For many yearsit was taken for granted that venture capital investment was fundamentally incompatible with defense technology.
Extremely long acquisition cycles – up to 10 to 15 years for large weapons programs – and the unfavorable economics of defense technology startup exits have been frequently cited as two reasons why the calculations do not simply did not match. Sometimes the objections took on a moral aspect: in 2018, a group of Google employees told CEO Sundar Pichai that the company should stop working on a Pentagon pilot called Project Maven because “Google should not launch into war.
The times have changed. Indeed, it is probably no exaggeration to say that the relationship between U.S. defense and Silicon Valley is undergoing its most profound transformation since the 1950s, when Pentagon funding led to massive advances in the fields of technology. computing, semiconductors and weapons systems.
Below, five venture capitalists describe this historic shift. Three of the investors separately use the word “generational” to describe the transformation: Jackson Moses, founder and managing partner of Silent Ventures, says defense technology is a “generational opportunity”; Jake Chapman, managing director of Marque VC, describes a “generational shift” in capital and wealth towards startups; and Josh Manchester, founder and managing director of Champion Hill Ventures, talks about the country’s “generational competition” with China.
It is no coincidence that this word is repeated over and over again. Spurred by geopolitical antagonisms, the growing realization that the U.S. defense industrial base is ill-equipped to maintain the country’s competitiveness (despite being extraordinarily well capitalized), and changes within the Department of Defense itself have even created new opportunities for venture-backed entrepreneurs – and the investors who fund them.
When considering dual-use segments like space launches and biotechnology, the opportunities become even broader. PitchBook, which includes these and other segments in its analysis, found that venture capital activity in defense technology reached $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 over (and under) saturated, and whether venture capital investments will help build America’s next premium.
We spoke with:
- Jackson Moses, Founder and Managing Partner, Silent Ventures
- Jake Chapman, Managing Director, VC Brand
- David Ulevitch, general partner, A16Z
- Raj Shah, Managing Partner, Shield Capital
- Josh Manchester, Founder 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 technology?
Defense technology is a generational opportunity best classified in the Dot-Com 2.0 category. It is the patient arbitrage of a massive market historically defined by inertia, occupied by flawed legacy businesses, plagued by suboptimal public-private relationships, and hobbled by entrenched structural deficiencies that encourage inappropriate behavior to the detriment of national security. Silent Ventures believes that investing in defense startups is an effective way for LPs to meaningfully diversify risk, support highly motivated builders, capitalize on asymmetric upside, and unequivocally eliminate the narrative emerging from a new world order.
It was long thought that defense technologies were not a suitable area for venture capital investment because they could never achieve the returns in the time frame sought by limited partners. Why was this so and how different is the landscape from five years ago?
Without questioning the philosophy and ethics of defense technology, one of the main reasons LPs have avoided this space, the short answer is that before 2022, many venture LPs were looking for alpha under the form of proven generalist funds and unproven “emerging” managers. For most of this century, particularly from 2018 to 2021, LPs have had to consider the historically high opportunity cost of participating in defense technology compared to generalist sectors. Explaining these trade-offs in 2018 would have been a lesson in futility. However, for better (or worse), the 2022 “reset” has forced LPs to revisit the fundamentals of risk management and portfolio construction.
In a turbulent macroeconomic context and global conflicts, sophisticated investors have chosen to reallocate their capital to defense technology specialists. While it was once a prerequisite to start L&D with minimal investment, exceptional defense technology founders now enjoy a premium.
Investment in defense technology has been ramping up: According to PitchBook, venture capital firms pumped $7 billion into aerospace and defense companies in the first 10 months of last year. As more generalist venture capital firms enter the space, what effect will this have on the defense technology ecosystem? How does the proliferation of generalist VCs force you to reorient your investment strategy?
Some well-known generalists have in fact changed course and presented defense technology as the “next big thing”. These are well-intentioned companies, and I applaud more money to support patriots who are developing substantial products. That said, A&D is inherently complex, shares few generalist analogues (see DoD contracts versus commercial ARR as a proof point), and requires years of specialized, honed expertise. Because of these substantial differences, early entrants protect the defense technology ecosystem: original investors protect founders and vice versa.