What Defense Tech VCs Are Looking For in Startups

Because of the ongoing wars and geopolitical tensions, investors have become much more interested in defense and dual-use technologies, which have both military and civil applications. Many venture capital firms are dedicated to investing in these technologies, such as Marque Ventures, Shield Capital, In-Q-Tel, Silent Ventures, Veteran Fund, Lux Capital, Snowpoint Ventures from the US, as well as MD ONE Ventures and Project A Ventures from Europe.

But what exactly are these investors looking for when scouting for potential investments?

Of course, some common criteria apply to any startup, such as valuation, cash-generating capacity, business scalability, exit potential, etc. However, defense and dual-use tech startups possess several unique features. Among these are innovative and proven technology, governmental contracts, commercial applications, and team experience.

1. Innovative and proven technology

Investors seek startups with cutting-edge technology that offer significant advantages over existing solutions. However, being “innovative” on paper does not guarantee usefulness in actual combat conditions. For instance, when engaging with drone startups or similar companies, many VC investors are now asking, “Are you in Ukraine?”

Over the past two years, due to the ongoing war, Ukraine has become a testing ground for many US and European companies. Many Western products, even the best ones “on paper,” turned out to be ineffective in real-life scenarios — either because of electronic warfare conditions, tactical specifics, or just because the theoretical modeling of their application can be far away from real life. Companies that collect feedback from the military and incrementally improve their product have a strong competitive edge — making them much more valuable for potential customers and investors.

2. Governmental contracts

Having governmental contracts is one of the most frequently mentioned factors by various VCs. Having contracts with governmental agencies or major defense contractors is extremely helpful. Among the most important reasons is that your startup can navigate the so-called “valley of death” — when you’ve started operations but aren’t generating much revenue.

Developing an understanding of the available contracts and the system in place to obtain them will help companies avoid getting stuck in the often discussed “valley of death.” David Ulevitch, General Partner, a16z

Another important aspect is that such governmental contracts teach you and your team how to operate in the complex environment of governmental procurement processes, which can be extremely difficult and time-consuming. Having those contracts and team members who know and have expertise in navigating these areas is a solid point for a potential investor.

3. Commercial application

Some VCs often indicate that the technology of the startup they invest in should have applications in the defense and civilian markets. The reason for this is quite simple — it is a way to de-risk their investment. Procuring governmental contracts may be a very long and complex process with unpredictable results. Nobody guarantees you anything. However, suppose you already have some commercial customers. In that case, you can expand your market and generate revenue while working on major governmental contracts.

Given their inherent agility, startups can prove a commercial product-market fit before taking the risk and applying their system to defense purposes. Outlander VC

For example, a startup can sell drones that can be used both in agriculture and military surveillance operations or an AI-powered algorithm processing satellite data for defense and insurance customers.

4. Team experience

It is always beneficial for a defense tech startup to have individuals with experience in military operations, who have worked at large defense contractors or specialized governmental agencies, or who have otherwise acquired relevant experience. This ensures that the team possesses firsthand knowledge of defense procurement processes, has access to relevant technical experts, and can effectively communicate with its core customers.

You want someone in your corner who understands organizational equities, knows decision-makers, and can help you navigate approval authorities across the federal government. Craig Cummings, General Partner at Moonshots Capital

However, such domain expertise may be rare within startups. In such cases, it makes sense to collaborate directly with VCs who possess significant knowledge and experience in defense and dual-use technology. These investors can be your true partners, sharing their expertise and connections. Recently, defense tech started attracting all sorts of VCs, including generalist investors without previous involvement in these sectors. Such generalist VCs may not always possess the appropriate level of knowledge or network.