The Key Patterns in Dual-Use Technology — Academy Investor Network

Authored by: Richard Tippitt, Geoffrey Yang, Ryan Chen, and Ashley Sogge.

The Academy Investor Network conducted a study on dual-use technology companies that have successfully raised over $5M of investor funding. By analyzing 500 dual-use companies, the study reveals patterns amongst these dual-use technology companies that may inform the reader of what to look for in the future.

Introduction

In recent years, countries openly competitive to the United States have invested government money into commercial innovation with the dual-goal of i) advancing their economies and ii) enabling a military/security advantage. This approach enabled these nations to challenge the technological supremacy of the United States, creating both economic and security implications. The U.S. Government realized this, and versus taking a top-down/government-led approach, the U.S. Government is working hand-in-hand with the private sector to provide non-dilutive funding to companies based on their ability to raise funding from private investors. As a counter to rising state-directed innovation by foreign adversaries, the government can make many “small bets” on emerging technologies with potential government applications while also ensuring these companies have commercial viability — the definition of dual-use.

The primary vehicles used by the government to insert capital into startups are the Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR) programs. These programs, funded by federal agencies such as the Department of Defense, Department of Health and Human Services, Department of Energy, the National Science Foundation, and NASA, provide non-dilutive funding to small businesses for research and development. Over the past decade, the U.S. increased mandatory SBIR and STTR spending to a minimum expenditure of 3.2% and 0.45% from federal agencies’ budgets with greater than $100M and $1B in R&D funding, respectively, on promising dual-use technology. If one solely considers the number of early-stage companies an entity invests in, the U.S. Government has no rival. For example, the SBIR program inserted money into 7,000+ companies in 2020, whereas there were only 3,400+ companies that received institutional VC funding in 2020.

In contrast to economic and military competitors, like the Chinese Communist Party’s (CCP) military-civil fusion efforts, the U.S. leverages its free-market economy to accelerate commercial technology adoption across all agencies instead of forcing the development of military-specific uses. To maintain its position as the world’s leading economy have no peer competitors to national security, the U.S. must support unique, government-applicable technology while allowing free-market economics to determine the success and failure of commercial endeavors.

Since the SBIR program was reauthorized in 2000, it has awarded more than $48B — $3.9B in 2020 alone. This makes the program one of the largest infusions of capital into early-stage (pre-seed to Series A type companies) globally. Beyond the SBIR program, Congress has reiterated its commitment to a “whole of government” approach to improve research and development through recent bills. The bipartisan and Senate-passed United States Innovation and Competition Act (USICA) includes tens of billions of dedicated funding for science and technology research across all sectors. In addition, both the smaller and larger infrastructure bills under consideration include billions more. These recent efforts from the Executive and Legislative branches reaffirm the importance of investing in technology to maintain U.S. economic and security superiority. The ability of the United States to harness its free-market technological prowess is critical, not only as a counter to adversarial states but also as a boon to future innovations that may not have a ready commercial market.

Key Findings

Below is an overview of our findings through this study. To find more in-depth analysis, visit our full analysis on our website: Full AIN Dual-Use Technology Article

California excels at producing viable dual-use technology companies

An incredible 217 out of 500 dual-use startups in our study claim California as home, dwarfing all other states. Even considered separately, Northern and Southern California fall 1st (182) and 3rd (35) amongst other states, respectively. Despite the reported divide between Silicon Valley and the DoD/government, our research suggests the Bay Area supplies a healthy number of companies focused on dual-use technologies.

But, California is not the only overperforming locale

Austin, TX receives less than 3% of venture capital overall but represents more than 12% of dual-use technologies in this study. A large number of active duty and veteran residents, a growing startup culture, recent efforts by the local government to capture federal initiatives, and DoD innovation hubs such as AFWERX and Army Futures Command headquarters all serve as contributing factors to the outsized number of dual-use companies headquartered in the Austin metropolitan area.

Compared to overall GDP with other states, Virginia and Massachusetts have an outsized number of dual-use companies. Despite having a relatively low federal government or military presence, Massachusetts has the second-highest number of dual-use startups, behind only California. Virginia is fourth overall, likely due to its proximity to Washington DC and significant government presence across the state.

In-Q-Tel is highly effective at funding successful dual-use technology startups

In-Q-Tel is represented by twenty-four investments in our study. While twenty-four may not seem high considering the overall number of companies in this study, In-Q-Tel has only made 167 total investments since its founding in 1999. Conversely, the investment fund most represented in our database, New Enterprise Associates, has invested in thirty companies despite having made over 2000 investments during the period of this study. Thus, In-Q-Tel’s success rate backing companies and technologies of interest to the government is extraordinarily high.

Cybersecurity, following recent federal trends, leads all other sectors

Cybersecurity has more than double the number of dual-use companies than the next sub-industry in this study. Cybersecurity support functions such as analytics, AI/ML, identity management, and data management represent four of the following six subcategories. Previous investments in cybersecurity are proving beneficial, and the latest push to improve cybersecurity will only increase this gap.

Founders’ demographics do not match commercial statistics

Across all categories, minorities or underrepresented groups represent a higher percentage of founders in our study compared to the national average. In addition, each category is higher as well as the aggregate. For instance, Latino and Black founders make up 1% of all startups in the United States, whereas these two groups each have a 2% share in the dual-use market. The percentages remain unacceptably low, but the data suggests the dual-use ecosystem is performing better than the overall early-stage investment ecosystem.

Most founders do not have military and/or government experience

Surprisingly, only seventy-five, or 15%, of founders have government experience to include large prime contractors. Thus, there is no direct link to government experience and building a successful dual-use technology. It seems that efforts to include non-traditional vendors (and personnel) helped to flip the paradigm for newer federal vendors.

Again, the rest of the report can be viewed on our site https://academyinvestor.com, and article was originally published on September 1, 2021.

The Academy Investor Network is an investment platform that syndicates investment capital from U.S. Service Academy Graduates to invest in venture capital

The Academy Investor Network is an investment platform that syndicates investment capital from U.S. Service Academy Graduates to invest in venture capital