments now need ways to "spin in" commercial innovation -- engineering a "reverse tech transfer."

Traditional acquisition approaches often fail to attract commercial innovators, however. Just 3% of Small Business Innovation Research grants go to what we typically think of as startups (backed by multiple venture firms). And it is not necessarily easier to attract "big tech" companies, where high-profile employee protests have cut short several projects.

Federal agencies should draw on a broader set of "investment strategies" -- adapting external engagement models from corporate venture capital. Our research highlights four models.

Industrial base: "Portfolio" investment strategy

As soldiers met evolving threats in Iraq and Afghanistan, the Joint Improvised Threat Defeat Organization (JIDO) needed to tap into ready solutions to counter new types of improvised explosive devices (IEDs) -- sourcing technologies to counter threats from armed drones, for example. By continuously scanning for the latest commercial capabilities, JIDO identifies trusted partners and uses rapid acquisition authorities to get these solutions to the frontline quickly.

Building a diverse set of suppliers like JIDO's commercial partners is an example of an "industrial base" partnership -- one variant of a broader "portfolio" investment strategy, which can help source products whose usage is well understood through innovative acquisition approaches and venture funding arms.

The Department of Defense has long relied on a large industrial base to efficiently supply military equipment -- what's important today is to broaden the base to include nontraditional players and startups that offer exposure to a wide portfolio of innovations.

Accelerators: "Early-stage" investment strategy

Based on startup accelerator Y Combinator, the World Food Program awards up to $100,000 to build out proofs-of-concept for promising ideas -- what Director of Innovation Robert Opp refers to as "scale-ups" -- to a point where they can qualify for outside funding. The accelerator has funded projects including a blockchain-powered aid distribution system for refugees, digital marketplaces for smallholder farmers and AI-based image recognition to diagnose malnutrition.

Accelerators like WFP's offer an early-stage investment strategy, providing resources to build out less mature products. They speed up innovation by offering access to customer insights, sector or category expertise and real-world environments or assets -- and offer government the opportunity to shape an off-the-shelf commercial product that fits its needs.

Government can also get many of these benefits without directly running the accelerator. The Department of Agriculture's National Institute of Food and Agriculture, for example, funds an external accelerator for high-tech, precision agriculture startups, while several Defense Department elements -- like MD5 and AFWerx -- partner with the well-known TechStars accelerator.

Strategic partnerships: "Joint venture" investment strategy

To provide humanitarian aid in underbanked regions, the United Nations has to set up infrastructure for tracking and management -- at significant cost and effort. To tackle this problem, the UN teamed up with an unlikely partner: Mastercard.

It turns out that credit card companies have core capabilities that are helpful in aid disbursement: fraud detection, electronic tracking, digital infrastructure and even marketing. Mastercard's collaboration with the UN helps it to monitor distribution of welfare grants using a smart card processed by a card reader that can be tethered to an Android device -- replacing the manual processes used by local merchants.

When commercial assets like Mastercard's are mature platforms -- making them harder to simply procure -- strategic partnerships can create the public equivalent of a "joint venture," capitalizing on areas where business and social incentives align.

"When we talk about startup-driven innovation, we think of it as large organizations adopting practices that make startups successful. One of the practices is significant partnering -- knowing whom to partner with and how to develop these partnerships efficiently," observes venture capitalist Evangelos Simoudis.

Open architecture: "Platform" investment strategy

Health research today can draw on inputs as diverse as genomic data, electronic health records, clinical trial data and patient-generated data from wearables or mobile apps -- but this data largely exists in silos due to privacy concerns or interoperability challenges.

To improve access, the National Institute of Health is piloting the NIH Data Commons, a cloud-based platform where investigators can store, share, access, and experiment with digital objects generated from biomedical research -- speeding hypothesis generation and validation.

This initiative illustrates the fourth investment strategy governments can use to spin in new capabilities: a "platform" investment strategy. A public-sector platform strategy makes investments in structures that increase the underlying value of the broader system -- what the United Kingdom's Nesta Innovation Foundation describes as "government as impresario," enabling data-sharing and innovation in more nascent areas like smart cities.

In an operating environment being redefined by technology, government must keep pace -- or risk consequences for mission delivery. The diversity of innovation asks that government similarly diversify acquisition strategies -- spreading across more suppliers, taking a wider range of bets, and infusing new capabilities mid-stream. Public-sector organizations can learn from venture capital to diversity and evolve investment strategies to "spin in" these new capabilities.

About the Authors

William D. Eggers is the Executive Director of the Deloitte Center for Government Insights.

Max Meyers is a Manager in Deloitte Consulting LLP's Government and Public Services practice.

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