Is there VC appetite for defense related startups?

The article you linked basically answers your question. The standard model for defense companies isn't VC-friendly -- you're either building hardware with a limited ceiling, or you're building a consulting business that bills by the hour. Those can be fine businesses, but they're not amenable to wiring $10m and getting back $100m 3 years later.

Defense buyers aren't inherently irrelevant, though. I'm working on a defense-related project at a VC-backed company, and plenty of our peers are. We're selling a standard SaaS model, and that continues to support our business model.

The real challenge is that most tech companies scale up before going after defense, so they can absorb the costs. If you're small, you're going to have to figure out how to scale quickly in the defense world. If you can crack that, I'm sure you'd find a VC or two.

Yes, but it's more niche and nuanced than mainstream stuff (I've dealt with it).

Have you reached out to anyone at In-Q-Tel (https://www.iqt.org/) yet? Looked at AFWORX and SOFWORX? SBIR grants and projects (https://www.sbir.gov/).

I see a wide variety of things coming across AFWORX and SOFWORX indicating interesting in AI-style things, and also what I would consider more mainstream stuff like battlefield coms and situational awareness gear.

Feel free to contact me if you want to chat about anything in more detail.

There absolutely is. Forget people's opinions and look at the last few years of investments in the sector. Look at Anduril, Epirus, Saildrone, Varda, HAdrian, etc. Josh Wolfe of Lux Cap is, and has been, leading the VC charge into defense.

Wouldn't an acquisition by a prime defense contractor be seen as a profitable exit to your VC backers?

Raytheon, Lockheed, Boeing et al all have deep pockets and will pay for smart people and mission relevant tech.

The experience I had with this was related to a seed round, where the multiple they were taking a bet on in a seed investment would be akin to that of the expectation of a venture round (10x-30x+) over 5-7 years.

I'd be interested in the later stage VC case for investing in a defense startup whose main out is to be acquired by a behemoth that has all the regulatory, support, cleared staff, and certification facilities to get on the necessary procurement vehicles to realize revenue.

Speculatively, without defense contract revenue, the acquisition math seems like acquihire numbers and some IP, which is in the low mid eight figures range, so it implies a ceiling on the best case for a $5m-$10m VC investment unless you have the most valuable patents on the planet. That said, a "breadth first" fund (my word) that puts small amounts in at early stages may want the exposure and participation for other strategic reasons, such as the ventures arm of some defense contractors having a mandate to bring startups in with them on their large bids, or a fund with other portfolio companies who would also benefit from the defense oriented tech and access to your channel.

My experience is (n=1) limited and speculative, but I've also worked for security and cryptography companies where the procurement vehicle thing was an issue, and have to think this through a while ago, and that's what I can add. Please don't let me mislead you, etc.

Find other defense startups on Crunchbase (e.g. https://www.crunchbase.com/organization/palantir-technologie...) and see who invested in them.

Also, maybe it'd be more common in this industry, but asking for an NDA at the idea stage is a big red flag in VC (i.e. "ideas are worthless"). This might not apply to you, just a heads up.

The consumer products industry is largely vendor driven - companies decide what products to offer and then make and sell them. The big money in the defence industry is customer driven - the DoD (etc.) decides what they need then goes out and gets several companies to compete to drive it.

I think this has implications for the particular question being asked here in terms of growth opportunities, but I also think it's a big reason why the defence industry is stagnant and has to copy innovation from the consumer sector. If companies were coming up with products (all the way up to warplanes), and then selling them to customers I think there would be much greater advancement, and probably much better product focus on what the product is trying to achieve!

There are obviously business model challenges to this - you're talking about a product with potentially 1-2 customers in some cases, and therefore a lot of risk. But it's interesting that the Israeli defence sector has moved a little more in that direction.

I've definitely seen VCs funding defense startups in recent years such as Anduril.

https://techcrunch.com/2021/06/17/anduril-funding-series-d-v...

450 million at a valuation of close to 5 billion.

The measure of VC is growth and if you are a component to larger systems or programs you will inevitably be throttled. If you are a platform and can own the end to end then you should take VC capital and invest heavily in well connected BD's that are known by the PM's and have a nuanced ability to navigate the orgs.

Palantir (who is end to end) has opened up VC appetites for defense and you see a certain signaling pattern to the VC backed defense start ups vs the traditional small defense business upstart.

I work at a "start up" that develops a component so we took a strategic investment from a defense contractor and that has enabled us to develop core technology and grow commercially while being patient with the arduous cycles of programs.

Former defense/intel contractor here (currently co-founder of a start-up):

Fuck No!

The Federal acquisition process is an absolute nightmare that favors incumbents. Innovation in this sector is extremely difficult, because contracts are super specific, down to requesting/stating the exact technologies to be implemented, rather than a higher-level capabilities based RFP.

https://www.acq.osd.mil/DPAP/dars/dfarspgi/current/index.htm...

It's a nightmare, it's a quagmire, and it needs to be fixed. Until then, anyone who invests in a start-up in this space is out of their minds.

Have you looked into IN-Q-Tel and DARPA?

NATO is said to be planning a VC-like fund for some of the reasons you have stated: https://sifted.eu/articles/nato-war-startups/

However, I also think some defense tech might have lots of civilian applications, like the Internet.

I know they are looking after e.g. autonomous submarine drones. I can imagine the same tech would be able to power non-manned surface vessels.

Absolutely we look at it often. There are government led defense incubators here in the UK at least that help spawn companies too.

There's this: https://www.anduril.com/

SV started as a defense contract with HP, which was definitely not three guys and a garage at that time.

Take a look at:

https://www.crunchbase.com/organization/anduril-industries

I think they have a record of acquiring smaller companies too.

8VC does some meaningful defense investing - they were founded by Joe Lonsdale (co-founder of Palantir) and they are invested in Anduril, and have some folks on the team who specifically focus on defense.

Doesnt the US Government basically serve as a VC for any defense start up? I'm simplifying it but... Fill out contracts until you land one and then hire and build like crazy.

There is cash for everything right now. Raising private equity from family offices is probably a better fit than VC. VC is a different business model.

Novak Biddle Venture Partners is based near Washington DC. Their portfolio includes several defense and security startups.

There are a few VCs that work with defense startups.

Reach out to Josh Wolfe from lux capital, or Delian from Founders fund.

Yea, a lot of private equity in DC...

Have you considered SBIR loans?

Been following defense tech since 2013. (built one in 2014 but failed)

Highly recommend:

- Founders Fund

- Lux Capital

One could probably get funding for a startup that sells sharks with frickin' laser beams attached to their heads.

I assume many VCs are civilian and also assume to make it in defence tech you need to be glowie approved.

Of course, some successful VCs like Michael Janke are ex-military, and naturally he is in defence.