What’s Driving the “Once in a Generation” Moment for Defense Tech Investment?

TOMMY HENDRIX: If you ever had a chance to get some of these transformative technologies off the slide deck and into reality, this is it.

MONTANA WARE: Hi, I'm Montana Ware. I'm an attorney in Orrick's Technology Companies Group, and today I'm joined by Tommy Hendrix, managing partner of Decisive Point Ventures. Tommy, there has been such a massive shift in investing in hard tech in recent years, and more and more managers are open to the idea of investing in defense. What's driving that?

TOMMY: We have a couple of things coming together at the right time for the industry. Historically, there's been a pretty big rift between Silicon Valley and the world of defense. Some of that is driven by the politics of the global war on terror, the appetite of investors to put really capital-intensive businesses at the forefront of their investment strategy with the backdrop of much more capital-light software technology companies – which were really driving the market for the last 20 years.

But today, we've seen dislocations in the market that were driven by things like COVID, the war in Ukraine. I think there's been a global realization that it's time to invest both domestically and in things that are really going to matter for the United States and our longevity, our independence in the long run. Things like defense, new industrials, energy – those are the things that are really capturing the attention of investors today.

MONTANA: There's been such a rapid proliferation in defense in dual-use startups. Is that sustainable? And do you expect consolidation in the coming years?

TOMMY: I think if we go back ten years and we talk about this term “dual use,” there's a little bit of misinterpretation that we see today. Ten years ago, dual use was absolutely necessary because there wasn't enough growth capital beyond initial seed funding to get these companies the runway they need to build hardware, to build very capital-intensive things. Today, that's less the case.

Many investors are interested and frankly enthusiastic about investing in deep tech and hard tech. Ten years ago, we needed there to be both a defense – or government – application and a commercial application, just because we needed to attract the long-term capital to ensure that the company had the runway to grow.

Now, as we've seen more specialist firms come in and be interested in this space, that's less the case. And there are some applications that are just pure defense applications.

MONTANA: What emerging technologies are you most excited about right now?

TOMMY: It's hard to ignore today that compute, AI, and energy are now effectively trading as one market. We see that in the public markets when there's big announcements related to AI infrastructure spending or deals.

The energy sector is also popping. That's traditional energy, it's green tech – and it's also things like nuclear which maybe straddle those two poles. We're looking at things like advanced manufacturing for chips, rare earths – and anything that will cross those industry lines between energy, AI and compute.

MONTANA: What traits or backgrounds do you look for in a founder or a founding team that you back?

TOMMY: For the most part, we want founders that have a deep understanding of both the technology and the problem set of selling it to the government. It doesn't mean that they have to have come from government themselves, but they have to understand the realistic challenges associated with selling into the federal market. That's navigating compliance, procurement timelines and cycles – understanding how appropriations work.

Really, they can't just be good at one thing. They have to be athletes. Just throwing money at a company that wants to sell to the government is a recipe for disaster.

MONTANA: Anything else you would recommend for founders and companies that are thinking about getting into the space?

TOMMY: This is not a market to wade into lightly. There's specific expertise that is necessary to be successful here, and there's an entirely different vocabulary that needs to be learned and understood. What we see a lot of times is founder exuberance when they get feedback from a military member, a government agency, or a national lab specific to their technology, without really understanding who the decision-makers are, who the buyer really is, and what the funding looks like year-over-year.

There's a lot of stray voltage that can be generated by running down every lead that you get within the government. It's the world's largest technology buyer. It's a customer that is not for the faint of heart if you're expecting to walk in, get immediate customer feedback, and have a go/no-go decision on any reasonable timeline without knowing exactly how the rules of the game are played.

MONTANA: Are there maybe some industries that need some of that acquisition reform more than others?

TOMMY: This is a once-in-a-generation opportunity where, for nuclear specifically, we have the government breaking down regulatory barriers in a smart, safe, scientific way, and private capital, largely driven by the demand for AI and compute, pushing money into the space.

These two things are coming together at precisely the right time. If you ever had a chance to get some of these transformative technologies off the slide deck and into reality, this is it.

MONTANA: Great. That's great, Tommy. Thanks so much for joining us.

TOMMY: Of course.