vc firms push the dod speed up its procurement and help deftech startups

A group of venture capitalists and tech company executives sent a letter to Secretary of Defense Lloyd Austin III this week, asking for an overhaul of Department of Defense procurement, acquisition, and funding policies to better leverage commercial innovation.

The letter, signed by representatives of both venture capital firms and tech companies endorsed recommendations from the Atlantic Council Commission on Defense Innovation Adoption.

It urged the DoD to modernize its alignment with the 21st-century industrial base, strengthen the role of capital markets, incentivize tech companies to do business with the Pentagon, and establish a bridge fund for proven technologies.

Innovation Adoption is the Real Problem, VCs Claim

The letter highlighted the commission’s finding that the U.S. has an “innovation adoption problem” not an innovation problem itself. It argued that while most critical technologies are developed in the commercial sector, the DoD is not leveraging them at the necessary speed or scale to maintain military superiority.

Among its specific recommendations, the letter called on DoD to provide the Defense Innovation Unit more staffing and resources to engage non-traditional defense companies, raise the cost accounting standards threshold to reduce compliance costs for tech companies, provide more funding for procurement to acquire commercial technologies faster, and revise Small Business Innovation Research grants to allow VC-backed firms to compete.

Specifically, they asked for an additional $20 billion to be added to the mammoth-sized $886 billion defense budget for next year to be earmarked “to acquire production quantities faster and leverage commercial research and development (R&D)”.

The letter warned that without reforms, DoD will fail to capitalize on the nation’s innovative private sector and will “squander the advantages that accrue from the freest and most innovative marketplace on earth”. The venture capitalists and tech firms said they stand ready to partner with the Defense Industrial Base but reforms are urgently needed.

The signatories of the letter included the CEO of Anduril Industries, a defense tech startup that raised as much as $1.5 billion from investors in December last year, Aki Jain, the head of Palantir USG, Trae Stephens, a partner at the well-known Founders Fund, and Paul Kwan, the Manager Director of the prominent VC firm General Catalyst.

“We need tech to win the [next generation of] warfare, and that tech is available in the tech sector, but we don’t have a mechanism to get it into the government”, commented Bilal Zuberi from Lux Capital another VC firm that signed the letter sent to the DoD, in a statement sent to the Financial Times.

VCs are Lobbying on Behalf of the Billions They Have Spent on the Def-Tech Space

vcs are making more and more deals with defense tech startups

The letter is being sent just a year after venture capitalists poured more than $33 billion into defense tech startups as the war between Russia and Ukraine has caused geopolitical tensions to escalate to a point not seen in decades.

Meanwhile, during the first five months of this year, $17 billion have gone to these firms already across a total of over 200 deals. Global spending on military defense surged to $2.24 trillion and analysts expect that the figure may continue to move higher in the coming years if tensions keep rising.

Venture capitalists seem to be identifying an opportunity amid these war drums and are taking advantage of the momentum that the sector is experiencing to push legislators and the federal government to pour money into the companies they are currently backing.

The lengthy sales cycle that companies in this sector tend to experience when working with government agencies has always been a roadblock for startups to obtain financing from venture capitalists as it can take years for the DoD to award an early-stage company with a contract.

What VCs hope is that the urgent need to maintain and increase the US supremacy at a time like this may push the DoD to overhaul its internal processes to give companies that are developing new technologies a shot at showcasing and developing their work for the benefit of the country’s military defenses.