Here’s a few slices from a great Venture Stories podcast with Alex Moore, an investor at 8VC and before that he was one of the original Palantir team members that helped build the company to the first 350 employees. Here, Alex talks a little about how investing in defense requires VCs to put together a “war chest” of a billion dollars:
The way enterprise software/SaaS works is you put in $2 million they build a prototype, they start to get a little bit of revenue. You put in $10 million they scale it out. Then you put in $30 million and you go from there. Now on defense, it’s radically different than that. My thesis is that in defense it takes $1 billion at least to IPO a defense company.
First, there’s this thing called the “valley of death” — you can build prototypes but then you have to get into budgeting cycles, get into programs of record, things have to work out with congressional budget cycles, there’s politics involved, lobbying involved and all this other stuff like ITAR licensing, special approvals. The 2-10-30 model breaks. When you see these new firms coming into defense, if they’re writing around $2-$10-$30 million checks I think they’re going to fail because that doesn’t fit the geometry of the situation.
You get a company like a Palantir, like an Anduril — these two companies have raised over a billion dollars. That’s what it takes, especially if you’re building hardware. This is a problem for a couple reasons. You have to be right on what you’re building. You have to be building something that’s probably a platform, something that can handle a lot of different things for DoD. Perhaps be sold to allied governments. That’s hard. There’s a lot of companies out there doing regular investing geometry and it’s just not going to work. They haven’t built out their DC-lobbying team, their licensing, and all other things they need. A billion dollars, that’s what it took for Palantir, and in many ways they’re still trying to get over the line in certain programs, budgets, etc. and we’re in year 17 or 18.
Instead of VC firms competing with each other, what they should do is team up and take certain projects like Anduril and put a huge amount of money. We have $100 million in Anduril, $100 million in Epirus. Really important to understand traditional models don’t work on defense. Our portfolio reflects that thesis, I have 6 or 7 companies in the portfolio and two have a hundred million and 3 or 4 where we put a few million in to help, we’re a fly on the wall.
Here’s what Alex would change that would help transform that investment geometry.
The way this needs to be reformed is we need to move away from this rigid line iteming of the DoD budget. Right now, acquisition officers… are not allowed to be entrepreneurial. What you need is budgets that can be used flexibly and in a way were cost savings can be achieved — you can have a program, buy a solution that’s a little cheaper than what the budget says, then move that money back into a central pot for more innovative technologies (aka startups) and jump start (1) savings for the taxpayer — that’s really important, and (2) moving money to where we know it needs to be. We need to wait two or three years to get new things into budgets. You automatically are three years behind people like the Chinese… That forces the venture community to build a war-chest to wait out these cycles or accelerate them.
Alex mentions in there talking with a lot of acquisition officers, and particularly Major General Cameron Holt who recently retired from the Air Force. Sounds like that is where Alex is getting the idea of passing budgetary savings into a pot of money that can be reallocated to emerging tech which Holt called the “cash flow” model. Continuing with Alex’s discussion.
The military are smart people, really innovative, and have actually fought in wars. They know what they want, to get these new technologies in there quicker. But they are hamstrung by Congress, political stuff, and we have this “color of money” where “these” colors are for this budget and you have to spend them on that. Why can’t you spend it on new technologies that have come out and use them in Ukraine? Why wait years to get new software out there?
I think Alex put all this really well, and it hits the nail on the head for why #PPBE Reform is a national security imperative.
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