Tech bros vs. munitions at scale -- what is helping Ukraine?

Here’s some good tweeting from Politico’s Lee Hudson on USD A&S Bill LaPlante’s keynote speech at the GMU-DAU Conference. A couple of the controversial points:

Pentagon acquisition chief Bill LaPlante says Ukraine has helped him understand what really matters. “What really matters is production.” “We as a country did our best to not do production,” LaPlante said.

“I challenge all of you to ask about that if somebody give you a really cool liquored up story about DIU or an OTA — ask them when it’s entering production, ask them about numbers, ask about APUC, is it going to work well against China?” … “Don’t tell me its got AI and quantum I don’t care” … “The tech bros aren’t helping us too much [in Ukraine],” LaPlante says.

We will post the full-length video online and to the Acquisition Talk podcast shortly so you can hear it yourself. I’m sympathetic to LaPlante’s argument that production of systems and munitions at scale really matters because it is a hard problem right now. Ukrainians call HIMARS “Saint-HIMARS.”

However, tech bros might point to companies like SpaceX which has provided 20,000 Starlink terminals as the most obvious help coming from tech companies. HawkEye 360 is another venture backed company that has performed over 1,000 satellite missions over Ukraine. Capella Space also supported Ukraine with SAR imagery to track ground objects. Brinc and Skydio have been donating small drones to Ukraine. Microsoft and Google are supporting cyber defense. I’m sure there’s more, not sure if anyone has been tracking it all or the military impact.

It is also interesting that nontraditional companies like Anduril (which likely support Ukraine as well) are getting a lot more traction in foreign countries like Australia than they are in the United States. Perhaps one reason AI/ML isn’t “at scale” in DoD isn’t because of raw materials and supply chains, but because DoD’s own processes get in the way. (Of course, an AI/ML algorithm can be deployed on any number of available devices at virtually zero marginal cost… because it is software.)

Here are some quotes from a recent Pitchbook article on venture investment into Aerospace & Defense:

Although the Pentagon is increasingly turning to Silicon Valley to develop cutting-edge technologies, securing those contracts still takes a long time and a lot of resources. “That is the reason investors [used to] advise startups to stay away from government contracts,” Shah said.

But in recent years, most companies in this sector start out catering to commercial customers and later expand to serving the military and intelligence communities.

Most VC funds tend to avoid investing in companies that are only focused on selling to the Pentagon, Yousef said. That’s because commercial uses help startups in this sector get initial revenue in the door.

Here’s an update on the total VC deals in aerospace and defense. Remember, not all of these investments are actually defense related. A lot of new space and eVTOL investment is based on commercial aspirations. But they can also be put to military use.

The article talks about how investors are starting to see aerospace and defense as an uncorrelated asset class to traditional SaaS companies which have taken a beating in 2022.

But venture requires a return on its investments. And if the defense companies want recurring revenue, they’ll encounter sole source requirements for cost or pricing data, which will limit their profit to 10-15% on top of auditable costs (not including sunk investment into R&D, sales and marketing, etc). I won’t do the math, but these companies need significant growth or crazy high valuations to make it all work. For some context, back in May 2022, Anduril raised $1.2 billion at a valuation of just over $8 billion.