Why is Venture Capital So Uneasy with the World’s Largest Customer

Why is Venture Capital so uneasy with The world's largest customer The U.S Department of Defense is the World's biggest customer And is often eager to work with Innovative companies backed by venture Capital Unfortunately most of the largest Venture Capital firms in the United States are often gun shy or have a Misunderstanding when it comes to Backing companies looking to tackle big Federal markets but why is this are they Being foolish and leaving money on the Table or do they understand something Very important To dig into these questions and more our Panelists represent all facets of the Conversation Please welcome back to the stage Ryan Evans the CEO of Bedrock learning and Co-founder of War on the rocks I'd also like to introduce Dan guac Managing partner .72 private Investments Morgan Beller General partner nfx Dave tremper the deputy assistant Secretary of defense for acquisition Integration and interoperability at the Office of the Secretary of Defense And Tess hatch vice president Bessemer Adventure Partners Ryan over to you Thanks so much great to be uh back on The stage and great to be here with such A great group of panelists I'd like to

Tell you a little bit more about them Starting with uh dan part of Point 72 That he runs is the institutional Private investing business uh he also Oversees 0.72's Venture Ventures defense Tech and growth investment teams and Before joining Point 72 as a partner at Incutel the Strategic investment arm of The CIA and the United States Intelligence community and he was also He's also a marine veteran Morgan is General partner at nfx she was The co-founder of Libra and head of Strategy for Novi Facebook's digital Wallet for Libra before Facebook she ran Corporate development for medium she Started her career well her bio says she Started her career on the deals team at Injuries and Horowitz but I learned Backstage that her introduction to Disrupt was actually volunteering at Disrupt when she was 18 years old So welcome back I think that deserves a Round of applause thank you uh Dave is The this is a very wordy title Deputy Assistant secretary of defense for Acquisition integration and Interoperability and one of the things I'm going to ask you is what all that Means and uh he's responsible for Strategies that involve Fielding a lot Of different capabilities for the US Military I think that's the most simple Way I can explain it and before being at

The Pentagon he was at DARPA and the Office of Naval Research and then we Have tests uh tests hatch invest in Technology and people who believe as Strongly as she does that Frontier Technology will develop solutions to Societal problems she is a partner at Bessemer Fostering entrepreneurship of these Technologies specifically the Commercialization of space drones Autonomous vehicles and climate Tech so You know some of the most pressing Problems of our era and I'm really Excited about the discussion we're about To have and starting with you Morgan It's not so often that people pivot from Crypto to space so I'd like to hear a Little bit about that and do you think Government has been too slow to embrace Both of these technology areas Short answer is yes definitely for Crypto less so for space but to rewind So as mentioned I was at Facebook prior To this meta as I was corrected Backstage now meta and started the Libra Cryptocurrency effort and I'm speaking For myself not on behalf of Facebook but What got me out of bed every morning was China and I think the Belton Road Initiative phase one physical Infrastructure roads ports Etc this was Like six seven years ago so people Thought I was crazy I am but to this

Point phase two 5G Huawei which was also Confirmed I believe that phase three is Money and phase four is space so My boss at Facebook David Marcus had to Testify in front of Congress twice for Libra and there were several Senators Who said hey people think nukes are the US biggest defense weapon but it's Actually the US dollar And if you believe that the future of Money is digital not physical which I Think is just a fact then the US Government's kind of shooting the bed on That is am I allowed to say that yeah And China gets it so that was a big Motivation behind Libra you're like okay China has If you four billion people are under Authoritarian regimes and therefore like Those leaders would probably love to Have forms of money where they can more Easily track who's using it how it's Being used so if you look at the Western World there's two companies that could Launch that type of asset to a similar Sized group of people and it's Facebook And Google so that was my motivation Behind it of course the headlines like Never will or did tell that part of the Story so then fast forwarding to space It's similar where you're like okay if You love America What do you think is important I still Think money is important so I'm still

Working on that but space as well great Thank you Dan I want to direct really The central the title of this panel at You it's what why are why historically Of so many Venture Capital investors Been so over cautious uh or maybe just Cautious I don't know about investing in Defense Tech startups is it changing and If so what's driving those changes Certainly hope it's changing I think um You know I'll start with why are Venture Capitalists kind of you know uneasy with The world's largest customer and just to Set a baseline I would say that a lot of That has to do with the fact that up Until about five years ago Startup pursuing government money was Generally a pretty bad idea you know it Was just it was it was a tough Market to Crack sales Cycles were longer how to Make the sale was less certain unlike Most rational commercial sales the Budget the user The Authority all these Things were disconnected didn't even Know about each other right Startups need to operate at a sales Velocity where they are proving Something every quarter every year right And when you've got a sales cycle that Takes three years that just doesn't Really click for for startups and so you Know up until five years ago I would say It was legitimately a bad idea to fund Startups that were going to pursue the

Government as the primary customer So what's changed clearly something's Changed because you know we're big on on Defense Tech right uh in my mind the Catalyst has really been that when there Is a technology wave that has the Potential to shift the global superpower Balance Suddenly the government gets a lot Better at buying things and the prize For delivering that kind of shift is Worth those three year sales cycles and Both of those things are happening right Now if you think about the technology Waves that uh that we're looking at Today AI in all of its forms whether That's autonomy or computer vision or Natural language processing machine Translation things like that for the First time in a while these are Technology waves that each can shift the Global superpower balance and you Couldn't necessarily say that about Prior technology waves you know take Like the.com boom right the birth of the Internet absolutely change the face of How knowledge gets shared on the planet But it wasn't necessarily going to make Or break superpowers Similarly mobile right I mean it just Has completely changed our lives as Consumers and how we interact with Commerce and data but it wasn't going to Shift the global superpower balance when

You think about Aerial autonomy Marine autonomy space Assets these things actually can shift The global superpower balance the last Time you saw a technology with that kind Of potential was in the pursuit of the Nuclear bomb and if you think about what Happened during the Manhattan Project And how the government was able to just Move Heaven and Earth and put resources On a problem the way that really only The government could I think we're Facing a similar Catalyst today and so That's really that's really the the Catalyst for the change and there's a Bunch of you know kind of messy things That need to be worked out you know in The pursuit of that but at least that Catalyst is there So if you're still facing you know let's Say you're starting a company or running A more mature company test and you're Facing that three-year sales cycle that Can be a little daunting and going Through it myself actually and so what Why should Founders and Company you know Whether it's a founder of a startup Whether it's a growth stage company or a More mature company than that why should They consider selling the government Maybe even first before Corporates it's definitely daunting it's It's it's cumbersome there's a high Barrier of entry and and there's

Potential risks when selling to the Government Um and and Dan you mentioned some of Them but I'm going to dig into to others But also the pros and hopefully convince Some of the founders or people running Companies in the audience to consider a A business to government product and Sales function early potentially even First Um so Why should you consider the government It's the largest potential Market the Largest market really loyal customer You're also not worried about them going Out of business and not being able to to Pay for your product really strong brand And and they'll buy a large contracts And even expand increasing your net Dollar retention Along the journey they'll give you Grants lovely non-dilutive sources of Capital I'm sure this panel will say Things like sipper small business Innovation research grants and idiqs Indefinite quantity a bunch of acronyms Just the government giving you free Money to help your company and your Technology And there's also a sense of in some Cases it's the right thing to do a sense Of of patriotism Those all sound really good There's some reasons not to Dan

Mentioned already really long sales Cycles it takes years sometimes to get To a Significant contract let alone recurring It's bumpy it's lumpy it's unpredictable You'll have a really busy Q3 the fiscal Year ends in September people need to Use their capital budget so it's kind of Unpredictable And lastly it there is it is cumbersome There's regulations there's various Things that as a startup it's either too Expensive or not a a a core piece of the Company to focus on at that time but Rambling aside I I think you should at Least yearly if not more consider a a go To government product and and and Therefore sales team Because it is the largest market it is a Really strong customer and that it can Bring your startup that reputation and And significance that it's difficult for Startups to get but you can with the dod Being a customer and you know Dan and I Did a podcast with uh someone from Leonid which is in the debt business Focused on defense and we learned that Fewer than one percent of Defense Contracts actually get canceled and even Those that do I think over 80 percent of Their funds have already been spent been Delivered to the to the company Um so there is there is that reliability And the r d funding can be considerable

And can be in the millions and it is Non-dilutive but there's still major Problems and Dave's going to tell us how He's going to single-handedly fix all of Them uh so Dan Dave sitting in the Pentagon Um first tell us what your job actually Is because my understanding is it's a Newer position it is yeah so so I was uh I was previously as about a year ago This time I was a director of electronic Warfare for the Department of Defense And and while I was in that job I was Really harping about how if the Navy's Building a capability And the Army needs the capability we Need to be able to move that capability Quickly between the services rather than Have the Army start investing in the Same capability we see that happen a lot In the Department of Defense you get These essentially a cylinder of Excellence where the Navy has Navy Missions so they focus on their Investment so they're not looking at What the Army and the Air Force are Doing and you have potentially some Redundant investment that's happening Across things so in the world of Electronic warfare you see that while I'm countering the the electromagnetic Spectrum and so if I'm building it for The Navy then it's equally useful for The Army in the Air Force and so we look

At how do you how do you uh Implement Software-defined architectures that Allow Navy investment to be leveraged Across Army and Air Force systems and Vice versa so now you get that Compounding Investments of the Navy Builds it then the other services get The benefit from it you get the cost Savings that they don't have to invest In and you get this ability to rapidly Insert the capability across Services Well while I was harping about that was This recognition that you know what We've got a joint acquisition problem in General right that if we're going to try To deliver a new joint mission to a Combatant commander who's responsible For the indo-pacific for instance or it Was a four-star Commander responsible For that domain that we really want our Systems to be interoperable we want to Be able to support the joint Mission so That the Navy system talks to the Air Force system talks to the Army system But the way we do acquisition today it's A very service specific and that that Dependency between the services the Requirements that potentially need to be Put in place to ensure the integration Process Services isn't inherently there So I was asked to stand up a new office A new Deputy assistant secretary of Defense office on the acquisition side Acquisition and sustainment side of the

Department that looks at how do I ensure That when systems are being delivered by The different services that they are Inherently integratable so that when They show up out in the operational Field the aircraft can talk to the tank Can talk to the to the ship and it's Inherently there and it's not something That we have to go back and Band-Aid fix Afterwards so it is a mouthful as the Ai2 is kind of the way we kind of the Way we shorten it down when we're Talking about it I think one of the key Pieces of this though is that word Integration and and so when we talk About Innovation we talk about new Technology right you in the Department Of Defense that exists within the Science and Technology world the s t Side and that aligns with the research And Engineering side of the office of Secretary of Defense so if you're Familiar with the office of Secretary of Defense there's a variety of different Undersecretaries one of them is research And Engineering which is where science And technology and Technology Innovation Happens there's also the under secretary For acquisition and sustainment that's Where you have your big programs like Your F-35 and your new submarines and Jad C2 and all those things are massive Programs where there's a lot of money Being spent on the acquisition of a

Program of record right so that all Happens on the acquisition and Sustainment side when an Innovative Disruptive technology shows up it Doesn't show up on the acquisition side It shows up on that Science and Technology side so you'll have Investment pots that are paying millions Of dollars right to mature a technology So that it demonstrates a military Relevant capability right so maybe you Demonstrate out on a ship that I have This new technology this Innovative System that's disruptive to the way we Do War fighting and it's available on a Ship I've got it I've got a I've got a Valley of death for lack of a better Term right we know that term value death There's a valley of death between what I Just demonstrated on a ship and having That integrated into the shipboard Systems with operators trained all the Authorities in place to use it and the Approvals for it to connect with the Rest of the systems on the ship so There's an integration challenge that Happens even after you demonstrate the The most game-changing technology and That integration piece of it is Critically important it means you have To understand what that Gauntlet is what Are the steps that you need to go Through that Gauntlet after you've Demonstrated the force field that can

Save the Earth right if I don't have a Requirement for a force field to save The Earth well then I'm not going to get Big money to put towards investment in The force field to save the Earth right So we have to look at how do you do Those requirements processes how do you Set up a program historically the Requirements to the internet the way That we analyze and determine every Company is separate there's an entire Name you have to request your money to Do that Now you're talking about a five-year or More program so now you're talking about 10-year timelines between what I Recognized that I needed a capability And I actually uh bring it out into the Field for the first time right so what We're looking at within the department Now is how do you parallelize those Things can I use year of execution Investment so what I mean what year of Execution investment means I have the Authority today to invest in that right The way we do it now is I have to plan To invest in it in two years out so I Have to do the analysis I have to Determine I have a requirement I have to Get Congressional approval to use that Money all of those processes take time What we're looking at now is where do I Have the authorities to use year of Execution investment in a prototype

System that would allow me to develop The requirements and the acquisition Plan all in parallel so that I can Deliver capabilities much faster so you Can have that sorted out one a week two Weeks yeah well yep so I just found my Physical space in the Pentagon and so Shortly after now I know what seriously What's the timeline for figuring this Out I mean so we have there are so the Deputy secretary of defense Hicks stood Up some initiatives called competitive Advantage Pathfinders and within those Competitive Advantage Pathfinders we're Looking at particular prototype Capabilities where year of investment Funding can be used to prototype a System and align it with what we call Adaptive acquisition approaches right so The department stood up something called Adaptive acquisition processes which are New ways of acquiring systems through Software Pathways so software pathway Historically software historically would Have been treated like you were Acquiring an F-35 well we all know That's not true so so new Pathways were Established that allow six-month type of Cycles for investment and implementation Of software something called middle tier Of acquisition which allows me to do Rapid prototyping right at the front of An acquisition program and skip a lot of The requirements process so that I can

Get to a prototype system much quicker Within the competitive Advantage Pathfinders of these these cap Initiatives looking at can I use year of Execution Authority that I have for Prototyping align it with my acquisition Strategies so that effectively as I'm Planning for an acquisition program I'm Building the Prototype so that when the Program of record starts it's actually The much much more mature phase so I'm I'm potentially at a what we would call A technology Readiness level seven or Something that's been out in the field And tested the day that the acquisition Program actually starts and so when that Acquisition program starts is when you Start to see the real money show up for Scaling kind of maintaining sustaining Those systems as opposed to that Prototyping phase which is demonstrating The proof accounts well this might be One of the most important jobs in the Pentagon right now so stay healthy take Care of yourself Um VCS Um what what are your reactions to what He just said is that encouraging or do You think depend depending on can pull This off it's an ambitious plan you know Ambitious plan Um I think that You know what you can't discount is that

Good defense Tech Founders sure they're Waiting for that to happen but they also Know how to execute in today's Environment right the reality is Um you know the dod is a is a big place It's not going to turn on a dime right And I think if we're gonna you know Build big defense Tech businesses the Answer cannot be to sit around and Bemoan how hard it is to sell into dod You got to be able to figure it out Right that does take a very specific Kind of domain expertise right Um a Founder that can you know Understand real technology on the one Hand and also all the words and acronyms That were just shared is a pretty Rarified kind of founder right but the Best defense Tech Founders you know they Will certainly benefit from a lot of the Efforts that will make selling into the Dod at scale easier over time but they Can also execute today and the way that They do it is you know by finding in Your execution money as proof points That there is a committed user and that There is at least some budget and Proving that to defense Tech focused VCS Who can appreciate those Milestones even Well short of it being fully adopted Into like a program of record or Something like that right and so I would Say yes those are all tremendously Important uh efforts I think in order

For us to really maintain superpower Status we have to figure out how to make This easier so that the best Technologists can devote their talents And efforts and and build their 10 20 30-year careers uh you know Building Technology that that makes the nation Stronger but as a VC we also have to you Know pick Founders who can operate in Today's environment today Test oh sorry go ahead Listening to to you maybe a con if I may Is the The Venture Capital industry and The dod we we just speak different Languages and and I think at the end of The day we're looking for the same thing We have the same North Star and and a Solution is okay I have a Founder if They're taking Venture Capital money With a former DOD background and Understood all of the various offices And things that you just said which Which I humbly do not Um or you and I work better together Whether that's through a handhold from Like an aerospace Corporation or an Inqutel dance former employer who whose Job is to help venture capital in the Dod work or more directly Um uh build those those bridges just in Translation you say acquisition which it Doesn't actually mean my type of merger And acquisition it means a big large Recurring contract I like that so let's

Just call it that and then it can help Our our company some more infiltrate the Dod and sell to y'all no that that's Extremely important that that Communication breakdown I think is is a Key thing that we need to resolve and And there's a there are initiatives Within the within the department that Are looking at something like along the Lines of our transition concierge Service right that for that would Essentially facilitate or Shepherd Non-traditional companies and small Businesses into the world of that that Integration space so instead of opening The door and saying okay this is how you Get in and here's the funding that you Can go after submit your proposals right Would actually Provide a concierge service which would Start to talk about what is the Operational relevance of what you're Talking about and I think I think when You get into that proposal phase and Department of Defense reviewing that Becomes very difficult for people who Haven't lived and breathed in that space For a long time people who haven't been War Fighters or operators or understand The lingo right because they can't Necessarily inherently tell you what the Operational relevance of this disruptive Technology is right and so so now you Have people that are looking at this

Thing to try to decide what is the Operational relevance with kind of the Best tech developers in the world who Can't communicate with the Opera can't Necessarily communicate what the Operational relevance is and you end up With this communication device so when You when you can insert something like a Transition concierge you can look at What what is being developed objectively And say Here's Where I think this is Operationally relevant I'm going to Connect you to the acquisition program That does this type of thing right and So now you can you can foster that Discussion and now you can be the Translator between the acquisition Program the tech developer to trying to Say okay this is what the acquisition Program is asking for and this is what The tech developer potentially provides I think as it stands right now there's a Wall between those two communities and When the proposal shows up if it doesn't Have the operational relevance that the Department of Defense is looking for the Technical Merit well that might sound Technically interesting but boy it Doesn't meet the mark of what we're Looking for because because that Communication breaks down Morgan when You were you know I don't know how many Deals come across your desk but probably A lot probably a lot for all of you when

You're looking at a founder and a Company that is interested in working With the defense department how do you Judge that they're actually proposing a Product or a company that will actually Fit and how does that compare with the Process you run with commercial-facing Businesses so the first deal that came Across my desk when I joined nfx was a Space company called Stoke and I'm Breaking my rule today I've never worn a T-shirt on stage but we're here and it Was sent from a former colleague Adrian Fenty who Is more familiar with the government World and I was like best mayor DC's Ever had in my opinion And I was like I have absolutely no Business investing in this I was always The kid with a telescope in my room but I didn't like study you know this in College but I couldn't stop thinking About the company so then when we met Andy and Tom This was January 2021. I was like I have A lot of work to do if I'm going to Justify doing this deal and The short answer is we did references I Mean at the seed stage the way I Described seed stage companies or any Company is an equation with a lot of Variables and the only coefficient that Is likely fixed at the seed stage of the Team so most of the references at that

Point were on the team and we spoke to General cost from the Air Force who had Worked with them both in their jobs at Blue origin and other folks like that Who helped us get comfortable but you're Not not rolling the dice at the sea at The speed stage Um I have other thoughts but I can yeah go Ahead well I was also just thinking like This isn't a question you asked but it's The question that I was staring at which Is why is Venture Capital so uneasy With companies that sell to this space And I think something I've been thinking About a lot because admittedly Stoke was the first space deal we did at Nfx and we talked about how it was kind Of breaking our rules so nfx stands for Network effects and you have to like Really use your imagination to see how Stoke's going to get there and they will But Um It required breaking the rules a bit and As I've been thinking about that more as Like we've looked at more space Companies as space companies that were Investors and are raising I'm like the Truth is like venture This is where I'm like Curious who's Gonna get mad at me but like venture has More or less over the past 10 to 15 Years not that I know any differently

I'm not that old but it has kind of been This get rich quick scheme where you Invested in companies it wasn't like More or less like things go up like you Know SAS things go up and the hypothesis I have is that SAS multiples are never Going to be what they were And that battle like get rich quick Scheme is not going to be what it was So then you're like okay and also there Are like all these AI application Companies for which the most I'm I'm Rounding up so don't know but the remote Is like zero for a lot of these AI Application companies so now you're like Okay all these industries that like Actually have modes like you're building A rocket Um that is I think all of a sudden more Interesting and the timelines for any Company to get to like public is going To be longer so I think that areas that Were previously not sexy because the Truth is it is like harder longer they Have to buy metal you have to do all These things that Venture capitalists Aren't familiar with I think are all of The sudden going to become more Attractive yeah and you mentioned SAS I Think the ads of service Sorry there are space to ask companies I'm not totally but I think the as a Service business model has yet to fully Been accepted by the defense department

I think I think that's a future I'd like To see with a lot of defense companies Tess space is one of your big passions What are some of the space technologies That you're most excited to see when They come across your desk Well before making To really quickly go back and uh note The technological Trends or catalysts That have gotten the industry to where We are today to then figure out where It's going next and there were two first The invention of the cubesat Decades of Moore's Law exponentially decreasing the Size and increasing the power of cheap Commercial off-the-shelf Electronics to Allow for students entrepreneurs to Throw a sensor on a tissue box size Satellite which really lowered the Barrier of Entry to space before the Invention of this tissue box cubesat the Only way to launch an asset into space Was a school bus size satellite the size Of sometimes this room that would take Years if not decades and hundreds if not Billions of dollars to design build test And launch Cubesat was invented but we had no way To get it up into space so the second Technological Catalyst or momentum Driver was the invention of the tiny Rocket sure SpaceX really helped get to It from space with a cheaper rocket but It was still designed for the school bus

Not the tiny tissue box so now we have a New form factor to throw assets into Space we have a way to get to and from Spacer better what's what's next what Are all the exciting next Technologies Uh there are folks working on Manufacturing in space pharmaceutical Testing and Manufacturing in space Private space stations in low earth Orbit asteroid mining lunar colonization And and Beyond I will say though the Aerospace engineer in me is thrilled for All of these ideas the investor in me is A little more skeptical with a shorter Return on her investment for her limited Partners so so I'm not as convinced These are within a 10-year time Horizon But I've got some confidence in in Manufacturing in space if varda is Allowed to come back down they're Producing um Pharmaceuticals up there so That could be an exciting next so you Heard it here Tess wants pitches on Manufacturing in space so exactly well This is a great conversation I know we Could keep talking about this I mean for At least another hour but we we're not Allowed to Um thank you all can we give a round of Applause for our amazing panelists This is great thanks for having us and Um thanks again to TechCrunch and thanks To Lisa West and her team and great to Work with on helping to organize the

Space stage so thank you very much