Back to news

May 5, 2020 | International, Aerospace, Naval, Land, C4ISR, Security

The defense industry needs new entrants, and a supportive government during crises

By: Venture capital community leaders

The COVID-19 health crisis is quickly leading to an economic meltdown, throwing millions of Americans out of work and forcing strategic reevaluations across industries. The defense industry is no exception. We are praying for a swift end to the crisis, but its effects will linger, shaping the Pentagon's priorities, organizational structure, military operations, logistics, supply chains and interactions with the defense-industrial base for years to come.

In the past few weeks, we have had numerous conversations with government officials about our venture and growth equity investments in the defense sector. These discussions have centered on the eligibility rules of the CARES Act's Paycheck Protection Program and the risk of foreign capital seeking entry into defense technology startups desperate for investment in these trying times.

But these are secondary questions. The primary question is this: How can the Pentagon best preserve its innovation base and develop the most competitive and advanced technologies?

The answer is simple: Buy commercial. New and emerging defense startups — and our men and women in uniform — don't need symbolic gestures. What they need is concerted action to bring the latest and most advanced technologies — many of which are routinely used in industry — to dangerously antiquated defense weapons systems and internal IT infrastructure. This was true before COVID-19, it is true now and it will be true when the next crisis strikes.

All too often the government has responded to crises by circling wagons around incumbent firms — the large prime contractors, whose political connections afford them bailouts in the name of “ensuring ongoing competition.” This process is already underway. After announcing its hope for a $60 billion relief package for the aerospace manufacturing industry, Boeing successfully lobbied for $17 billion worth of loans for firms “critical to maintaining national security.”

The CARES Act also announced provisions to streamline the Defense Department's contracting process, which sounds promising, except for the fact that these provisions apply only to contracts worth over $100 million. This discriminates against smaller, more nimble innovators and providers of cutting-edge technology.

This isn't how things have always been. After complaints about large horse dealers monopolizing military contracts during the Civil War, the government allowed quartermasters to purchase horses and mules from any dealer on the open market. In World War II, Congress created the Smaller War Plants Corporation, which awarded tens of thousands of contracts to small, competitive firms. Today, through innovative use of Small Business Innovation Research money, other transactional authorities, rapid work programs and the like, the Pentagon is certainly signaling interest in emerging technologies.

But let us be clear: We are not advocating continuing to invest larger dollar amounts into never-ending, short-term pilots and prototypes. The key to sustaining the innovation base through this crisis and any future crises is transitioning the best of these companies and products into real production contracts serving the day-to-day needs of the mission. Host tough, but fair competitions for new innovations, and then rapidly scale the winners.

America's technological supremacy has afforded our country nearly a century of military hegemony, but it is not a law of nature. Sovereign states and peer competitors like Russia and China will quickly outpace us if we take our prowess for granted. We need new entrants into the defense industry more than ever, but without government support through crises like this one, the talent and capital simply won't be there.

Why do investors say defense isn't a safe bet?

As the Department of Defense readily acknowledges, its mission is fundamentally changing. Breakthroughs in technological fields like artificial intelligence, autonomous systems, robotics, resilient networks and cyberwarfare mean that future conflicts will look nothing like those we have seen before. The DoD of tomorrow needs a fresh wave of technical expertise to understand and respond to these new kinds of threats.

That is not to say that legacy defense contractors are not needed; their expertise in large air and sea vehicles is currently unparalleled. But the expertise to build these new technologies resides in pockets of talent that the big and bureaucratic incumbents, who made their names with 20th century technology, lost access to decades ago.

The DoD has publicly exalted the importance of innovative defense startups for years. That is partly why we are so excited to invest capital into the defense sector at this moment in history. Silicon Valley has a chance to live up to its oft-ridiculed but sincere ambition to make the world a better place by investing in American national security.

However, we as venture capitalists and growth equity investors also have a duty to our limited partners who have entrusted us to invest and grow their capital. If we see the same old story of the government claiming to support small businesses but prioritizing its old incumbents, those investment dollars will disappear.

Times of rapid and unprecedented change, as COVID-19 has precipitated, also provide opportunities. The DoD and Congress can reshape budget priorities to put their money where their mouths have been and support innovative defense technologies. Each dollar awarded to a successful venture capital and growth equity-backed defense startup through a competitively awarded contract attracts several more dollars in private investment, providing the DoD significantly more leverage that if that same dollar was spent on a subsidy or loan to a large legacy contractor. This leverage of private capital means that every contract a startup receives accelerates by up to 10 times their ability to build technology and hire talent to support the DoD's mission.

The bottom line is this: There's no reason to let a health crisis today become a national security crisis tomorrow. The DoD has an opportunity to not only sustain but grow its innovation base, and give contracts, not lip service, to innovators. We, the undersigned, hope they do.

The contributors to this commentary are: Steve Blank of Stanford University; Katherine Boyle of General Catalyst; James Cham of Bloomberg Beta; Ross Fubini of XYZ Capital; Antonio Gracias of Valor Equity Partners, who sits on the boards of Tesla and SpaceX; Joe Lonsdale of 8VC, who also co-founded Palantir; Raj Shah of Shield Capital, who is a former director of the U.S. Defense Innovation Unit; Trae Stephens of, Founders Fund; JD Vance of Narya Capital; Albert Wenger of Union Square Ventures; Josh Wolfe of Lux Capital; Hamlet Yousef of IronGate Capital; and Dan Gwak of Point72.

https://www.defensenews.com/opinion/commentary/2020/05/04/the-defense-industry-needs-new-entrants-and-a-supportive-government-during-crises/

On the same subject

  • The Space Force considers a new mission: tactical satellite imagery

    February 5, 2021 | International, Aerospace, C4ISR

    The Space Force considers a new mission: tactical satellite imagery

    Nathan Strout WASHINGTON — The U.S. Space Force is still in its early days, but leaders are already considering adding a new mission for Guardians: providing tactical satellite imagery for beyond-line-of-sight targeting. “That's something that we're thinking through as we speak. I've got a group of folks doing some work on what that design might look like,” Gen. John “Jay” Raymond, the chief of space operations, said Feb. 3 during a Defense Writers Group call. The Space Force, like Air Force Space Command before it, provides the GPS signal, missile warning information, and wideband communications with its on orbit satellites. Tactical satellite imagery, however, has not been part of its workload. “That's largely been more on the intelligence community side,” Raymond said. Specifically, satellite imagery is generally the responsibility of two intelligence agencies: the National Reconnaissance Office and the National Geospatial-Intelligence Agency. While the NRO builds and operates the nation's spy satellites and contracts with commercial providers to access their imagery, NGA sets imagery requirements and transforms that raw satellite data into intelligence products. The military typically relies on NGA for geospatial intelligence (GEOINT) products. “I do think as technology has allowed for smaller satellites to be more operationally relevant and you can do so at a price point that is cheaper, that there is a role for operational level tactical satellites as you described and that the Space Force would have a role in that,” Raymond said “Again, it's early in the study efforts, if you will, and whatever we do we'll make sure that we do it in close partnership with our intelligence partners, because what we don't want to do is duplicate efforts,” he continued. “We want to save dollars and reduce taxpayer dollars, not duplicate.” The proliferation of small and relatively affordable small imaging satellites and the growing commercial satellite imagery market has sparked interest at the Pentagon in using satellites for beyond-line-of-sight (BLOS) targeting. The U.S. Army has been at the forefront of that effort, launching its own small imaging satellite — Kestrel Eye — in 2017. More recently at the Project Convergence 2020 exercise, the Army used commercial satellite imagery to develop targeting data and shoot at BLOS threats. The Air Force and the Navy are also investing in tactical GEOINT products. The Air Force Research Laboratory is investing in commercial tactical GEOINT software to help them find moving targets with satellite imagery, while the Navy is paying for commercial synthetic aperture radar imagery and analytics. Elsewhere in the Department of Defense, the Space Development Agency has set BLOS targeting as one of the main capabilities it is pursuing for its new proliferated constellation in low Earth orbit, which will eventually be made up of hundreds of satellites. “That's where the Army is most affected and that's where we're working very closely with the Army to make sure that we're tied together. So this is the ability to detect and track and maintain custody of anything, say, larger than a truck and to be able to actually give a targeting fire control solution to a weapon in the field in real time anywhere on the globe,” SDA Director Derek Tournear said in 2019. “That's the goal. That's the capability.” The SDA is slated to become part of the Space Force in late 2022. https://www.c4isrnet.com/battlefield-tech/space/2021/02/03/the-space-force-is-considering-adopting-a-tactical-geoint-mission/

  • Saab prepares GlobalEye bid for South Korea

    August 6, 2020 | International, Aerospace

    Saab prepares GlobalEye bid for South Korea

    by Jon Grevatt Saab has reaffirmed its intention to offer its GlobalEye platform for South Korea's recently announced programme to acquire additional airborne early warning and control (AEW&C) aircraft for the Republic of Korea Air Force (RoKAF). Saab told Janes that it expects the procurement to feature an initial two aircraft acquired through either an open tender or a direct acquisition. South Korea's Defense Acquisition Program Administration (DAPA) is expected to confirm the procurement method later this year. A Saab spokesperson said that the company's offer will also include “both technology and collaboration projects” that match South Korea's future aerospace requirements and involve “multiple stakeholders from the military, government, industry, and other partners”. While detail on these projects will be expanded as the programme enters future phases, the spokesperson said Saab has already developed “clear principles and ideas for collaboration” as well as highlighted its own capabilities to local stakeholders, and “gathered information on Korean industry”. The spokesperson said, “Korea is a country with a highly skilled and developed industry opening several interesting areas for co-operation which we hope to explore further in the coming stages of the programme.” Although not confirmed by the company, this is likely to draw on Saab's existing industry ties in the country, which include strong links with LIG Nex1, one of South Korea's leading military electronics and missile manufacturers. Saab and LIG Nex1 have previously collaborated on supplying the Swedish group's Arthur Weapon Locating System to the Republic of Korea Armed Forces and on developing radar technologies. https://www.janes.com/defence-news/news-detail/saab-prepares-globaleye-bid-for-south-korea

  • Switzerland names contenders in $8 billion ‘Air 2030’ program

    April 5, 2018 | International, Aerospace

    Switzerland names contenders in $8 billion ‘Air 2030’ program

    By: Sebastian Sprenger COLOGNE, Germany — Swiss officials have unveiled details of their envisioned reboot of the country's air-defense complex, setting the stage for purchases of aircraft and ground-based missiles totaling more than $8 billion. The head of Switzerland's defense and civilian protection department, Guy Parmelin, on Friday unveiled a list of requirements for the “Air 2030” program that the neutral country wants to begin fulfilling in the mid-2020s to defend its skies and repel intruders. The existing fleet of decades-old F/A-18 and F-5 jets is considered too outdated for the task. New aircraft under consideration include the Airbus Eurofighter, Dassault's Rafale, Saab's Gripen, the F/A-18 Super Hornet from Boeing and Lockheed Martin's F-35A, according to the March 23 list of requirements published by the defense department. Ground-based weapons on the short list are the Eurosam consortium's SAMP/T system; the David's Sling missile shield from Israel; and Raytheon's Patriot system. Swiss officials want to protect an area of 15,000 square kilometers with ground-based weapons, which is more than one-third of the country. They also seek to intercept targets up to 12 kilometers high and 50 kilometers away. The envisioned concept of operations dictates that a fleet of roughly 40 aircraft will intercept those targets outside of the ground weapons' range. Officials want enough capacity to have four planes in the air at any given time during crises. Request for proposals for an acquisition program are expected to be published in the summer, Renato Kalbermatten, a spokesman for the defense department, told Defense News in an email Tuesday. Before a referendum is held about the project in the first half of 2020, ministry officials want to finish qualification of all potential vendors. That includes studying the data from a first round of proposals and collecting final offers from those still in the running at that time, according to Kalbermatten. Referendums are a key tool of the Swiss political process. Asked by a Swiss news agency this month if the country would still have an air force if the population voted against spending money on Air 2030, Parmelin responded dryly: “That's policymaking in Switzerland.” The Swiss won't be asked which type of aircraft the country should buy, only about the program as a whole. Government analysts would then decide which system is best suited for the task, Parmelin said. A 2014 plebiscite saw the acquisition of Sweden's Gripen defeated, a rare outcome for a referendum on security policy matters, Swiss national broadcaster SRF commented at the time. Notably, Germany's future TLVS air and missile defense system, a development based on the trinational Medium Extended Air Defense System, is missing from the lineup of candidate ground-based weapons. That is because the Swiss consider that system suitable only for short and medium ranges, according to Kalbermatten. “As Switzerland has not had a defense system for long ranges since 1999, the first goal is buying a long-range system,” he wrote. Exactly how much money will go to aircraft purchases and how much to ground weapons will depend on the interplay between the two program components ultimately picked, according to officials. However, previous estimates assume that $6 billion or $7 billion would be spent on planes. Winning bidders must agree to arrange for 100 percent of the program cost to flow back into the Swiss economy through so-called offset agreements. Those can be negotiated after final contracts are signed, according to the defense department. The government is looking for aircraft and missile hardware as is, meaning few to no “Helvetizations,” or Swiss-specific tweaks, would be made to the weapons, the new requirements document states. The ministry wants to purchase a single plane type under a “one-fleet policy.” https://www.defensenews.com/land/2018/03/27/switzerland-names-contenders-in-8-billion-air-2030-program/

All news