The Pentagon and national security leaders have talked up the need to tap into the emerging technologies and capabilities being developed by defense startups but the message has largely fallen on deaf ears withing the acquisition community, which is why a relatively new group that is advocating for these companies plans to hook them up in the coming year with potential customers.
“The national security community as a whole is not much of a customer of these companies,” James Cross, a co-founder and executive board member of the Silicon Valley Defense Group (SVDG), said on Monday. “So, I think we’ve got tons of rhetoric coming out from senior leadership, but it’s not making it down to the program executive offices (PEOs) and whatnot.”
To help bridge this communications gap, Cross said a policy initiative of SVDG next year dubbed “PEO Innovation” is to lobby Congress and enable the Defense Department’s Innovation Unit (DIU) to get the defense startups and commercial dual-use technology companies and their venture capital (VC) backers “to the table with real customers.”
Each military service has PEOs and under them program managers that are responsible for the day-to-day acquisition activities of their respective departments.
Cross’ day job is as co-head of private investing for Franklin Equity Group and managing director of Franklin Partners, and said during a webinar hosted by SVDG that since the late 1990s when he started being a defense investor in Silicon Valley, he has only seen one PEO in person in the Valley.
Cross said it would help if the PEOs would make it easier for the startup community to help them get in the “front door” to meet with them.
Earlier this month, SVDG released its first report of the top 100 National Security startups and pointed out that there’ is a yawning gap between the amount of VC funding these companies are receiving versus the revenue they are generating from the DoD and intelligence community (Defense Daily, July 17). The group’s report warned that without national security customers regularly acquiring products and services from more of these startups, the VC backers will put their money elsewhere, leading to failures among the technology companies and a loss of innovation for the government.
“So, I think that’s a broken linkage but the obvious conclusion is if the NatSec world, particularly big DoD, Navy, Army, Air Force doesn’t start buying things from this list, this list will go away, because the VCs will stop giving them money,” Cross said.
The report shows that VC investments in the defense technology startups peaked in 2021 in part to what Cross said is “general market malaise” but also because investors are not seeing their investments garner national security sales.
Steve Bowsher, president of the non-profit equity firm In-Q-Tel, which was founded by the CIA nearly 25 years ago to invest in startups with potential technologies of interest to the national security community, said he is not surprised currently by the “imbalance” between VC investments and revenue since investors are betting that they will eventually see a return.
Still, Bowsher said that the government needs to purchase from these startups for the investment community to believe their bets have been successful and to sustain their funding. He mentioned the success of SpaceX and Palantir [PLTR], the data analytics firm that is now publicly traded, and the rise of Anduril Industries as examples of what the investment community is looking for.
“But we need a handful more out of this top 100 to really achieve that level of success,” he said.