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January 31, 2020 | International, Aerospace, Naval, Land, C4ISR, Security

As tech startups catch DoD’s eye, big investors are watching

By: Jill Aitoro

SIMI VALLEY, Calif. — Private investors are not yet lining up to back defense startups, but they are paying close attention.

Two factors have created an opening that could lure venture capitalists to defense investments: first, a few select venture-backed technology startups are gaining traction; and second, there’s been a strategic shift in approach to weapons development from the U.S. Department of Defense, focusing more on information warfare and, as such, software.

In the words of Mike Madsen, director of strategic engagement at the Pentagon’s commercial tech hub, Defense Innovation Unit: "We’re at a significant inflection point right now that will be visible through the lens of history.”

Nonetheless, for the tech startups, it’s been slow going, as discussed during a Defense News roundtable in California. For the second year, leadership from DoD and the tech community came together to discuss the state of the Pentagon’s efforts to attract commercial startups — this time digging into the challenges and opportunities that come with investment in defense development.

“We went into this eyes wide open, knowing full well that to the venture community, the math doesn’t make sense. Making the choice to contribute to the advancement of artificial intelligence for DoD represented for us more of a mission-driven objective,” said Ryan Tseng, founder of artificial intelligence startup Shield AI.

But early on, “we were fortunate to get the backing of Andreessen Horowitz, a top-tier venture fund. They’re certainly leaning in, in terms of their thinking about defense technology — believing that despite the history, there might be a way to find an opening to create companies that can become economically sustainable and make substantial mission impact.” Shield AI has raised $50 million in venture funding since 2015, with more rounds expected.

Indeed, a few key Silicon Valley investors have emerged as the exceptions to the rule, putting dollars toward defense startups. In addition to Andreessen Horowitz, which counts both Shield AI and defense tech darling Anduril in its portfolio, there’s General Catalyst, which also invested in Anduril, as well as AI startup Vannevar Labs.

And then of course there’s Founders Fund. Led by famed Silicon investors Peter Thiel, Ken Howery and Brian Singerman, among others, the venture firm was an early investor in Anduril, as well as mobile mesh networking platform goTenna. Founders Fund placed big bets on Palantir Technologies and SpaceX in the early days, which paid off in a big way.

Some of the early successes of these startups have “done an excellent job of making investors greedy,” said Katherine Boyle, an investor with General Catalyst. “There’s a growing group who are interested in this sector right now, and they’ve looked at the success of these companies and [are] saying: ‘OK, let’s learn about it.’ ”

Take Anduril: The defense tech startup — co-founded by Oculus founder Palmer Luckey and Founders Fund partner Trae Stephens — has raised more than $200 million and hit so-called unicorn status in 2019, reaching a valuation of more than $1 billion. As the successes piled up, so did the venture capital funding. According to Fortune magazine, those investors included Founders Fund, 8VC, General Catalyst, XYZ Ventures, Spark Capital, Rise of the Rest, Andreessen Horowitz, and SV Angel.

“I started my career at Allen & Company investment banking. Herbert Allen, who’s in his 80s, always said: ‘Hey, you should run into an industry where people are running away,’ ” said John Tenet, a partner with 8VC as well as a co-founder and vice chairman of defense startup Epirus.

“There’s so much innovation occurring, where the government can be the best and biggest customer. And there are people who really want to solve hard problems. It’s just figuring out where the synergies lie, what the ‘one plus one equals three’ scenario will be.”

Also attracting the attention of Silicon Valley investors is the growing emphasis by the Pentagon not only on systems over platforms, but software over hardware. Boyle described the shift as the “macro tailwind” that often drives innovation in a sector. Similar revolutions happened in industrials and automotive markets — both of which are also massive, global and slow-moving.

That emphasis on tech, combined with some recent hard lessons, also provides a glimmer of hope that the typical hurdles associated with defense investments — lengthy procurement cycles and dominance by traditional manufacturers, for example — could be overcome.

Consider U.S. Code 2377, which requires that commercially available items be considered first in procurement efforts, said Anduril’s Stephens. He also noted court decisions in lawsuits filed by SpaceX and Palantir, which ultimately validated claims that defense agencies had not properly ensured a level playing field for major competitions.

“These types of things are now at least in recent memory for Congress, and so they have some awareness of the issues that are being faced,” Stephens said. “It’s much easier now to walk into a congressional office and say, ‘Here’s the problem that we’re facing’ or ‘Here’s the policy changes that we would need.’ There are also enough bodies like DIU, like In-Q-Tel, like AFWERX, like the Defense Innovation Board, like the [Defense Science Board] — places where you can go to express the need for change. And oftentimes you do see that language coming into the [National Defense Authorization Act]. It’s part of a longer-term cultural battle for sure.”

For now, all these factors contribute to the majority of skeptical investors’ decisions to watch the investments with interest — even if they still take a wait-and-see approach. And that places a lot of pressure on the companies that are, in a sense, the proof of concept for a new portfolio segment.

“My fear is that if this generation of companies doesn’t figure [it] out, if they don’t knock down the doors and if there aren’t a few successes, we’re going to have 20, 30 years of just no investor looking around the table and saying we need to work for the Department of Defense,” Boyle said. “If there aren’t some success stories coming out of this generation of companies, it’s going to be very hard to look our partners in the eye and say: ‘We should keep investing in defense because look at how well things have turned out.’”

https://www.defensenews.com/smr/cultural-clash/2020/01/30/as-tech-startups-catch-dods-eye-big-investors-are-watching/

On the same subject

  • CEO of Airbus Defence and Space on what will be vital in 2020

    December 2, 2019 | International, Aerospace

    CEO of Airbus Defence and Space on what will be vital in 2020

    By: Dirk Hoke  The year 2020 will become one of truth for Europe’s defense industry — especially in the sector of military aviation. For years, European nations are discussing efforts to jointly develop defense assets that should ensure better security into the 21st century. Progress has been made — mainly on the development of a European drone and the Future Combat Air System. Next year will show how serious the nations take the projects, as for the first time big contractual and financing milestones will have to be achieved. Security never comes for free. Everybody acknowledges that fact, but practical decisions need to underpin this. Same applies to the promise to meet the NATO target of spending 2 percent of gross domestic product on defense. We can only show a credible line of defence if enemies of the alliance are afraid of feeling the strong military power NATO is able to provide in the worst case. Procrastination and post-Cold War recession in several countries need to come to an end. I acknowledge that, for example, Germany is moving in the right direction. But is it fast enough while security is evermore volatile in certain parts of the world? The defense industry, especially that in Europe with its decades of experience in working in collaborative programs, can help. We are on standby, but political decisions need to be taken first. Modern threats sometimes require modern answers. But we shouldn’t forget that these answers are often two- or threefold and inherit also a large pack of traditional approaches — and sometimes the old ways are still the best. Nations and industry must not wait for the next big thing, but they also need to consider constantly refining their existing equipment. A perfect example for this is the military aircraft fleet of Airbus. Be it our transport, mission or combat segment: By adding more sensors and connectivity into the existing fleets, we will see in 2020 good things becoming better and enable them to play a vital role in the Future Combat Air Systems scenarios. Special attention will also need to be devoted to the novel situation in space as a serious area of engagement for defense. As Europe’s largest space company, we know what we are talking about here. Let’s be frank: Without our assets in space — all communications nods and observation assets — what the Western world calls “normal” life is no longer possible. And with this goes the well-being of our societies. So it is only fair that nations are starting now to make up their minds on space defense, and NATO recently decided to declare space the fifth dimension of defense next to land, sea, air and cyber. This adds another layer to an already extremely complex scenario. How does that translate into the defense industry? The importance of the few large companies will rise. With their huge integration, capabilities and portfolio that is spread over all five threat dimensions, they will have to play a key role in mastering technologies, integrating smaller, specialized companies, and ensuring that government and military users can focus their decision-making on the bits and pieces that really matter. This is a challenge we will passionately continue working on in 2020 and the years beyond. https://www.defensenews.com/outlook/2019/12/02/ceo-of-airbus-defence-and-space-on-what-will-be-vital-in-2020/

  • Lockheed offers cash to supply chain, use of private jets for COVID-19 fight

    March 30, 2020 | International, Aerospace, Naval, Land, C4ISR, Security

    Lockheed offers cash to supply chain, use of private jets for COVID-19 fight

    By: Aaron Mehta WASHINGTON — Lockheed Martin, the world’s largest defense contractor, announced a series of steps Friday to bolster the defense-industrial base to keep it humming along and to assist in the broader effort against the new coronavirus outbreak. In a statement posted on Lockheed’s website, CEO Marillyn Hewson said the company recognizes “that the rapid spread of COVID-19 and its wide-ranging impacts have caused severe disruption across society and tragic loss of life around the world. We also recognize that the global pandemic has created a need for urgent action by government, business, communities and citizens.” “We will do our part to use our know-how, resources, and leadership as a company to assist our communities and our country during this period of national crisis,” Hewson wrote, before laying out a series of moves she called an “initial contribution” to the COVID-19 relief efforts. The company plans to advance “more than $50 million” to small and medium-sized companies in its supply chain to “ensure they have the financial means to continue to operate, sustain jobs and support the economy.” Pentagon officials and outside experts alike have raised concerns about risk to small companies in the supply chain. Lockheed is also dipping into a $6.5 million disaster relief fund to assist employees and retirees who are impacted by the disease, and will donate $10 million to nonprofit organizations involved in outbreak relief efforts, with an emphasis on veteran and military family issues. Additionally, Hewson pledged the use of the company’s corporate aircraft and vehicle fleet for the delivery of medical supplies and for logistical support. She also offered the use of company facilities for “crisis-related activities including critical medical supply storage, distribution, and COVID-19 testing, where needed and practical,” as well as the company’s technical and engineering skills if states or the federal government require assistance. The company plans to continue recruitment and hiring despite the current economic downturn, using virtual technology and other social distancing tools. Lockheed brought in more than $53.7 billion in revenue in fiscal 2018, 94 percent of which came from defense contracts, according to the annual Defense News Top 100 rankings. https://www.defensenews.com/news/coronavirus/2020/03/27/lockheed-offers-cash-to-supply-chain-use-of-private-jets-for-covid-19-fight

  • SPACECOM is a go: Newest combatant command signed into existence

    August 30, 2019 | International, Aerospace

    SPACECOM is a go: Newest combatant command signed into existence

    By: Aaron Mehta   WASHINGTON — The Pentagon has a new combatant command. With a twirl of the pen, Secretary of Defense Mark Esper signed into creation U.S. Space Command, the 11th war-fighting command for the Defense Department. “This is a landmark day, one that recognizes the centrality of space to America’s national security and defense," President Donald Trump said during the event, held in the Rose Garden of the White House. “It’s all about space,” Trump said, adding that for anyone looking to challenge the U.S. in orbit, “it’s going to be a whole different ballgame.” Air Force Gen. Jay Raymond is the new head of SPACECOM; Army Lt. Gen. James Dickinson has been nominated to become the deputy commander. Upon Trump’s signature, 287 individuals, pulled largely from U.S. Strategic Command, became the first members of the new command. Earlier in the day, Raymond and Stephen Kitay, deputy assistant secretary of defense for space policy, told reporters the creation of SPACECOM marked a new era in how the Defense Department approaches space. “We are at a strategic inflection point. There is nothing that we do [as a joint force] that isn’t enabled by space. Zero,” Raymond said. “Our goal is to actually deter a conflict from extending into space. The best way I know how to do that is to be prepared to fight and win” should deterrence fail. SPACECOM’s mission falls into four broad categories: To deter potential adversaries in space. To defend American assets in orbit. To deliver war-fighting capabilities (such as GPS) to other combatant commands. To develop joint war fighters to be able to operate in the space domain. The command will include a traditional headquarters staff, service components from all four armed services and two operational components: Combined Forces Space Component Command — focused on integrating space capabilities around the globe and throughout joint coalition partners — and Joint Task Force for Space Defense — focused on protecting and defending the war-fighting domain. “Space will not be an Achilles’ heel. We will protect and defend and provide it for our way of life and our way of war,” Kitay added. Technically, this is a relaunch of SPACECOM, which existed in another form from 1985 through 2002. However, Raymond said, the two organizations are very different, with a “sharper” focus on the dangers from other nations in space a key part of the new incarnation. Those threats include kinetic and non-kinetic activities from competitors such as China and Russia — and any future competitors who might gain space capabilities in the future.   As if to underscore the changing space environment, news broke Thursday that Iran’s most recent attempt at a space launch appears to have failed on the ground. The effort was the third failed launch attempt this year, but the effort shows Iran is willing to invest significant national capital into putting assets into orbit. SPACECOM will continue to grow, including a final selection on the location of its headquarters. But questions remain about integration plans with an eventual Space Force, should Congress back its creation as a new military branch. The budget for SPACECOM in fiscal 2020 was $83.8 million, of which $75.6 million was shifted from previous organizations. Raymond warned that a continuing resolution this year would have a “significant impact” on the standing up of the new command. “We need to have stable budgets as we build this command. Continuing resolutions are never good, and it would be bad in this case as well,” he said. https://www.defensenews.com/space/2019/08/29/spacecom-is-a-go-newest-combatant-command-signed-into-existence/

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