For a few years, it was taken as a provided that enterprise investing was fundamentally incompatible with defense technology.

Cripplingly long acquisition cycles — upward of 10 to fifteen years for major weapons programs — and unfavorable economics of defense tech startup exits were ceaselessly cited as two the reason why the maths simply didn’t add up. Sometimes the objections wore moral garb: In 2018, a gaggle of Google employees told CEO Sundar Pichai that the corporate should stop work on a Pentagon pilot called Project Maven because “Google mustn’t be within the business of war.”

The times have modified. Indeed, it is probably going not an overstatement to say that the connection between U.S. defense and Silicon Valley is undergoing its most profound transformation for the reason that Nineteen Fifties, when Pentagon funding led to massive advances in computing, semiconductors and weapons systems.

Here, five enterprise investors describe this historic shift. Three of the investors individually use the word “generational” to explain the transformation: Jackson Moses, founder and managing partner at Silent Ventures, says defense tech is a “generational opportunity”; Jake Chapman, managing director of Marque Ventures, describes a “generational shift” of capital and wealth toward startups; and Josh Manchester, founder and GP of Champion Hill Ventures, talks concerning the country’s “generational competition” with China.

It is not any coincidence that this word is repeated time and again. Spurred on by geopolitical antagonisms, a growing awareness that the U.S. defense industrial base is poorly equipped to maintain the country competitive (despite being extraordinarily well capitalized), and changes inside the Department of Defense have created recent opportunities for venture-backed entrepreneurs — and the investors who fund them.

When one considers dual-use segments like space launch and biotechnology, the opportunities change into much more expansive. PitchBook, which incorporates these segments and others in its evaluation, found that defense tech VC activity topped out at $34.3 billion last 12 months alone.

In fact, risks remain. You’ll hear from five investors on the complexities of defense tech investing, which sectors are over- (and under-) saturated, and whether enterprise dollars will help construct the subsequent U.S. prime.

We spoke with:

• Jackson Moses, founder and managing partner, Silent Ventures
• Jake Chapman, managing director, Marque Ventures
• David Ulevitch, general partner, a16z
• Raj Shah, managing partner, Shield Capital
• Josh Manchester, founder and general partner, Champion Hill Ventures

Jackson Moses, founder and managing partner, Silent Ventures

What’s your investment thesis for defense tech?

Defense tech is a generational opportunity best categorized as dot-com 2.0. It’s the patient arbitrage of an enormous market historically defined by inertia, occupied by imperfect legacy businesses, suffering from suboptimal public-private relationships, and hindered by entrenched structural deficiencies that incentivize improper behavior on the expense of national security. Silent Ventures believes investing in defense startups is an efficient way for LPs to meaningfully diversify risk, support highly motivated builders, capitalize on asymmetric upside, and unequivocally eliminate the emerging narrative of a recent global order.

It was long assumed that defense tech was not an appropriate area for enterprise investing since it could never achieve the returns in timeframes limited partners are in search of. Why was that the case, and the way different is the landscape now in comparison with five years ago?

Without re-litigating defense tech philosophy and ethics, a serious reason LPs avoided this space, the short answer is that prior to 2022, many enterprise LPs pursued alpha in the shape of proven generalist funds and unproven “emerging” managers. For many of this century, especially 2018 through 2021, LPs had to think about the historically high opportunity cost of participating in defense tech over generalist sectors. Explaining these trade-offs in 2018 would have proved a lesson in futility. Nonetheless, for higher (or worse), the 2022 “reset” served as a forcing function for LPs to revisit risk management and portfolio construction fundamentals.

With turbulent capital markets and global conflicts because the macro backdrop, sophisticated LPs selected to re-allocate capital into defense tech specialists. Whereas it was once a prerequisite to bootstrap A&D with minimal investment, exceptional defense tech founders now command a premium.

Defense tech investing has heated up: In line with PitchBook, VC firms injected $7 billion into aerospace and defense firms through the primary 10 months of last 12 months. As more generalist VCs enter the space, what effect will this have on the defense tech ecosystem? In what way is the rise in generalist VCs making you retool your investment strategy?

Some storied generalists have indeed pivoted and advertised defense tech because the “next big thing.” These are well-intentioned firms, and I applaud more good dollars backing patriots developing products of substance. That said, A&D is inherently complex, shares few generalist analogues (have a look at DoD contracting vs. industrial ARR as a proof point), and requires years of honed, specialized expertise. Due to these substantial differences, early participants are protective of the defense tech ecosystem: Original investors shield founders and vice versa.