Opening Our Investment Aperture Thanks to Army Futures Command
At Moonshots Capital, we are both West Point graduates and Army veterans. Together we’ve made almost 90 investments, many of which were into early-stage tech companies founded by military veterans. You might think that we like to invest in companies focused in the military/defense space, but we have almost entirely avoided investing there. Our hesitancy to date has been driven by:
1. Complexity of the government contracting process.
2. Uncertainty of funding timelines and political priorities
3. Difficulty in quickly scaling a defense business given a typical 10-year VC portfolio framework
4. Need or requirement to customize solutions to fit a unique defense use case
5. Our offices in Austin and L.A. are located away from Defense centers of gravity (like Washington D.C.)
We no longer avoid those deals. In fact, we are now receptive to investing in companies in the defense space. Here’s why.
In the summer of 2018, the Army, after a nationwide “Amazon-like” city search to identify the headquarters of its newest 4-star command — Army Futures Command — selected Austin, TX. Their website reads:
Army Futures Command leads a continuous transformation of Army modernization in order to provide future warfighters with the concepts, capabilities and organizational structures they need to dominate a future battlefield.
AFC is the Army’s first four-star command established in over 40 years and marks a major reorganization to more quickly identify, acquire, and field new capabilities to the Army. AFC has a budget of $30B over the next five years to focus on six modernization priorities 1) soldier lethality 2) next generation combat vehicle 3) future vertical-lift platforms 4) a mobile & expeditionary Army network 5) air & missile defense capabilities and 6) long-range precision fires. About 2.5 months ago, General Mike Murray, the AFC Commander, announced that AFC is now “fully operational capable.”
So now the Army is smack dab in the middle of Austin and actively engaging the tech ecosystem. The innovation team for Army Futures Command, called the “Army Applications Lab,” chose to headquarter in the Capital Factory, Austin’s “Center of Gravity for entrepreneurs in Texas.” The AFC headquarters are located just two blocks away in a brand new University of Texas-Austin building. Ryan McCarthy, Secretary of the Army, says that he wanted AFC to “collide” with the tech and startup ecosystem in Austin and believed strongly that the Army needed to be right downtown for that to happen. One year into the initial arrival of AFC, the “collisions” are happening, and in a good way, with startups, corporate partners, and the entire city.
Joshua Baer, Co-Founder and CEO of the Capital Factory, asked me to be his Director of Military and Veterans Affairs about three years ago as he saw the pace of visitors to the Capital Factory from the defense and intelligence community increasing. I was happy to be what he called his “military sherpa” and help welcome these visitors by “speaking their language.” The pace of visits over the past three years has increased to the point that the Capital Factory welcomes teams from across the U.S. Government (USG) multiple times a week — NGA, DHS, FBI, Air Force, DIU, and many more. Josh likes to joke that we have “on average about one General a day visiting the Capital Factory.”
With the arrival of AFC has come the arrival of large systems integrators (LSIs), like BAH, CACI, BAE, Boeing, and others. As much as we are excited about AFC coming to Austin, we are equally excited about the LSIs building out a presence here. In fact, we believe that the LSIs may be more important to growing the Austin startup ecosystem than even AFC, conceding, of course, that the LSIs are here because of AFC. The advantage of the LSIs is that they know the USG ecosystem so well that they can meet a startup and think, “I know customers in State, DHS, Army and Customs and Border Patrol who could use your technology.” And not only do they have a high-level view of government requirements, they know how to integrate and scale a startup into the USG.
Finally, we are witnessing what feels like a rapid expansion of the Small Business Innovation Research (SBIR) Program that is funding startups and small companies to help solve challenging tech problems for the government with three-phased program grants. Included in the evaluation criteria of the SBIR program is the commercialization potential of the technology, meaning that the government prefers a “dual-use technology” versus a technology solely built for a USG customer. AFWERX, an organization established by the US Air Force in 2017, also partners with the SBIR program to provide matching dollars up to $1.5M to companies who receive private investment dollars from investment firms (like ours!).
At Moonshots Capital, we believe that the time is now right to look for exciting companies who are doing business in the defense space, albeit with “dual-use technologies.” The concerns highlighted above in #1–5 still exist, but, for all the reasons outlined, the landscape has changed across a number of fronts and we have opened our investment aperture to include companies doing work in the defense space. In fact, we recently made our first Fund investment into a company whose primary focus is in defense, Red 6 Aerospace.
We first met the Red 6 team, led by a former UK fighter pilot and first ever F-22 exchange pilot, Dan Robinson, through an introduction from a senior leader of AFWERX in Austin while helping escort the Secretary of the Air Force through the Capital Factory. The company specializes in Augmented Reality in dynamic environments. For the Air Force, the company has developed the capability for pilots to see, in the visor of their helmet WHILE THEY FLY, virtual objects. This means that an Air Force pilot can train with friendly pilots and against “enemy” pilots without the need for actual friendly or enemy planes in the air. The capability could have a massively positive effect on training budgets, timelines, and effectiveness with the Air Force and other military services in other use cases. This same capability can be used in the commercial sector, and the longer-term vision, pun intended, is for the team to leverage spatial computing to fundamentally change all manner of human-computer interactions.
We continue to be blown away by the company’s team, current capabilities, and future potential. We led the Series Seed round and Kelly joined their board. The company is headquartered in Santa Monica, just 2 minutes from Kelly’s home and 10 minutes from our office in Marina Del Rey, so now we actively work to support the Red 6 team in Los Angeles and in Austin.
We will continue to weigh the risks associated with investing in companies like Red 6 who do a large amount of business with the defense industry, but we feel like the tides have shifted thanks to the arrival and mission of Army Futures Command. We hope that the venture capital community joins us in leaning further into the space.
