{"id":54874,"date":"2020-02-13T16:53:32","date_gmt":"2020-02-13T16:53:32","guid":{"rendered":"https:\/\/one.sightlinemg.com\/defensenews\/uncategorized\/2020\/02\/13\/should-the-pentagon-stop-playing-the-role-of-venture-capitalist\/"},"modified":"2026-08-08T00:04:10","modified_gmt":"2026-08-08T00:04:10","slug":"should-the-pentagon-stop-playing-the-role-of-venture-capitalist","status":"publish","type":"post","link":"https:\/\/one.sightlinemg.com\/defensenews\/commentary\/2020\/02\/13\/should-the-pentagon-stop-playing-the-role-of-venture-capitalist\/","title":{"rendered":"Should the Pentagon stop playing the role of venture capitalist?"},"content":{"rendered":"
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If venture capital and the Pentagon can come together, the results could be game changing. But \u2013 how do they get there?<\/figcaption><\/figure>\n\n\n

\u201cThe US government must recognize its proper role in this innovation ecosystem,\u201d Chris Brose of Anduril Industries told Congress on Feb. 5, 2020. \u201cInnovative companies do not need the U.S. government to try to play venture capitalist.\u201d<\/p>\n\n\n\n

Katherine Boyle from General Catalyst agreed at a Defense News roundtable<\/a>: \u201cThat\u2019s another core component that I\u2019ve seen from a number of the branches. \u2018Oh, we\u2019ll invest alongside of you.\u2019 There\u2019s so much capital \u2014 interest rates are so low \u2014 we don\u2019t need you to invest. We need contracts.\u201d In other words, government should provide revenue, not equity financing.<\/p>\n\n\n\n

The number of government innovation hubs<\/a> engaging startups has exploded over the last five years. They have used a wide range of vehicles. For example, the Army\u2019s Venture Capital Initiative was chartered to invest in companies alongside venture capitalists. In-Q-Tel represents<\/a> the venture arm of the intelligence agencies.<\/p>\n\n\n\n

But these programs are the exception, not the norm. Most government startup funding comes as revenue. As Air Force acquisition executive William Roper described<\/a>, the government is an \u201cideal\u201d investment partner: \u201cOur money is non-dilutive; our company equity requirements, nil.\u201d<\/p>\n\n\n\n

The Air Force\u2019s pioneering pitch days seek to organically grow startups into large enterprises. It starts with a $50,000 round one contract that may scale to $1-2 million, which may in turn scale between $3 million and $30 million, or perhaps more. Successful projects are then in line to receive a coveted program of record, likely worth hundreds of millions of dollars over several years.<\/p>\n\n\n\n

For years, industry has begged the Pentagon to make big bets on promising startups. Only two firms have reached a $1 billion valuation in the defense market in the last 30 years. If more success stories were available, more venture capitalists would invest in defense startups.<\/p>\n\n\n\n

At the same time, if the Pentagon organically grows startups with contracts, then VCs are presented with a problem. Why would startups need them? After all, the Pentagon has long covered all development costs ahead of product launch.<\/p>\n\n\n\t