Don’t Fear the Demise of Defense Venture Funding

Is the sky falling on tech startups and venture capitalists looking to break into the defense sector? “Time is running out for Silicon Valley” tweeted Katherine Boyle, partner of Andreessen Horowitz, the day before last year Reagan Forum on National Defense. She added: “After five years of [the Defense Department] by saying “we want to work with the best startups”, we have at most two years before the founders leave and the private capital dries up. breaking defense echoed Boyle’s sentiment, writing that the Davos-style gathering of defense executives, politicians and tech leaders was filled with “an air of foreboding.”

A recent article published in these pages by Shands Pickett also called some tech startups struggling to secure government funding “zombies” who can “just hang around until someone stops paying hosting fees.” website”. Pickett also pointed out that there has only been one recent initial public offering (IPO) for a defense startup: Palantir.

I disagree with his views. Many organizations are working hard to bring the best technology into government and ensure venture capital bets on startups pay off.

Take a look at my company’s government acceleration and training programs: We’re in the trenches working with business and government decision makers. Our portfolio includes more than 18 unicorns (out of 115 companies) doing business in the federal market, all of which contrast sharply with commentators who suggest otherwise. Indeed, Dcode companies have raised nearly $19 billion in venture capital.

We are not alone. In January, Andreessen Horowitz, of whom Boyle is a partner, announcement launching his American Dynamism practice to invest in founders and companies that support the national interest.

There is no doubt that startups facing the government face an uphill battle. The most defense of contracts are awarded to giant incumbents like Northrop Grumman and Booz Allen Hamilton. Even when a VC-backed company gets a foot in the door, it must bridge the infamous “valley of death” (the gap between the research and development phase and contract award) to get the government equivalent of recurring revenue.

Making the Department of Defense a better customer is indeed hard work, but it can be done. Watch the work being done by AFWERX, the Defense Innovation Unit, and other offices leveraging Small Business Innovation Research None of them has the complete solution for integrating technology into government, but they have made significant progress towards an improved system. These programs are full of motivated people who want to solve the problem – and need to be supported. We know this because we work with them on a whole range of issues.

This is good work worth doing. Here are three perspectives that venture capitalists, tech companies, and government stakeholders need to consider as they work to bridge the gap between Silicon Valley and Washington.

Getting to a recording schedule is rarely realistic

The story of the breaking defense The article suggests it’s up to the federal government to act quickly to help startups get through the valley of death so they can get to a record-breaking program quickly — before venture capital finds another place to go. to go. This is a flawed argument and not the whole story.

Here’s why: Many investors don’t know what it takes to sustain a sustainable defense tech startup business. Going to a recording program is not that. A registration program is an effort directed and funded within the US federal budget – think of fighter jet scale spending. Startups won’t be competing in this space, nor should they try. Yes, there are Palantirs, SpaceXsand Andurillas of the world — which, between them, have registration programs at the Department of Defense and, in Anduril’s case, Customs and Border Protection — but that’s not where the vast majority of companies emerging companies should expect to succeed.

What is the solution ? One way for startups to get a foot in the government’s door is to partner with a venture capital firm like ours that has extensive experience in the federal space and is willing to help the company build a winning go-to-market strategy that ensures a consistent line-up of business wins and recurring revenue.

This strategy can also open the doors to a slice of the bigger pie. For example, Lockheed Martin may have the record-breaking program for the next-generation combat aircraft and a startup may partner with it on the aircraft’s data processing or cybersecurity systems to get a foot in the door.

Bottom up, no brass down

Building a network is an essential part of being a successful venture capitalist. Venture capitalists like to mingle, nurture relationships, and showcase their companies when they host government bigwigs in Silicon Valley in hopes of securing a big contract for their investments.

The problem? Senior military leaders aren’t usually the buyers – they have people for it. This top-down approach risks alienating users forced to use the technology, whether or not they think it’s the best option for the mission. This poses a reputational risk to the startup.

In the bottom-up approach, venture capitalists who understand the federal government know they need to go beyond schmoozing with top executives to open the door to startups. They need to target and build relationships with the people who matter: the program managers who control the budget, the contractors who approve purchases, and the end users who drive and use the technology on a daily basis.

Venture capitalists take defense-focused tech startups seriously

Time is running out for Silicon Valley and venture capital funding for defense technology startups is not drying up. In fact, dual-purpose startups continue to find venture capital money and interest.

To read in full, Boyle’s Twitter feed strikes an optimistic tone. The feds are the biggest buyer in the country — and Silicon Valley wants in on the act:

“…there is good news! In fact, BIG NEWS. It turns out that Silicon Valley has heard the call from the Department of Defense and talented engineers want to create software for their country.

And investors support them:

“Investors have heard the call, too: in 12 months, about $2 BILLION in private venture capital has gone to defense-focused companies.”

What about the fact that there has only been one major IPO in the defense market’s recent past? Pickett calls this “a hugely negative signal for venture capitalists about market value.” In a sector with so much private capital, IPOs are an imperfect indicator of defense-focused innovation. For example, SpaceX has a valuation of over $100 billionmuch larger than Palantir’s approximately $21 billion market capitalizationand SpaceX was only part of the $14.5 billion in private investment in space startups over the past year. Anduril has achieved a valuation of $4.6 billion in just four years without being made public.

The federal market is not easy to navigate. Pickett is right on this point: we need to protect contracting officers and program managers and reward them for taking smart risks. The Department of Defense needs the best American technologists on its side.

But to get there, tech companies will need to smartly leverage forward-thinking government programs and partner with an investment firm that understands government, its missions, and how it buys. Ultimately, understanding each of these perspectives can help companies enter and scale in the federal marketplace. Time is not pressing. Innovation is in the air.

Rebecca Gevalt is a general partner of Dcode Capital, a venture capital fund that invests in commercially successful technology companies that can improve how the government serves and protects Americans. Previously Chief Technology Officer of Dcode, Gevalt built and operated the Dcode Acceleration program. She also started Dcode’s government enterprise to teach government stakeholders how to find and contract with non-traditional tech companies. Prior to Dcode, Gevalt worked at the CIA for over a decade, and for some of those years she worked with In-Q-Tel to bring new tech startups into the national security space.

Picture: Marine Corps spear. Jose Guerrero Deleon Jr.

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