6 July 2017

Defense Industry in a Race to Buy Into Hot Startups


In just one year, the nation’s largest defense contractor has injected close to $20 million into tech startups. And more investments are coming, says Chris Moran, executive director and general manager of Lockheed Martin Ventures.

Moran spent three decades in Silicon Valley before joining Lockheed Martin in June 2016. The company’s $100 million venture capital shop had been dormant for a few years and Moran was hired to revive it.

His most recent pickup is Terran Orbital, a manufacturer of tiny spacecraft known as nanosatellites.

Space companies have been popular targets of investors. Defense contractors are especially attracted because of the crossover appeal for military and commercial options. Lockheed became an early financer of New Zealand's Rocket Lab, which is building a carbon-composite rocket to launch small satellites into orbit for less than $5 million.

Other markets the defense industry is pursuing feverishly are cybersecurity and artificial intelligence. Lockheed last year struck a deal with Cybereason, whose machine learning software helps detect network attacks as they happen. This is a huge breakthrough compared to traditional cyber defenses that are the equivalent of closing the barn doors after the horses left. “Artificial intelligence looks for pattern changes to prevent attacks before significant damage occurs,” Moran says in an interview. “Cybereason was one of the early practitioners in this space.”

Also among Lockheed’s investments is Peloton Technology, a developer of autonomous vehicle technology that could be parlayed into military projects such as unmanned truck convoys. And earlier this year, Lockheed bought a stake in chipmaker IQ-Analog. The company designed chips that relay data at very high speeds, a technology with enormous potential in commercial and military communications systems.

Like any other venture capitalist, Lockheed expects results for the investment. If the startups deliver on their promises, they likely get more funding.

The recently announced investment in Terran Orbital puts Lockheed in a position to help the company get ahead in an increasingly cutthroat commercial space sector known as “new space.” Investors have pumped more than $10 billion into space businesses since 2000. “We looked at more 400 opportunities, at least 20 satellite manufacturers,” Moran says. “We were looking for a maturing, high-quality manufacturing process” that could be inserted into Lockheed’s military programs. “Small payloads can deliver value,” he says. “That was not the thought process a few years ago. Sensors are smaller and cheaper. You can put an exciting payload for the U.S. government in a small package.”

The Pentagon is just beginning to grasp the significance of commercial space innovation, Moran says. Small satellites and rapid launch means the military could deploy systems in weeks, not years. And with satellites that offer higher revisit rates, the government could monitor areas of the globe more frequently.

The commercial space sector has become crowded, and eventually there will be a shakeout. “Every company I talk to seems to want to launch a constellation of one sort or another,” says Moran. “It’s hard to imagine all those business models being successful. There’s a little bit of a wait-and-see going on.”

Lockheed Martin’s archrival in the defense market, Boeing, also has been pouring money into commercial ventures. Just last week, Boeing announced it has teamed with Verizon to fund SparkCognition, a company that develops artificial intelligence and machine learning software for cybersecurity and other uses. Earlier this year, Boeing reported it had become a minority investor in Upskill, a startup that figured out how to combine “augmented reality” smart glasses with voice-recognition software to help assembly-line workers become more productive.

Boeing dubbed its new venture capital arm HorizonX. Executives believe that over the next five to 15 years, technologies will pop up in the consumer sector that will push the defense industry to more automation and efficiency.

Moran says he is enthused by the growing intersection of commercial and defense. After moving to the defense side, he noticed that many technologies that Silicon Valley believes are fresh and new in fact have existed in the defense world for decades. Autonomous vehicles are a case in point. “That said, what you do notice is that the commercial side brings the scale that the military side doesn’t bring.”

Low-cost manufacturing and efficiency are the Holy Grail in the defense industry. “What I hope to get is rapid cost reduction, rapid evolution of the technology,” says Moran. “When you’re only building tens of units a year you can’t afford the learning cycle as when you build thousands of units a year.” When commercial companies started making small radar sensors, for example, they had to bring the cost down dramatically in order to sell them to the auto industry, whereas the Defense Department buys a handful of units and pays much higher prices.

As the Pentagon has become more attuned to the innovation coming out of Silicon Valley and how to exploit it, it also has noticed that China increasingly is deploying its financial muscle there. Reportedly, the Pentagon became alarmed by a rash of investments by state-run Chinese companies in U.S. tech firms. The New York Times in April detailed investments by Chinese firms in American startups working on cutting-edge technologies with potential military applications, including companies that make rocket engines for spacecraft, sensors for autonomous ships and printers that make flexible screens that could be used in aircraft cockpits. The Times obtained a Pentagon white paper that says Beijing is encouraging Chinese companies to invest in technologies that could advance China’s economy and military capabilities.

Moran says he is aware of the trend, and personally knows some of the CEOs of the companies cited in the Times article. What stands out in the way China does business, he says, is that they are in it for the long haul. American investors demand immediate returns by comparison. The Chinese sometimes become the investors of last resort when companies are trying to develop technologies that are difficult and risky, says Moran. “That’s the challenge: Where do we get the money?”

It is no secret that the Chinese government is interested in emerging technologies, says Moran. “They have industrial policies, they make money available.” The U.S. government closely scrutinizes the acquisition of American firms by foreign entities, but in relatively smaller investments of under $100 million, regulations are not as strict. The investments made by the Chinese “give them insights and access on how technology is progressing. This deserves more debate and discussion.”

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