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Why we win: The new wave of investment in defense

Right place, right time

Since a16z partners Katherine Boyle’s category-defining blog post Building American Dynamism was released early last year, the defense tech space has seen an influx of new venture capital interest, particularly from Silicon Valley investors. However, there’s more to this wave of interest beyond trend chasing. 

In recent years, we’ve seen the DoD begin to lean into innovation budgeting and solving the interminable and daunting issue of dealing with the defense procurement system. Earlier this year, the Defense Innovation Unit (DIU) was elevated to report directly to the Secretary of Defense, indicating a new level of importance for the unit. The latest Defense Appropriations Bill seeks to provide DIU with a $1B hedge portfolio that would ultimately allow for increased investment in private company technology built for defense buyers. The reason for the increased investment is clear when you consider the results in their FY22 year-in-review report, which showed that DIU has successfully transitioned 52 technologies to products in procurement, representing $4.9B in production contract ceiling, over the past seven years, with 69% of those transitions occurring in the past three fiscal years.   

These results from DIU come alongside a steady drumbeat of increasing DoD innovation budget for private company technology through other governmental organizations like the Chief Digital and Artificial Intelligence Office (CDAO), the Office of Strategic Capital, AFWERX, SpaceWERX, NavalX, TaskForce 59, the Army Applications Lab, and the Marine Corps Warfighting Lab. 

The infusion of interest and capital in private innovation requires a shift in how defense spending operates. The historical procurement and acquisition pathways for the Department are opaque at best. In order to maintain America’s position as the leader in defense tech, there needs to be clearer and more accessible contracting avenues that encourage private companies to build technologies for the defense sector. We are now at the moment where the tide within the DoD is shifting towards a more collaborative environment between commercial and defense players, which makes the playing field much more attractive for investors looking to decipher the defense procurement system.

It’s all about relationships

While from the top, it’s clear that the DoD intends to partner with VC-backed startups, the challenge will be cultivating relationships across levels of government, from end users who can validate the use case of the technology to Program Management Officers across the different service branches who can course and allocate budget for technology deployment to leaders in the Department who can align strategic funding initiatives to demonstrated technologies that aim to gain traction within the DoD. Especially for startups looking to demonstrate traction in the challenging space of defense and dual use strategy, these relationships are integral to success, both in terms of securing procurement to the most important piece: building the right thing.

And sure, relationships are important for startups in many industries, but bridging the gap from Silicon Valley to DC is no small task. Events like the Defense Ventures Summit are critical for providing space for candid conversations about DoD priorities, procurement strategies, and technology readiness. 

What we’re looking forward to

The defense tech space is clearly heating up. At Scale, we have growing conviction that this next wave of early-stage startups will continue on the successes of predecessors such as Palantir, Anduril, Shield AI, and Vannevar Labs. The DoD has made it clear that particular areas of technology advancement have particular alignment with strategic initiatives within the military and we believe that commercial solutions with deep understanding of the defense end user are coming out to meet the demand from the Department. 

Of the top technology areas of interest, we’re looking forward to seeing the successful execution of companies building within the spaces of AI/ML, autonomy, cybersecurity, and communications/data sharing – areas of expertise that are already heavily aligned with our own portfolio here at Scale Venture Partners and that we believe have both real defense and dual use potential.  

For America to continue its position as the global leader in defense technology, it is paramount that we continue to dominate these technology areas, particularly to serve the warfighter and the Department of Defense as a whole. We are looking forward to seeing commercial startups scale their capabilities with the Department and continue to strengthen America’s position as the most advanced military in the world. If you believe you’re a part of this journey, we’d love to chat.

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