So you wannabe a DefenseTech investor, Part II
Navigating the Landscape
Last week I started the “So you wannabe” thread, with some references to help any aspiring Defense Tech investor (and particularly those that are moving from the DoD to VC).
Venturing into the world of Defense Tech venture capitalism is a challenging yet rewarding endeavor. As the landscape undergoes changes with firms right sizing and some closing doors, it’s crucial to approach this field with strategic insights.
Here’s a few bits of advice tailored to veterans aiming to make their mark in Defense Tech VC.
1. What’s your why?
Discovering your “why” is the compass that guides your journey into Defense Tech VC. Are you enticed by the allure of easy money, or do you carry insights from working within a Program Executive Office (PEO), spotting untapped opportunities for VC backed companies? Perhaps the entrepreneurial bug has bitten you, and VC is your canvas for cultivating innovation. Understanding your motivations is crucial—it aligns your passion with purpose. Whether it’s the challenge, the desire to support groundbreaking technologies, or a deep connection to the defense sector, defining your “why” propels you forward in the dynamic realm of venture. So, take a moment to introspect and unveil the driving force behind your venture aspirations.
2. VC is tough
Entering the world of venture capital is notoriously tough. There’s no singular path to being a VC; however, many operators-turned-investors believe that is the most appropriate route. There is a sense that only those that have been entrepreneurs themselves understand the difficulties founders face and can provide the empathetic support that they need.
Of course, that’s not the only path to VC. Arthur Rock, largely credited with creating venture capital as an industry, was a financier by background—originally working as a securities analyst. Katherine Boyle—an important voice in Defense Tech investment—found her way from a journalism career to General Catalyst and eventually to a16z as a general partner in their American Dynamism practice.
Army Special Forces have a saying that it’s harder to keep one’s Green Beret than it is to earn it. Similarly, Navy SEALs talk about how yesterday was the only easy day. This notion carries over to VC, as well. VCs have to provide consistent value or risk marginalization and being pushed aside. VCs are beholden to their Limited Partners (LPs, those that invest in the VC fund) and have to provide tangible returns.
Finally, I think its worth noting that while the VC industry saw unprecedented growth and free capital during the ZIRP (zero interest rate policy) period from 2020 to 2022, there’s currently a right-sizing underway. Jenny Fielding, GP at Everywhere Ventures highlighted this in a Forbes article predicting VC trends for 2024:
“We are starting to see the great [VC] resignation, as many investors realize that they won’t be able to raise new funds easily, and that the time horizon to liquidity is in the distant future. The better news is that this shake-out is actually healthy for the ecosystem, as too much money in the system contributed to the hype cycle in the first place.”
Some of these VCs that will leave the industry are what industry insiders refer to as “tourists” that showed up during that ZIRP period, seeing VC as easy money. Others will be long-time investors or otherwise deeply serious and committed individuals that decide to move on. We will see more funds shut down over the next year or two. It’s a tough time in a tough industry.
Of course, the upside is that Defense Tech is having a renaissance, and is still seeing some growth.
3. Understand the roles
It’s important for aspiring VCs to understand the various roles. Not every firm uses these terms, but these are generally accepted and understood. For example, one of the largest firms, a16z, refers to all employees as “partner,” obscuring whether you’re talking to a GP or associate-level individual.
General Partner / Partner - Partners are generally the most senior members of the VC firm. They are responsible for investment decisions, fundraising, and portfolio management. GPs almost always have carried interest (“carry”) in the fund, and as such have a GP commit—meaning that they have to put their own money into the fund. The term GP can also be applied to the actual firm that manages the fund.
Limited Partner - LPs are investors into the fund. While the GP manages the fund, the LP agrees through a Limited Partnership Agreement to contribute capital when called for from the GP and trusts the GP to deploy the capital. LPs often include family offices, pension funds, insurance companies, and other institutional investors. They are not active participants in the day-to-day business of VC.
Principal - Principals are junior to partners, senior to Associates, and assist in sourcing, conducting and reviewing due diligence, advising on investments, fundraising, and other activities. They may also negotiate deal terms with founders. This position is generally considered a partner-track position, meaning that strong performance could lead towards a promotion to partner. They may receive a small amount of carry in the fund, although they might have none.
Associate - Associates source deals, conduct due diligence, prepare reports and presentations. Associates often have MBAs, likely have no to very little carry, and probably aren’t on a partner-track.
Analyst - Analysts are generally the most junior members of the investment team, responsible for tracking companies and industries before and after investments. Analysts are usually pre-MBA and rarely have carry.
Venture Partner - Venture partners are professionals that work with VC firms with limited scope. This position can be thought of as an advisor or consultant. They may help source deals, they may provide an interface between the VC firm and a portfolio company. Generally, these are individuals with considerable professional experience or networks that they can leverage to the benefit of the fund. As we see more senior leaders move from the DoD to VC, many of them will take venture partner roles where they can provide expertise and network effects.
For many personnel moving from the military or Defense Department to VC, figuring out what sort of role is appropriate may be difficult. I would think that for those with robust professional networks and special business skills, the venture partner role might be a great fit. This is the same role that Tony Thomas assumed at Lux Capital, upon retiring as the commander of SOCOM. For those with considerable background in business and finance, or specialized skills, a principal role might be a good fit. For the majority, an associate role will provide the experience necessary to continue growing and contributing to a firm and national security.
4. Veteran’s value props - Early wins for VCs
It’s important for those entering VC (and particularly for veterans) to provide value very quickly. Here are some ideas where veterans might be able to provide early wins for a firm.
Founder Support - Provide invaluable assistance to defense tech companies in their early stages. Help a company learn the language of DoD. Have considerable background in strategy formulation? Help guide the firm’s portfolio companies (portcos) in developing their GTM strategy. Have experience in drafting statements of work for contracts or reviewing submissions? Help review the portcos’ drafted bids. Many smaller firms don’t have the bandwidth to provide sufficient founder support, and this is an area where veterans could provide quick value.
Navigating Government Regulations - Master the complexities of the FAR and DFARS to facilitate smoother operations. These documents are immense and esoteric to outsiders. Helping a firm understand the regulations and articulating the opportunities of potential investments to capture revenues from the government is a huge value add.
Military Procurement Expertise - Related to the previous two, the military procurement and acquisition processes are obscure and difficult to navigate. Leverage your understanding of military procurement to facilitate due diligence (“oh, you’re an awardee on a $100M multiple award IDIQ but haven’t received a single task order? That’s nice, but you can’t claim $100M in ARR.”) and assist portcos.
Due Diligence Support - The conduct of due diligence is critical to prudent investing. Part of that process relies on expert calls and customer calls to understand the technology, the business, problem-solution fit, and product-market fit. Veterans bring considerable expertise as former customers, and they bring their network of potential current customers. All of this allows an opportunity to provide support to the DD process.
Relationship Building - The trope in tech is that “your network is your net worth.” Relationships matter. Facilitating connections between VCs and companies, customers, and investors will always open doors and provide value.
5. Words of caution
Longer Timelines - Understand that returns in Defense Tech take time, and patience is key. The military operates on the FYDP during the budgeting process. That means that programs won’t be funded immediately and revenues for Defense Tech companies will take longer. Help manage expectations for VCs, their LPs, the portcos, and yourself. Commit to the long game; and don’t expect a cash windfall.
Competitive Landscape - I described earlier how difficult the VC ecosystem can be. Acknowledge this intense competition, and develop resilience and adaptability.
Potential Bubble - There’s no doubt that Defense Tech is a hot sector in the tech and VC ecosystem currently. VC is a business that is largely driven by bubbles (think of crypto in 2021, AI this year). Defense Tech and Dual-Use sectors could be in a bubble. How long will that last? Nobody knows for sure. Certainly the deep tech / hard tech is necessary and will continue to be necessary, but will we enjoy this same alignment between the Pentagon and Silicon Valley for more than a few years? Only time will tell!
Conclusion
Embarking on a career in Defense Tech VC demands a unique set of skills and a strategic mindset. Veterans have the opportunity to contribute significantly, bringing their experiences to the forefront of this dynamic industry. Stay resilient, focus on early wins, and navigate the challenges with informed caution. Your journey in defense tech awaits.
Keep Building!
Andrew