Unpalatable defense markets and the problem of non-obviousness

Here is Elad Gil on the Venture Stories podcast answering a question on why some markets become unpalatable:

Sometimes its just competition, you can’t really end up with a differentiated product over time. So that’s one issue. The other issue is that the distribution is locked up and the sales cycle is really long and it’s really hard to break into the market that you need to have so much money to be able to last through.

 

Gov-tech or defense is an example where you want to be very well capitalized because if it takes you five years to hit a DOD contract, that’s a really long time to run a business until you hit it — but when you hit it you end up with a half-billion dollars a year in revenue. So there’s some markets where the sales cycle makes is very favorable for incumbents. Most regulation of markets tends to favor incumbents. The regulators don’t know that their effectively locking the door because the incumbents can comply and you can’t.

Here is some more:

… there’s lots of different types of businesses you can build. When all is said and done, the best type of business is some sense — although Amazon disproves many of these things, so there’s always an exception to the rule — the best types of businesses tend to be high margin, high growth, recurrent revenue driven — so you don’t want to buy a customer and lose them — and a massive TAM [total accessible market].

 

If you have those characteristics and low competition, you have an amazing market. If you have a market with those characteristics, then its very easy to spot and already saturated with people. And so most startup markets have to by definition be non-obvious. Right? If it was obvious everybody would be doing it. So a startup market is one that you have to figure out and sort out.

Let’s say you had a start-up trying to enter defense. Well, only very obvious ideas are allowed by the government because they have to be approved by fifty or more separate offices. The requirements, programming, and contract processes take many years. So the market is already saturated because its been obvious for so long that it was coming.

Because non-obvious projects cannot get funding — in fact, the acquisition system was set up specifically to generate a government-wide consensus — that means trial-and-error innovation cannot be pursued. This trying out of new things and iterating quickly is what startups have an advantage in.

But the government moves slow, requires huge capitalization, and negates the startups’ advantage. As a result, disruptive technology primarily happens outside of government funding, only to contribute to government programs when they have become mundane and commonplace — when the technology becomes obvious.