TechCrunch: Seven Defense Tech Questions With Silent Ventures Founder Jackson Moses

The below is an excerpt from a recently published TechCrunch+ Investor Survey entitled 5 investors have high hopes for defense tech amid growing venture interest, which asked Silent Ventures Founder Jackson Moses about his fund’s investment thesis and the current state of aerospace and defense tech. It was authored by Aria Alamalhodaei.

1. What is your investment thesis for defense tech?

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

2. It was long assumed that defense tech was not a suitable area for venture investing because it could never achieve the returns in timeframes limited partners are looking for. Why was that the case, and how different is the landscape now compared to five years ago?

Without re-litigating defense tech philosophy and ethics, a major reason LPs avoided this space, the short answer is that prior to 2022, many venture LPs pursued alpha in the form of proven generalist funds and unproven “emerging” managers. For most of this century, especially 2018 through 2021, LPs had to consider the historically high opportunity cost of participating in defense tech over generalist sectors. Explaining these tradeoffs in 2018 would have proved a lesson in futility. However, for better (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 as the macro backdrop, sophisticated LPs chose 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.

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

Some storied generalists have indeed pivoted and advertised defense tech as 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 (look at DoD contracting vs. commercial ARR as a proof point), and requires years of honed, specialized expertise. Because of these substantial differences, early participants are protective of the defense tech ecosystem: original investors shield founders and vice-versa.

In general, defense tech participants are long-term strategists. We understand not all venture dollars are the same shade of green; we know unfair advantages don’t always stem from the largest institutions; and we have yet to see which generalists, if any, are tourists or are truly dedicated to national security. Until we collectively know more, the best A&D founders will continue to partner with specialist investors who helped lay the foundation when defense tech was (extremely) unpopular, many years back.

As for new entrant consequences, I suspect more A&D companies will receive funding at increasingly higher valuations and that failures will be more seriously scrutinized. However, this isn’t unique to defense tech.

4. National security means more than munitions. What are the most overlooked or undervalued defense tech segments, or ones most primed for growth, in the next 12 months? Conversely, are there any areas that are oversaturated?

Silent Ventures believes munitions, kinetics, and affordable mass are essential pillars of effective U.S. deterrence, or “peace through strength,” that are critically underfunded or mismanaged, depending on your prerogative. The root cause — magazine coverage — is an area I spend much of my time researching. I frequently meet with founders developing solutions across a hybrid stack that includes munitions, propulsion, manufacturing, supply chain and logistics.

It is unfathomable that Stinger, Javelin, and Harpoon missiles are in short supply. It is incomprehensible that, with an $857B defense budget, America must arm allies with cluster bombs instead of “dumb” artillery shells. This is an existential problem in need of immediate solutions. As for saturated defense verticals, I confidently speak for many VCs in asking entrepreneurs to please cease building new class 1–2 UAVs and collaboration & productivity platforms.

5. What role should non-dilutive financing programs play as a company builds its cap table?

It really depends on the contracting vehicle. For example, I place zero premium on traditional non-dilutive financing mechanisms like Phase I SBIRs and research grants. However, TACFIs and STRATFIs are a different story. As it pertains to the former, my reasoning is multifold:

• They are low dollar amounts and not difficult to obtain (i.e. not a strong PMF signal).
• Venture scale businesses shouldn’t require them (i.e. premier startups solving hard problems will always attract more investment).
• A dual-use strategy can more effectively de-risk financials (i.e.focus on commercial GTM where possible)
• An emphasis on non-dilutive funding, often pushed by inexperienced investors, can seriously jeopardize core business development.

Tactically, at this juncture in defense tech, very few startups can survive, let alone thrive, on government contracts alone (SBIR mills are not venture scale investment opportunities). I prefer my companies primarily focus on commercial sales while running longer-term government partnerships in parallel. Ultimately, this means working with USG to establish a program of record.

6. The “valley of death” is a well-known risk for commercial companies selling to the government. How can startups bridge this gap before the dollars dry up?

Sophisticated defense entrepreneurs are extraordinarily savvy when it comes to revenue, burn, and runway. They are acutely aware of their budget constraints. They are also uniquely positioned to proactively avoid, or at least mitigate, existential risks derived from the “valley of death.”

The easiest way to avoid this proverbial trap is to employ a dual-use business model whereby private sector revenue (i.e. shorter sales cycles and feedback loops) subsidizes the time cost associated with onerous government contracting initiatives. That said, if an A&D startup is strictly focused on addressing USG pain points, it can work alongside DoD agencies DIU, AFWERX and DARPA, among others, to more efficiently source and secure government contracts.

7. Will venture help build the next U.S. prime? Will it look differently than today’s primes? The past 24 months have been a challenging economic environment, but rising geopolitical tensions have been something of a counter-boon for defense tech. Is defense tech due for a reset?

For better or worse, the word “prime” is associated with many unfavorable connotations. For many, prime evokes thoughts of rent-seeking, special interests, troubled technologies, cost overruns, and endless delays, realities that have compounded over time and now seriously threaten Western civilization.

My hope is the modern equivalent embodies the polar opposite set of characteristics. New era defense companies must operate with integrity and steer clear of regulatory capture if they are to power our sustainable defense apparatus. These companies must consistently deliver superior capabilities on-time and under budget.

Moreover, we mustn’t be distracted by the lure of plausible science fiction. Americans must realize we’re still in the early innings of this paradigm shift and there remain many more reasons for defense startups to fail than to succeed. Investors and founders must embrace this challenge; nothing is guaranteed. This isn’t supposed to be easy.

Read the full TechCrunch+ Investor Survey here.

About Silent Ventures

Founded by Jackson Moses, Silent Ventures is an early stage venture firm that invests in exceptional founders building unrivaled aerospace, defense, and national security companies.

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