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  31 janvier 2020 | International, Aérospatial, Naval, Terrestre, C4ISR, Sécurité

  ‘The math doesn’t make sense’: Why venture capital firms are wary of defense-focused investments

  By: Aaron Mehta WASHINGTON — In American's technology marketplace, venture capital funds are crucial for pumping capital into small companies in need of cash infusions to keep operating. Part of the venture capital model is acknowledging that many of those businesses will fail, but if a few are successful, venture capitalists can make huge returns on their investments. At a time when the Pentagon is working hard to entice small technology companies to work on defense projects, venture capital, or VC, funding could further mature technology and give entrepreneurs a chance to keep projects going. And yet, investors seem wary of putting forth cash to support companies with a defense focus. Why? In the wake of the very public fight inside Google over working with the Pentagon — which ended with the company pulling the plug on its Project Maven participation — there was a consensus from the defense establishment that there may be a culture gap that is simply too large to overcome. But according to a trio of venture capitalists who spoke to Defense News in December, the reasons are simpler. Katherine Boyle, with VC firm General Catalyst, said the culture issue is overblown for the VC community. The reluctance to work on defense programs comes down to a mix of “math and history," she said. "The math is the reason why investors are hesitant to put a third of their fund into these types of technologies because history shows us that they haven't worked out well,” Boyle explained. She said the math can be broken down into three factors: mergers, margins and interest rates. On the first, she pointed to the fact that the defense sector has seen thousands of firms exit the market, sometimes because of acquisitions by primes. But, she argued, where mergers and acquisitions tend to occur in other parts of the world to acquire new technology or capability, in the defense realm it's all about contracting value. That makes it “very difficult for new technologies to enter the market and ultimately be acquired at the valuations that venture investors would need to see in order to have a return for their fund.” In terms of margins, Boyle pointed out that defense firms are very focused on hardware, which requires a lot of investment upfront. That makes it “very difficult to invest in for venture capital firms because software has 80 percent margins, and it's much easier to build a company that can scale very quickly if it's software-based versus needing a lot of capital,” she said. The third factor, interest rates, ties into the last two. For decades interest rates have allowed VC firms to expand dramatically — something that requires a constant flow of return from investments in order to turn around funds and quickly invest in another opportunity. In the world of defense, investors with $3 billion to $5 billion under management by the VC community will find it difficult to get the kind of returns investors are accustomed to from other markets. All three of those factors come together in a mix that means there are very few chances for VC firms to invest in defense-related companies that match up with what a VC traditionally wants to see, said John Tenet, a partner with investment firm 8VC and vice chairman of the defense company Epirus. “VC investors invest based on speed and scale and probability of a 10 to 20 times return. And so I think that's where you've seen a little bit of apprehension, at least in [Silicon] Valley,” Tenet said. “The exits haven't been that fast, and you sort of have these five big players on one side [that] sort of monopolize the market.” From a pure numbers standpoint, a good benchmark for performance is to look at the S&P 500, according to Trae Stephens, co-founder and chairman of Anduril Industries and partner at Founders Fund. Over a 10-year period, an investor in the S&P can expect to get roughly 3 times their investment back. VC firms want to be able to beat that for an investment to be worth it. To highlight the challenge of attracting VC funding to defense firms with potentially limited return, Stephens pointed to the case of Blackbird Technologies. A venture-backed player in specialized communications tech aimed at the defense market, Blackbird was bought in 2014 by Raytheon for about $420 million. That looks good on paper, but the reality is the churn isn't strong enough for a big, Silicon Valley-based venture capital group. “A lot of times in the government, people say: ‘Oh, Blackbird is this, like, great example of a success story that was like a boost for venture.' It's actually not. It's not a venture scale of return for most funds,” he said. “There are some funds where the economics of [an exit that size] is really good, but for large, Silicon Valley tier-one funds, it doesn't move the needle. And so you have to have these multibillion-dollar opportunities in order for it to really make economic sense.” Another issue raised by Stephens will be familiar to defense primes as well: concerns over sharing intellectual property with the Defense Department. The department is essentially saying “you are the right product for us, now turn over your source code,” Stephens said. “It's crazy. We're literally doing to our companies in America what we're criticizing the Chinese for doing to their companies and to our companies when we enter that market. And so there has to be a better commercial practice for enabling companies to retain their IP and do business with the government without having to fight a legal battle every time they go through a contract.” ‘Knock down the doors' Despite those concerns, all three venture capitalists that spoke to Defense News are involved in investments in defense-focused firms. So why are they spending their money in the sector? Mission is part of it — the belief that, as Americans, a stronger Defense Department benefits their firms. But that only goes so far if dollars don't follow. Once again, it comes down to math. Investing in a company focused on defense technologies, which may have to wait years to secure a contract with the Pentagon, isn't a great strategy for a VC firm looking for quick returns. But if a company is able to get government funding early on, the business suddenly becomes more worthy of investment, said Boyle. “If the government is allocating capital in the right way, it will get VC dollars immediately. Like, it will follow so quickly,” Boyle said. “I see so many people come in to our office and they have an OTA [other transaction authority contract], and they're excited. It's a small, $1 million contract, and that is great for a seed company. But if that same company came in 18 months later and said, ‘Oh, by the way, the OTA has turned into a $10 million contract,' that would meet every milestone that I usually see to series A.” (An OTA is a type of contract that enables rapid prototyping; series A financing is the investment that follows growth from initial seed capital used to launch operations.) “$10 million to the US government is nothing, but to [a] startup — $10 million is the best startup I've seen all year, if they're an 18-month-old startup and they're getting that kind of capital early on,” she said. Added Stephens: “It means they're doing something right.” That creates a chicken and egg scenario: Venture capitalists only want to invest in companies that already have a Pentagon contract, but small firms often can't keep the doors open long enough without external funding while waiting for the department's contracting processes to progress. While groups such as the Defense Innovation Unit — the Pentagon's technology hub — are helping speed along that process, it remains a problem with no easy solution, at a time when the Pentagon needs the nondefense technology community in ways it hasn't for decades. Boyle believes there is a “growing group” of investors who see the strong success of a handful of companies like goTenna, Anduril or Shield AI that have managed to break through and become successful defense-focused investment vehicles. That means the next few years are going to be critical for everyone involved. “None of us would be here if we weren't optimistic,” she said. “I actually think this is an incredible time to be investing in deep tech, particularly deep-tech companies that are selling to the Department of Defense because if it doesn't happen now, it never will.” https://www.defensenews.com/smr/cultural-clash/2020/01/30/the-math-doesnt-make-sense-why-venture-capital-firms-are-wary-of-defense-focused-investments/

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  14 juin 2023 | International, Autre défense

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  15 juin 2020 | International, Aérospatial

  U.S. Military Turns To Remote Pilot Training

  Lee Hudson June 11, 2020 Once the global coronavirus pandemic hit the U.S., the military moved to ramp up remote pilot training options. But it is unclear if the trend will continue after the contagion passes. Before COVID-19, the Air Force was developing immersive training devices that would help instruct students remotely as part of Air Education and Training Command's Pilot Training Next program, says Lt. Col. Ryan Riley, commander of Detachment 24. Instead of the pupil coming into the office, receiving an in-person brief, locating a training device and executing a mission, Riley's team was looking at how to conduct those events with both the student and instructor at separate locations. Army pauses to assess training options Air Force and Navy immediately pivot to remote instruction “What we wanted to see, prior to COVID-19, was how far [we could] push the bounds of remote instruction,” Riley says. The pandemic turned that desire into a need to provide students the same level of instruction remotely as they would in person. The Air Force and training companies were already working to develop virtual training systems when COVID-19 struck, and the pandemic seems to have accelerated adoption. “There are only so many places to train,” says Todd Probert, defense and security group president at CAE. Though the military was once reluctant to fully tap into distance training, the question has become: “Is there a way to centralize that instruction?” he says. Pilots more than 100 mi. from a training base would be required to quarantine for two weeks once they arrived. The technology, however, was “very glitchy,” Riley says. The main problem was latency. So the team got to work, disassembling hardware and issuing the newest equipment to students and some of the instructor corps. Another issue was the fact that the detachment's home-use devices were running off a laptop. The team discovered that various software programs such as remote screen-sharing were taxing the central processing unit (CPU) heavily, overwhelming laptops, says Lt. Col. Robert Knapp, Detachment 24 operations officer. “No matter how good a laptop you buy, they're just never going to run at the same speed as a desktop computer,” Knapp says. “We took some of our older desktop computers that were in the building and sent those home with students to replace the laptops, which opened up a lot more CPU bandwidth.” The students also were asked to plug their devices into their routers instead of using wireless home internet, which reduced latency and resulted in a more streamlined, less glitchy process. Meanwhile, the Army was tackling similar challenges at Fort Rucker in Dale County, Alabama, where the service produces pilots to fly the Boeing AH-64 Apache and CH-47 Chinook and Sikorsky UH-60 Black Hawk. In addition to training its own pilots at Fort Rucker, the service also assists with the training of foreign military aviators from as many as 47 countries annually at the base. The Army established a virtual instructor's course so that the instructor pilots could learn how to teach using a digital platform, says Maj. Gen. David Francis, U.S. Army Aviation Center of Excellence and Fort Rucker commanding general. “COVID-19 has enabled us to really take a look at ourselves and how we're delivering training,” he says. Francis envisions a blend of in-person and virtual training once the crisis passes. As the pandemic took hold, the Navy, too, set up remote instruction with unprecedented speed. With 45 students per class, the service would not have been able to comply with social distancing guidance from the Centers for Disease Control and Prevention, according to Lt. Tim Benoit, aviation preflight indoctrination instructor at Naval Aviation Schools Command located in Pensacola, Florida. So in just five days, the Navy created a digital classroom and launched classes for its student Coast Guard, Marine Corps and Navy pilots. Benoit had selected flight instructors to test the new digital system, and the next day he prepared a presentation to train the rest of the instructors. “We were able to adapt to this without missing any productivity targets,” Benoit says. The Navy does not plan to employ remote instruction after the COVID-19 crisis but views the technology as an alternative when a natural disaster such as a hurricane hits. The service is recognizing the advantages of remote learning, however, which include saving time and money. Students have access to each session's recording and associated course materials, and the technology would allow students not in Pensacola to take the courses. “It can also be used in conjunction with in-person training to prep students . . . and it's been used to enable guest speakers” in another city, Benoit says. “Those are some things that I think may persist beyond the pandemic.” https://aviationweek.com/defense-space/budget-policy-operations/us-military-turns-remote-pilot-training