For many years, it was taken as a given that venture investing was fundamentally incompatible with defense technology.
Cripplingly long acquisition cycles — upwards of 10-15 years for major weapons programs — and unfavorable economics of defense tech startup exits were frequently cited as two reasons why the math simply didn’t add up. Sometimes the objections wore moral garb: In 2018, a group of Google employees told CEO Sundar Pichai that the company should cease work on a Pentagon pilot called Project Maven because “Google should not be in the business of war.”
The times have changed. Indeed, it is likely not an overstatement 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 computing, semiconductors and weapons systems.
Below, five venture investors describe this historic shift. Three of the investors separately use the word “generational” to describe the transformation: Jackson Moses, founder and managing partner at Silent Ventures, says defense tech is a “generational opportunity”; Jake Chapman, managing director of Marque VC, describes a “generational shift” of capital and wealth toward startups; and Josh Manchester, founder and GP of Champion Hill Ventures, talks about the country’s “generational competition” with China.
It is no coincidence that this word is repeated again and again. Spurred on by geopolitical antagonisms, a growing awareness that the U.S. defense industrial base is poorly equipped to keep the country competitive (despite being extraordinarily well capitalized), and changes within the Department of Defense itself have created new opportunities for venture-backed entrepreneurs — and the investors that fund them.
When one considers dual-use segments like space launch and biotechnology, the opportunities become even more expansive. PitchBook, which includes these segments and others in its analysis, found that defense tech VC activity topped out at $34.3 billion last year alone.
Of course, risks remain. You’ll hear from five investors on the complexities of defense tech investing, which sectors are over- (and under-) saturated, and whether venture dollars will help build the next U.S. prime.
We spoke with:
- Jackson Moses, founder and managing partner, Silent Ventures
- Jake Chapman, managing director, Marque VC
- David Ulevitch, general partner, A16Z
- Raj Shah, managing partner, Shield Capital
- Josh Manchester, founder and general partner, Champion Hill Ventures
The responses have been edited for length and clarity.
Jackson Moses, founder and managing partner, Silent Capital
What is your investment thesis for defense tech?
Defense tech is a generational opportunity best categorized as Dot-Com 2.0. It is the patient arbitrage of a massive market historically defined by inertia, occupied by imperfect legacy businesses, plagued by suboptimal public-private relationships, and hindered by entrenched structural deficiencies that incentivize improper behavior at the expense of national security. Silent Ventures believes 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 emerging narrative of a new global order.
It was long assumed that defense tech was not a suitable area for venture investing because it could never achieve the returns in timeframes limited partners are looking for. Why was that the case, and how different is the landscape now compared to five years ago?
Without re-litigating defense tech philosophy and ethics, a major reason LPs avoided this space, the short answer is that prior to 2022, many venture LPs pursued alpha in the form of proven generalist funds and unproven “emerging” managers. For most of this century, especially 2018 through 2021, LPs had to consider the historically high opportunity cost of participating in defense tech over generalist sectors. Explaining these tradeoffs in 2018 would have proved a lesson in futility. However, for better (or worse), the 2022 “reset” served 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 re-allocate capital into defense tech specialists. Whereas it was once a prerequisite to bootstrap A&D with minimal investment, exceptional defense tech founders now command a premium.
Defense tech investing has heated up: According to PitchBook, VC firms injected $7 billion into aerospace and defense companies through the first 10 months of last year. As more generalist VCs enter the space, what effect will this have on the defense tech ecosystem? In what way is the increase in generalist VCs making you retool your investment strategy?
Some storied generalists have indeed pivoted and advertised defense tech as the “next big thing.” These are well-intentioned firms, and I applaud more good dollars backing patriots developing products of substance. That said, A&D is inherently complex, shares few generalist analogues (look at DoD contracting vs. commercial ARR as a proof point), and requires years of honed, specialized expertise. Because of these substantial differences, early participants are protective of the defense tech ecosystem: original investors shield founders and vice-versa.
