The Defense Department abruptly decided to stop funding Shift, a $2 million fellowship program that strengthened the Pentagon’s relationship with startups and venture capitalists.
By David Jeans, Forbes Staff
InNovember, hundreds of people from Silicon Valley gathered at a defense tech conference in Washington, D.C. to urge the Pentagon to collaborate with the tech industry. It was a worthy goal, something the Department of Defense itself has said is essential for deterring and defending against foreign aggression, particularly from China. The event, which brought together some of the most prominent venture capitalists and technologists with top military brass, was the inaugural gathering of Shift, the company behind a popular fellowship program that connected startups and VCs with military personnel.
“This is an institution that’s had an outsized impact in providing the connective tissue between America’s greatest entrepreneurial innovators, and the innovators within Defense,” said Shyam Sankar, the CTO of Palantir, who was a keynote speaker at the Shift Defense Ventures Summit. “I was really looking forward to next year.”
But five months later, Shift unexpectedly shut down. The reason: “funding constraints” that led the Air Force’s AFWERX innovation unit to decline to provide the approximately $2 million annually required to run it, according to an AFWERX memo obtained by Forbes sent to members of the program last week.
The move came as a surprise to Shift CEO and founder Mike Slagh, who told Forbes that AFWERX had indicated it planned to continue funding the Defense Ventures fellowship as recently as January. Though he scrambled to secure new financing, he was unable to do so; he was forced to shutter the program earlier this month.
“How can industry investors possibly validate any demand signal from the [Department of Defense] with this kind of disregard for a universally praised innovation program?” Slagh, a U.S. Navy veteran, told Forbes. “The adversaries of the U.S. don’t need to do anything but standby and watch us defeat ourselves.”
Part of Shift’s goal was to help defense tech startups bridge the gap they face between initial contracts and grants with the Defense Department, and on-ramps to the type of major contracts typically held by the likes of Lockheed Martin, Booz Allen and Northrop Grumman. With the exception of SpaceX, Palantir and Anduril, few venture-backed defense companies have surmounted the so-called “Valley of Death,” where capital typically dries up before companies are able to move from a pilot to major contract.
“I think transition clearly is one of our biggest problems,” Defense Department Deputy Secretary Kathleen Hicks has said. “The so-called ‘Valley of Death,’ scaling up to fielding and full-scale production is a piece of that.” The Pentagon had even recently cited Shift as an example of how it would continue to “increase collaborative efforts with the private sector.”
In a statement, AFWERX said that it did not renew the funding for Shift “due to fiscal constraints and expected funding cuts” in the coming financial year. In its memo to former fellows, seen by Forbes, the unit said, “Our goal is to continue to accelerate the connection between industry and Airmen by iterating on the knowledge gained from the Defense Venture Fellows program.”
Since 2021, venture capitalists have poured in some $100 billion into defense startups, but that hasn’t necessarily translated into military contracts. A new study released Tuesday by the Reagan Institute found that the government is “failing to transition” most pilot contracts, known as Small Business Innovation Research grants, to production: the top 25 companies, some of which received over $100 million over the past decade, generated less than $500,000 in subsequent contracts. And last year, less than 1% of the Pentagon’s $411 billion spending on contracts for the last fiscal year was awarded to venture-backed companies, the Wall Street Journal reported, citing recent data from defense software company Govini.
Trae Stephens, the chairman of Anduril, told Forbes that he has seen “a lot more talk than there is action,” from Pentagon leaders. “Private industry shows up with startups that have venture backing, and the government isn’t actually there to convert those things to production,” Stephens told Forbes. “And at some point, the industry is going to realize that [the government] hasn’t showed up and the money is going to stop flowing.”
Slagh launched Shift in 2016 after leaving the U.S. Navy, where he had been a explosive ordnance disposal technician. With seed funding from Andreessen Horowitz, it was initially a hiring platform that provided career services to 50,000 veterans. But when the company struggled to pencil out a sustainable business model, Slagh pivoted from his network of jobseekers to launch the Defense Ventures Program in partnership with AFWERX. Its main focus was providing fellowships for active military personnel with tech companies and investors.
Kaly McKenna, one of the program’s first fellows, completed a stint with Andressen Horowitz where she had advised the venture fund on go-to-market strategies for portfolio companies selling to the government. She said the program had an outsized effect on connecting Silicon Valley and the Pentagon with a relatively small budget. “They inspired so many military people to really think differently about how you solve problems,” said McKenna, who is now chief of corporate budget process at the Air Force. Since 2020, more than 450 military personnel have completed the program’s eight-week fellowships before returning to active duty.
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Beyond the inaugural conference in November, attended by more than 700 people including leaders from the Defense Department, General Catalyst, Palantir and Andreessen Horowitz, dozens of companies saw huge upside to the program. Hermeus, a hypersonic aircraft manufacturer that has raised $130 million, took around 10 fellows from the Air Force, according to CEO AJ Piplica, who advised the company on how its aircraft could better address DoD needs. At General Catalyst, which has invested in several defense tech companies, including Anduril, partner Paul Kwan said he hired one of his defense fellows to become an investor. “[Shift] was a great shining example, who did it very efficiently at scale, bringing the best of the best from each of those worlds together,” said Kwan.
Other efforts to connect the Pentagon to tech companies have had mixed results. Twenty-five years ago, the Defense Department launched In-Q-Tel, the CIA’s venture investing arm, which has backed companies like Palantir and Dataminr. Around 50% of its portfolio companies have been “adopted for use” by the government. Based on this model, newer so-called innovation organizations — DIU, AFWERX, SOFWERX, NAVALX, among others — have been launched to provide grants and invest in companies looking to do business with individual military branches, but they are hamstrung by a “limited ability to facilitate adoption” by the DoD, according to a 2023 report commissioned by the Pentagon and conducted by RAND.
In a talk at another conference this month, Heidi Shyu, undersecretary of defense for research and engineering, pointed to another program called RDER, which aims to move companies from prototyping to product faster. “The DoD cannot afford for useful research to languish in the laboratories,” Shyu said, or ”for bureaucratic processes to prevent engagement with innovative private companies.”
In the meantime, AFWERX spokesperson Matthew Clouse told Forbes that there are no plans to replace Shift’s fellowship program. He added: “AFWERX will continue to look for other opportunities to engage with the Ventures community including possibilities for new programming.”
