In case you missed it: A whole new generation of defense companies is betting that novel hardware, software, and manufacturing approaches will help the Pentagon maximize the bang for its buck.
Red Cell Partners thinks that an entirely new contracting model is the key to keeping more cash in the Pentagon’s piggy bank, and DoD’s Chief Digital and Artificial Intelligence Office (CDAO) is giving them a major chance to test it out.
This morning, the Virginia-based national security incubator and VC firm announced a $100M OTA contract with the CDAO to validate a shared savings contracting model—where companies get paid a cut of the savings they generate, rather than a fixed fee—in places where agentic AI can replace manual processes.
Flip the risk: In the defense world, this is a wholly novel contracting approach—and the first time a venture firm has been given the opportunity to test it—but the model is widely used in the health-care sector. That’s where Red Cell’s CEO and founder, Grant Verstandig, got his start.
Here’s how it works:
- Red Cell serves as the prime for its portfolio companies, primarily in the agentic AI space, that they believe can automate manual, repetitive processes. Audits and Authority to Operate (ATO) approvals are two immediate use cases.
- They align with a customer on the objective, then run a pilot program to test the solution and establish a savings baseline with a portfolio company to confirm the program will save money versus the incumbent contract and manual process. Next—if it’s successful—Red Cell’s portfolio company scales the project up.
- In the end, the Pentagon only pays the Red Cell portfolio company a percentage of the savings the agentic AI solution generates, rather than a fixed fee. In other words, the company bears all the other upfront costs, and only gets paid if it saves the Pentagon money.
“Having this OTA in place helps us move faster. If we’re talking to the Navy or the Space Force, and they say, “We would really like you to come in and help solve this problem,’ we don’t have to start from scratch,” Red Cell National Security Practice President Veronica Daigle told Tectonic.
“We can say that we’ve got a vehicle—let’s map it out and give it a try—and then if it works, we move forward and scale it,” she added. “It’s a great way to test very quickly, and it’s really aligned with what the department has really been talking about.”
Getting started: To kick things off, Red Cell and the CDAO are looking at audits and ATOs as a first use case for their portfolio companies.
- That includes Trase, which builds AI agents for highly regulated industries, and Andesite, which develops AI tools for cybersecurity teams, but the OTA is open to all of Red Cell’s companies.
- For the agentic-AI-in-audits case, Trase has already “developed a prototype and is starting to do that initial build-out of what it would look like in the initial stage,” Daigle said.
Prove it out: Right now, the contract is focused on Red Cell’s portfolio companies, but if the pilot program is an early success, Daigle thinks it’s a model “that will become more widely adopted in the department.”
“That’s where the CDAO deserves a lot of credit for really leaning forward in creating this vehicle for us to test it out,” she said. “If we can start to demonstrate that the model works—and that there are savings, and a way for companies to make money on this where their incentives are aligned—then other agencies or departments will start to say, ‘Oh, maybe this is something that we should try as well.’”
