Decoding Venture-Backable Companies in Defense Technology: Scalability and Defensibility
If you’re building in Defense Tech or investing in those that are building, you’ve probably at some point run into the question: “but is it venture-backable?”
First, it’s important to note that the majority of companies are not venture-backable.
Many companies that aspire to be venture-backable, aren’t.
Understanding what makes a venture-backable defense tech company is important to help entrepreneurs decide if they should even pursue VC investments and to help VCs know in which companies they should put their money.
So, what makes a company venture-backable. Two things: scalability and defensibility.
Scalability: Unlocking the Potential for Monumental Growth
At the heart of venture capital lies the pursuit of exponential growth. Scalability serves as the litmus test for a venture-backable company, gauging its capacity to capture a significant market share and propel its valuation to stratospheric heights.
For investors playing the power law game, each investment must harbor the potential to "return the fund" – a feat achievable only if the company can achieve valuations surpassing the initial investment manifold. This demands a market opportunity of substantial magnitude, one that can accommodate the company's growth trajectory and yield a sufficient return at exit.
Several considerations give insights into a company’s scalability.
Government / defense budgets - understanding how and where the government is allocating money reveals current market opportunities. Going deeper into the “colors of money” can suggest potential future growth rates. In the US, this is publicly available information, through the DoD Comptroller’s website.
Concepts and requirements - the military largely projects forward 20 years to envision what future warfare might look like. Based on this, it develops operating concepts that it will then test through various means. Once it has some confidence that the concept COULD hold, it will start to develop requirements based on the concept.
Defense appropriations - while the budget is the plan for how the DoD wants to spend money, appropriations are the means by which Congress approves and allocates money to specific programs.
Specific vertical trends - there is no shortage of research organizations offering insights about projected growth rates for various vertical markets in defense and dual-use technologies. Whether its a 27% CAGR in drones by 2030, a 4.5% CAGR in munitions by 2026, or a 23% CAGR for extended reality by 2028, both founders and investors should cross reference growth opportunities with market predictions.
The creative minds of futurists - some people are great at envisioning a future world. Tap into several of those futurists to find out commonality and learn about potential use-cases for technologies.
Expert calls - some founders may not realize that investors will call experts in your domain, during their due diligence. The Office of Strategic Capital could help VCs connect directly with senior leaders in the Pentagon for expert calls.
In addition to the market opportunity, scalability also covers a company’s ability to reproduce its products quickly, the company’s ability to impact time/cost savings for the customer, differentiation, and growth rates.
Defensibility: Building Fortresses Against Risk
While scalability paints a picture of potential, defensibility illuminates the path to realization. It revolves around mitigating risk and safeguarding investor interests by fortifying the company's position in the market.
In the realm of defense technology, defensibility manifests through technical and economic moats. Technical moats, such as patented technologies, erect barriers against competitors, shielding the company's innovations from replication. Meanwhile, economic moats, like network effects, forge unassailable positions by leveraging market dominance.
Contracts serve as a potent proxy for defensibility in defense tech. Securing contracts at early stages lays the foundation for growth, while programs of record (PoR) emerge as bastions of long-term stability, offering a fortress-like defense against market volatilities.
As defense tech companies evolve, the pursuit of multiple PoRs becomes paramount, ensuring resilience across diverse customer landscapes and solidifying the company's foothold in the industry.
Charting a Course Forward: Navigating the Nexus of Scalability and Defensibility
In defense technology, venture-backable companies stand at the crossroads of scalability and defensibility. By harnessing the potential for monumental growth and fortifying against market risks, these companies pave the way for innovation, resilience, and enduring success.
As investors and entrepreneurs alike navigate the ever-changing landscape of defense tech, understanding the interplay between scalability and defensibility becomes paramount. It's not merely about identifying opportunities; it's about deciphering the DNA of success and charting a course towards a future defined by innovation, impact, and prosperity.
Keep building!
Andrew