I've heard that one should run into an industry where others are running away. Traditionally, VCs haven't been lining up to back defense companies, and after conversations with entrepreneurs, acquisitions officers, investors, my congressman, and professors with industry experience, I think that this industry is changing in ways that make it worth running into.
Read on to understand why I'm bullish about the DefenseTech space.
I see three drivers that are making DefenseTech a much more appealing market today for venture investors compared to 5-10 years ago:
Software is eating the Pentagon
The Pentagon is now investing billions into software acquisitions, and is even changing the software acquisition process to be faster and easier for small companies. Since software companies often better fit VC time horizons and return expectations, this is a paradigm-shift for the market.
New resources for founders
In the past five years, a constellation of new resources for entrepreneurs interested in working in this space has emerged. The Defense Innovation Unit, AFWERX, Squadron Innovations, and more groups help companies do R&D, receive patents, and build a technological moat before fundraising. It's a powerful signal that the DoD wants to work with startups on their terms.
It is also a good way for investors to identify entrepreneurs that are ready for funding.
How useful are these resources? I actually spoke with two entrepreneurs who took advantage of them: Teo Balbach, CEO of CoachMePlus and Ryan Chen, co-founder of a stealth startup. They said these resources and the fast-track contracts helped them generate revenue quickly, win grant funding, and made it easier for them to receive outside investment.
Early successes have paved the way for future wins
The success of Palantir, Anduril, Ayasdi, Expanse, and others has demonstrated that big outcomes are possible, and has sparked some early investor interest in this often underrated space For example, big-name funds like a16z, Founders Fund, and General Catalyst have invested here. They've also catalyzed trust between the Pentagon and Silicon Valley after the Google-Project Maven low point.
The Pentagon is particularly interested in AI and ML technology, especially in predictive analytics and big data analysis, and entrepreneurs are following their lead. This is an area where large companies like Lockheed don't have a lot of experience, so this is a strong opportunity for startups to win lucrative contracts.
On the hardware side, field usage of autonomous systems like drones and robots is rising thanks to better batteries and leaner hardware, and I'm eager to see which startups are able to break out here.
I think that investors have historically overlooked the opportunities in this market, but won't want to miss the massive tailwinds that are driving it this decade. The past five years has minted some major companies that fit this thesis, and I'm eager to meet more of the entrepreneurs helping ensure that the men and women of the armed forces are ready for the challenges of the 21st century.
*When I talk about DefenseTech, I'm broadly referring to companies designing and selling products for U.S. national security purposes first, civilian purposes second, and companies that have received substantial financial backing through contracts/grants from the government that are selling product for both the government and for civilian uses.