Investing in Defense Tech: A Realistic Perspective
The defense technology sector is attracting significant attention. High-profile statements from government officials signal a drive to quickly adopt new technologies. This creates enthusiasm for investors seeking to turn patriotism into profit.
However, potential investors need a strong grip on reality to decide if a defense-focused startup is worth the investment.
The Realities of Defense Tech Investment
Success in this sector requires careful evaluation. The Department of Defense (DoD) operates with a zero-sum budget. New technologies often require displacing or reducing funding for existing programs. Established solutions, even if less effective, hold an advantage because of bureaucratic inertia. Anyone entering this market must accept this.
A key concern is the lack of clear, written requirements for addressing problems. Demand signals are also hard to forecast, leaving startups to guess the direction.
Startups often emphasize partnerships and pilot programs. However, feedback from the end user might reveal a different picture. Many startups boasting impressive LinkedIn profiles may not receive glowing reviews from their customers.
Challenges for Hardware Startups
Hardware-focused startups face even greater challenges. Demonstrating a functioning prototype isn’t enough. Is the product integrated into military systems? Has it passed all certifications?
DoD approval involves extensive compliance and security procedures, often taking years. Milestones such as military airworthiness and achieving a high Technology Readiness Level are difficult, but they don’t guarantee success. Distinguishing between progress indicators and solid outcomes matters.
Saving the Government Money
Another crucial factor is whether the technology creates cost savings for the government. While improving efficiency is a selling point in the private sector, defense contracting is different. Does the startup’s technology improve existing solutions and reduce costs? If it introduces a new technology, which existing program loses funding?
Questions for Investors and Founders
Investors and founders need a more nuanced approach to evaluating defense tech startups. Consider these questions:
- Is there evidence of genuine interest and commitment from DoD customers beyond public relations?
- For hardware solutions, has the product completed the necessary certifications and been deployed on operational military platforms?
- Does the proposed solution provide documented cost savings and, if so, how are other programs or budget allocations affected?
It’s about focusing on tangible results rather than superficial indicators. Defense tech startups demonstrating actual installations, verified cost savings, and enthusiastic user feedback are the most worthwhile investments.
The Path Ahead
The potential for defense tech is vast, but failing to understand all the challenges could have serious implications, not just for investors but for national security. We must focus on what’s truly important.
By adopting a pragmatic approach and encouraging collaboration between investors, startups, and DoD decision-makers, we can turn investment enthusiasm into contract acquisition. This strengthens national defense through genuine technological advances.
Matt George is the founder and CEO of Merlin, a venture-backed defense tech company. The views expressed are his own and do not represent The Defense Post’s editorial position.
