For many yearsit is taken as a given that venture investment is fundamentally incompatible with defense technology.
Long acquisition cycles – upwards of 10-15 years for major weapons programs – and the poor economics of defense technology startup exits are often cited as two reasons why. the math just doesn’t add up. Sometimes objections wear a moral garb: In 2018, a group of Google employees said CEO Sundar Pichai that the company should stop working on a Pentagon pilot called Project Maven because “Google should not be in the business of war.”
Times have changed. In fact, it is probably not an overstatement to say that the relationship between US defense and Silicon Valley is undergoing the most profound change since the 1950s, when Pentagon funding led to massive advances in computing. , semiconductors and weapons systems.
Below, five venture investors describe this historic shift. Three of the investors separately used the word “generational” to describe the change: Jackson Moses, founder and managing partner of Silent Ventures, said that defense tech is a “generational opportunity”; Jake Chapman, managing director of Marque VC, describes a “generational shift” in capital and wealth to startups; and Josh Manchester, founder and GP of Champion Hill Ventures, talked about the country’s “generational competition” with China.
It is no coincidence that this word is repeated over and over again. Fueled by geopolitical antagonisms, a growing awareness that the US defense industrial base is ill-equipped to maintain the country’s competitiveness (despite better capital), and internal changes The Defense Department itself has created new opportunities for venture-backed entrepreneurs — and the investors who fund them.
When one considers dual-use areas such as space launch and biotechnology, the opportunities become even wider. PitchBook, which includes these features and more in its analysis, found just that defense tech VC activity topping $34.3 billion last year alone.
Of course, risks remain. You’ll hear from five investors about the complexities of investing in defense technology, which sectors are (and aren’t) oversaturated, and whether venture dollars can help build the next US flagship.
We are talking to:
- Jackson Mosesfounder and managing partner, Silent Ventures
- Jake Chapmanmanaging director, Brand VC
- David Ulevitchgeneral partner, A16Z
- Raj Shahmanagement partner, Shield capital
- Josh Manchesterfounder and general partner, Champion Hill Ventures
Answers have been edited for length and clarity.
Jackson Moses, founder and managing partner, Silent Capital
What is your investment thesis for defense tech?
Defense technology is a generational opportunity best categorized as Dot-Com 2.0. This is patient arbitrage in a large market historically defined by inertia, occupied by imperfect legacy businesses, plagued by suboptimal public-private relationships, and hampered by entrenched structural deficiencies. which prompts improper behavior at the expense of national security. Silent Ventures believes that investing in defensive startups is an effective way for LPs to meaningfully diversify risk, support highly motivated founders, take advantage of asymmetric upside, and undoubtedly eliminate in the emerging narrative of a new global order.
It has long been thought that defense technology is not a suitable area for investment investment because it will never achieve the returns over time that limited partners are looking for. Why is that the case, and how different is the landscape today compared to five years ago?
Without re-litigating the philosophy and ethics of defense technology, a key reason LPs avoid this space, the short answer is that before 2022, many business LPs will follows alpha in the form of proven generalist funds and no proven “emerging” managers. For much of this century, especially 2018 to 2021, LPs must consider the historically high opportunity costs of engaging in defense technology in generalist sectors. Explaining these tradeoffs in 2018 will prove to be a lesson in futility. However, for better (or worse), the 2022 “reset” serves as a forcing function for LPs to revisit risk management and portfolio construction fundamentals.
With turbulent capital markets and global conflicts as the macro backdrop, sophisticated LPs chose to reallocate capital to defense technology specialists. While it was once a necessity to bootstrap A&D with minimal investment, unique defense technology advocates now command a premium.
Defense technology investment is heating up: According to PitchBook, VC firms injected $7 billion into aerospace and defense companies in the first 10 months of last year. As more generalist VCs enter the space, what impact will this have on the defense tech ecosystem? How does the rise of generalist VCs make you retool your investment strategy?
Some prominent generalists have actually pivoted and heralded defense technology as the “next big thing.” These are good companies, and I appreciate the many good dollars that support patriots who develop substance products. That said, A&D is complex, has few generalist analogs (see DoD contracting vs. commercial ARR as a proof point), and requires years of trained, specialized skills. Because of these many differences, the first participants protect the defense technology ecosystem: the original investors protect the founders and vice-versa.