The Rise of Dual-Use Tech: A Win for Founders, VCs, and the Government
Imagine a technology that serves the needs of both the public and private sectors, offering a compelling and innovative solution for customers in each sector. “Dual-use” technology is precisely that, and its relevance and popularity is on the rise. My business partner, Kelly Perdew, and I have been helping founders leading dual-use companies for two decades.
The purpose of this article is to provide examples of dual-use technology companies, discuss how government and VC leaders view and approach dual-use technology companies, and suggest ways that dual-use companies can navigate the long, winding — but potentially very satisfying — road of government contracts. Finally, I’ll discuss what we look for as fund managers when we invest in dual-use companies.
Dual-Use Technology Examples
Here are a few examples of dual-use companies from our Moonshots Capital portfolio:
- ID.me works with state and federal agencies — to include the IRS, Veterans Affairs, and the Social Security Administration — to help Americans digitally verify their identity to access benefits and services while preventing fraud. At the same time, ID.me, using those same digital identity credentials, verifies an individual’s eligibility for special offers and discounts, such as a military veteran discount at Nike or Apple.
- Transmute supports U.S. national security by helping Customs and Border Protection track imports of strategic resources. The exact same verifiable data platform is used by commercial customers, like steel company ArcelorMittal, to track the shipment of their goods across international borders.
- Red 6 develops Augmented Reality technology to revolutionize Air Force pilot training. Their early efforts have focused on fighter jet manufacturers and large government contracts with the U.S. and the U.K. However, commercial applications are right around the corner. Outdoor entertainment like theme parks and sports would both thrive on an AR metaverse.
Dual-Use and the Government
Throughout the past century, the United States has been at the forefront of dual-use innovation: the Department of Defense funded the birth of the Internet while NASA is the driving force of global space exploration. In the face of new emerging threats and challenges in Asia, Europe, and the Middle East, the U.S. government is once again looking for national security innovations and partnerships.
The military is particularly interested in rapid innovation. In 2018, the Department of Defense created Army Futures Command, a brand-new Command tasked with modernizing the Army with cutting-edge technologies to improve its warfighting ability. AFC is headquartered in Austin, TX, and has helped turn Austin into a “center of gravity” for emerging defense technologies. I’ve been working with the Command closely since their arrival and can confirm first-hand that the military is an energetic and proactive partner for the start-up and VC ecosystem.
The military and the government like dual-use technologies because evidence of commercial success “de-risks” government investment in that same technology. They equally like the prospect of partnering with the VC investors for the similar reasons — we spend extensive time and resources to diligence a company’s leadership team, their technology, and the market opportunity, and we take board seats that allow us to further assist and guide the company. In addition, we can help financially bridge dual-use startups should they get caught in the proverbial “valley of death.” More on that “valley” later.
Dual-Use and Venture Capital
Although VC investors often overlooked dual-use companies in the past due to government bureaucracy and budget uncertainty, it has become increasingly attractive in the last two years. Some of the reasons for the shift are pragmatic: Palantir, Epirus, Shield AI, Hawkeye360, and Anduril have been winning significant government contracts and venture investor dollars. Meanwhile, the Defense sector has continued to grow despite the commercial market headwinds of the last 18+ months.
Russia’s large-scale invasion of Ukraine became a watershed moment for defense tech. The United States’ role in thwarting a powerful enemy reminded the world of the global importance of U.S. military readiness. With China’s increasing capability to meet us as a peer adversary, there is an increasing and urgent sense of priority for technologies that can provide us strategic, operational, and tactical superiority. The recent outbreak of war in the Middle East shows that establishing peace and stability will take significant time, effort, and capability. Addressing all these challenges will require a joint effort by innovators inside and outside of the entrepreneurial community and our government leaders.
The U.S. Government and venture capital alike are eager to support national security innovation. In fact, for the VC community, backing dual-use companies does provide a unique opportunity to “serve” the common good while also potentially delivering very strong returns to their investors. Founders should consider whether their innovation can have dual-use applications. When ID.me received a series of major government contracts including the IRS, Social Security Administration, and Veterans Affairs, the valuation of the company spiked massively and immediately. Though the road to navigate through government contracts can be long and winding, the financial rewards can be especially powerful.
Navigating through the “Valley of Death”
For a company that has never done business with the government before, the road is not only long and winding, but it can also be hard just to see through the windshield itself. Multiple phases of validation, approval, and procurement can drag on for months or even years before a positive outcome is realized. Working for two different types of customers — private and public — may mean companies must meet different needs. Scoring a lucrative government contract may require investing in a unique, one-off feature that takes meaningful time and resources to build but sadly does not serve a commercial customer. In these situations, founders have to choose wisely whether to bet on the government opportunity or stick with a product roadmap that takes their company towards broader appeal first.
It is not uncommon for founders to run out of money during the time waiting for contracts to be awarded in what is nicknamed the “Valley of Death.” Founders can try to bridge through this “valley” with revenue from commercial customers but often rely on investors to provide additional runway. VC investors investing in the dual-use space know or will learn that they need to preserve “dry powder” to help bridge companies to contract awards.
Some founders will avoid the “valley of death” altogether by pursuing and winning multiple Small Business Innovation Research (SBIR) grants. These grants are a part of a highly competitive program that encourages domestic small businesses to contribute to federal R&D efforts with the potential for commercialization. SBIR grants progress in phases, each requiring the successful completion of a prior one and a new grant application.
Our Fund I company Red 6 has been successfully navigating these waters since 2017. As a developer of augmented reality systems for training fighter pilots, it had to meet the needs and expectations of both the government and industry giants that provide the aircraft itself. Getting to a Phase III SBIR contract took a lot of hard work over four uncertain years, but Red 6 now has well-established cooperation with Lockheed Martin, Boeing and BAE Systems. Their technology is already supporting the U.S. Air Force, and they recently announced a partnership with the British Royal Air Force as well. The string of successes did not go unnoticed among investors: the company raised a ~$70M Series B in a challenging fundraising environment of 2023. Although Red 6 tech has many possible commercial applications, Founder and RAF veteran Dan Robinson chose to put military first and that decision appears to be the right one.
Sometimes, the government contracting process does move faster. For example, take Outpost Space, another Moonshots Capital investment. Outpost is building the world’s first returnable and reusable satellite, using a proprietary paraglider landing system in combination with a heat shield solution that stops the spacecraft from combusting when it re-enters the atmosphere.
Here’s what Outpost accomplished in a little over a year:
- In August 2022, it closed a $7.1M Seed round led by Moonshots Capital.
- In September 2022, it completed its first autonomous paraglider test for precision landing, validating its early technology to support future applications.
- In December 2022, it won its first SBIR contract with NASA to develop the Cargo Ferry, the world’s first returnable satellite that could bring back cargo from the International Space Station.
- In June 2023, it launched its first mission — a test flight that would help them refine and iterate.
- Shortly after the successful test flight, it was awarded a NASA contract to develop GasPak, a gas generator designed to improve the efficiency of NASA’s own technology for re-entry into the Earth’s atmosphere.
- In October 2023, it won a Phase II Ignite SBIR contract to advance its cargo return system.
- In November, it launched Mission 2, executing on the Phase II contract.
This is an impressive pace, and each of these awards supports the product roadmap and larger vision of the company. And Outpost’s journey is just beginning. If Outpost succeeds in delivering the Cargo Ferry, they will be eligible to apply for a Phase 3 award. Eligibility does not mean they will automatically get the funds, but they will once again enter a strong competition with start-ups vying for the same dollars.
The key for the company — Outpost or otherwise — is to ensure that the SBIRs are not so distracting or deviating from the company’s product roadmap and go to market strategy that the award does more harm than good.
What we look for in dual-use investments
In the dual-use space, our ideal founder not only has extraordinary leadership skills that are always at the core of our thesis, but also demonstrates a capacity for navigating the complex government contract environment. We recently invested in Proteus Space, led by Co-Founder & CEO David Kervin, a former U.S. Marine with 20+ years of experience in bidding and winning government contracts. According to our Military Fellow Lieutenant Colonel Chris Mitchum, a government contracts expert, David “knew more about the federal procurement process than any other founder I’ve ever met.” Paired with Co-Founder and CTO Andrew Shapiro, a 25+ year veteran of NASA JPL, we invested with conviction and led their Seed round. They just opened their first satellite manufacturing facility, and the team is lining up a list of potential government contract wins.
Admittedly, this degree of domain expertise is rare, and just because you haven’t had exposure to government contracting doesn’t mean you should not pursue it.
Dual-use founders with little experience with the federal government can and should turn to VCs and advisors who can provide guidance and support. You want someone in your corner who understands organizational equities, knows decision-makers, and can help you navigate approval authorities across the federal government. Kelly and I believe we can help provide the proverbial “unfair advantage” to startups because we are military veterans, have worked in the defense and intelligence communities, and have massive networks there. We are not the only ones. We have friends and colleagues at Founders Fund, 8VC, Mithril, Red Cell Partners, General Catalyst, Lux Capital, Shield Capital, Lavrock Ventures, Snowpoint Ventures, Outlander VC , Ridgeline Ventures, Lightspeed Ventures, Squadra Ventures, TFX Ventures, Scout Ventures, The Veteran Fund, In-Q-Tel, MaC Ventures, Lockheed Martin Ventures, AEI HorizonX, RTX Ventures, Marlinspike, Riot Ventures, J2 Ventures, and Airbus Ventures.
Conclusion
It is an exciting time to be a dual-use technology founder or investor. We literally have the opportunity to make the world a better and safer place by helping to build cutting edge technologies. It’s not an easy journey, but the rewards are large and meaningful. Embrace the complexities, leverage the right resources, and shoot for the moon.
Moonshots Capital is a veteran-founded venture capital firm that invests in early-stage startups with extraordinary leaders.
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