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The government’s need for fresh technology and innovation extends across the supply base. A new trend is that major contractors are accelerating their investments in promising startups. An example is the $100 million fund founded by Booz Allen Hamilton. We spoke to Booz Allen’s Vice President of Technical Scouting and Venture Capital Brian McCarthy to learn about his goals and principles. He talked to Federal Road with Tom Temin.
Tom Tam: And is this venture capital firm that you started, I wish I had that much cash, or should it be modeled after a classic venture capital firm that you might find on the West Coast?
Brian McCarthy: Yes, I believe it is a corporate venture firm. As such, it will be a wholly owned subsidiary of Booz Allen. There are no other investors in this fund. The capital of the fund comes from our balance sheet. One important clarification: traditional venture capital is really too focused on bringing the best technology to consumers and other bases. This particular fund will be very focused on the public sector and will be a strategic fund, not just a financial one. And by that I mean that we hope to extract some strategic value from the companies that we find and eventually invest in.
Tom Tam: And when you talk about strategic value, what does that mean?
Brian McCarthy: Yes, I think that means a few things. First, we know that the public sector, it’s been covered extensively by you guys and several other publications that track our industry. But it is widely recognized that the government sector, DoD and national security missions need access to commercial and blue-chip technologies to accelerate time to market. And with that, from a value perspective, our customers ask us every day in some of the most important missions that we do, how can you go and find and access the best commercial technology. So the strategic value for us is to spend a lot of time sourcing, testing, validating some of these technologies and then bringing them to our channels, bringing them to the forefront of some of the most challenging public sector missions and delivering them to our customers. It also means we can tap into new markets and channels for ourselves. So, you know, an example of that would be whether it could open up a new channel in a quantum or immersive system, or against UAS? Yes, things that we may not develop, necessarily at home. We have such opportunities at home. But can we find companies and startups that are fast-tracked and poised to succeed in these areas?
Tom Tam: You mentioned dual use. So the assumption is that these companies may already have technology that has commercial applications, and your job will be to make the investment that will help them enter the federal market.
Brian McCarthy: That’s exactly the case. One of the things that we’re going to be looking for is we use a technical scouting division that’s primarily based in San Francisco and Austin, and in Washington, D.C., we have about 25 full-time scouts, we’re going to use that as source to find some of these companies. And I think one of the first things we’ll look at is a good marker, do some of these companies, number one, already have a product, right? We’re not necessarily looking for advertising space, but do they have a product? And can it be used right now? right? Because this is exactly what our clients demand from us. And if it is already in commercial use, can we change? And can we, you know, give an example of the use of this product in the public sector? This is really what we mean by dual use.
Tom Tam: We’re talking to Brian McCarthy, who is vice president of technical scouting and venture business at Booz Allen Hamilton. And by investing in them, will you also be investing, I guess, in people? Because very often these companies are just completely green when it comes to the ins and outs of getting a federal contract, or are you just using them as subcontractors?
Brian McCarthy: Yeah, I think there’s probably a mixture of both. So we’re going to take a minority investment in the company. In terms of strategy, we’re going to help them do a lot of different things. One is to bring them into new markets and channels through contracts with Booz Allen. Second, we’re going to give them access to our customer base that they might not otherwise have direct access to, but there’s also a lot of other things specific to the federal market, right? So maybe they need facility permits? Are they having trouble getting facility permits, and can Booz Allen help sponsor them? Anyone who builds SaaS applications in the cloud knows how difficult it is to get federal pre-use certifications, right? So that’s another thing we can help with. So our core engineering background, we’re definitely going to bring that to the table. And in some very, I wouldn’t say, rare cases, but one of the things that we’ll definitely look at is whether we can take this product, this SAAS product that we’re primarily talking about here , can we also incorporate it into our own R&D pipeline?
Tom Tam: What if one of the companies got the investment and they were on track and they were comfortable with the feds? What if they are at Deloitte?
Brian McCarthy: No problem.
Tom Tam: Okay, so there are early examples of the types of companies that you may have been involved with?
Brian McCarthy: Yes, we have been stealth for the last year. We’ve actually already made three investments, and judging by your last question, that’s pretty cool, right? So, one of the things about the investment game is that it really is a team sport. So one of the first companies that we invested in, actually, our first one was a company called Latent Artificial Intelligence. It’s basically an artificial intelligence company where they develop tools that allow us to deploy algorithms in low-compute, low-power environments. Perfect for soldiers. Another investor of this company was Lockheed Martin ventures. And we’ve actually exchanged due diligence and findings on whether this company can be beneficial to both of us, right? Yes, I think this is an early example. And we are already dragging them to the army contract. So, in terms of the partnership there, I think it’s been fantastic so far.
Tom Tam: That’s right, because if they replace Booz Allen, then you’re going to get closer to winning a federal contract. And if they partner with Lockheed or with somebody else, with some other competitor, then you win because you’ve invested in them and they get revenue that way.
Brian McCarthy: It’s true. And I think even more so when you think about the strategic imperative, really, in terms of great power competition, whether it’s Lockheed or whether it’s L3 or whether it’s Raytheon, some of these other people have venture arms, we all need to play this sport. And there is no other way to say it. The Department of Defense just announced $100 million of its own money for what it calls the “valley of death” for startups. And we know that our adversaries are really going after some of those markets, especially in quantum, especially in microelectronics, particularly in AI and 5G. So we need to attract credible sources of capital to the startup community and really emphasize why working with the public sector is good for their business. So it was really nice to see how many startups and founders are very willing to work with the public sector.
Tom Tam: And in a way it ensures that these types of up-and-coming companies stay away from, say, Chinese capital, which is not an unknown phenomenon.
Brian McCarthy: Well, that’s for sure. And I think that was a serious concern, it continues to be a serious concern. There was a big article in the Wall Street Journal. I know that SASC [Senate Armed Services Committee] very concerned about it, as well as senior officials in the Pentagon. So one of the things that we have to do, even in all of our business cases, is really look at their table of foreign investment restrictions. So that’s part of the process we go through before we make an investment in a firm.
Tom Tam: And the last question: who makes the investment decisions? Are you alone? Or do you have a board at Booz Allen that looks at these companies?
Brian McCarthy: Yes, we have a five-member investment committee. So my fun team is raising business cases and we’re working with four business units where we’re focused on AI, cyber, deep tech and anything else c5isr [Command, Control, Communications, Computers, Cyber, Intelligence, Surveillance and Reconnaissance]. Those business cases are reviewed by a five-member board, of which I’m a member, and then we have people from our CTO office, our corporate development office, and others, and it goes to a five-person vote.