What Defense Tech Startups Miss In Their Fundraising Pitch

Andy Tang is a partner at Draper Associates, the early-stage venture capital firm founded by Tim Draper in 1985. He joined in 2006 and his notable investments include Scout AI, Oklo, ICEYE, Otter.ai and Coinbase. Andy specializes in finding promising startups in dual-use defense/commercial tech, space, biotech, web3, AI and more. He’s a deeptech expert, having first worked in R&D for semiconductor technologies at MIT and then moved into Intel’s commercial operations during its generations of chip dominance. Since 2006, he’s invested in early-stage startups at Draper Associates and Draper Dragon.

If you lead a defense tech startup or scaleup, it’s a great time to be going out for investment. There’s certainly no shortage of capital. Between government/agency initiatives and the surging interest from investors/VCs, defense-related startups in all fields (space, mobility/ transport, AI, data/monitoring, robotics and more) should be able to close their next round easily.

However, one of the obstacles founders in this space face is their categorization - namely, focusing too much on the military side of their business and not developing dual-use capabilities for defense and commercial customers. Given the choice between backing a purely defense-focused technology or a dualuse startup, most investors will choose the latter. And it’s not because there’s a problem with funding defense applications. The problem is that defense startups, compared to their dual-use counterparts, have a smaller total available market and an overly concentrated customer base.

First, on the total available market. Any startup that can sell to multiple markets is better than being limited to one. Therefore, if you have developed a product that is good for the military, have you explored how it can be used in civilian enterprise sectors or industrial customers? Those companies that do are “dual-use” and more scalable. It also keeps their investors happy to know that their investment will succeed even if the best-case scenario (less war and geopolitical conflict) comes to pass.

Second, on customer concentration. Conventional wisdom in the VC/investing world is that if a startup sells to the government, they are beholden to them. There’s an exception, of course, for Western defense companies - they are beholden to their home government and/or any of the others they sell to within NATO. Even then, that’s a tiny, concentrated customer base, which is not ideal for growth.

Defense and aerospace companies that focus on the dual-use of their innovations have a larger total addressable market and a diverse customer base. That gets them the investor meeting, but what gets them funded?

I looked at the pitches from the dual-use portfolio companies we’ve backed (which includes newly launched Scout AI, which just announced its $15 million seed round, Firehawk Aerospace, Venus Aerospace, Gravitics and Vermeer - to name a few). Here are five aspects of their pitch that worked well:

1.They had a clear roadmap with inspiring, ambitious tenyear goals, punctuated with a detailed overview of their 18-month operating milestones.

2. They had a well-articulated market size. They avoided using the generic “We have a total addressable market of more than $1 billion” and instead showed the revenues of their existing, ready-to-be-disrupted competition.

3. They shared detailed founder experience. They didn’t just name where their founding team came from, but identified relevant projects they worked on and led.

4. They offered strong technical validation. Wherever they were in their technical roadmap, they showed working tech— from a functional computer simulation model to proven core components, working systems/successful test flights, repeatable second unit/product produced, etc.

5. They already had specific customer/commercial validation and traction, such as awarded government grants, a plan of records and purchase orders from their clients.

(Author’s note. These companies also use the term defense tech. I recommend that startups still leverage this, given that investors are explicitly looking for these companies to add to their portfolio. However, your startup should also have two or three other commercial categories and you should already be building up your credentials and partnerships to prove your market appeal.

"If You Have Developed A Product That Is Good For The Military, Have You Explored How It Can Be Used In Civilian Enterprise Sectors Or Industrial Customers? Dual-Use Makes It More Scalable"

Besides these “items to have”, there were also six commonalities between the companies we declined to invest in:

1.Mistakenly showing the served available market instead of the total available market.

2. Having incomplete or non-complementary skill sets in the founding team. For example, two founders with business backgrounds and no technical cofounder, or vice versa. Also included here would be founders who have not worked together before.

3. Working on features that a consolidating platform can easily absorb. Regardless of these features’ novelty, a startup journey may be ten years long. Within those ten years, incumbents will catch up and new competitors will form, so the barrier to entry is one of the most critical factors for a winning startup.

4. Showing an incorrect or overly optimistic competitive landscape. Leaving competitors off your pitch indicates either a lack of knowledge or transparency, neither of which is ideal.

5. Offering an uncommon deal structure. Most investors don’t like to be on a rescue mission. Generally, primary equity offerings are better than convertible notes, the secondary sale of equities (insider selling is always a red flag), or SAFEs (Simple Agreements for Future Equity). Similarly, offering a security priced over a year ago is also a red flag. Investors will ask, Why was the round not filled in the first place?

6. Maintaining a high burn rate. Especially in this bear market environment, investors heavily scrutinize the runway. Ideally, your startup should have Nine plus months of runway when you start your roadshow.

These are the factors I look at as a dual-use tech investor. So, if you are having trouble completing your fundraiser (or have yet to begin it), I recommend you first find your dual-use capabilities. Meanwhile, evaluate if any of the six commonalities above describe your company. Once these points are resolved, it will be much easier for you to develop your winning pitch.

In closing, I often advise our LPs (family offices, pension funds and corporate investing arms in the U.S., Europe, Asia and the UAE) not to invest solely in defense tech. They are also looking for ‘dual’ tech-startups who can succeed just as well in wartime as peacetime. Recently, one of our portfolio companies was selected as a key partner for NATO. The same week, they launched a project for U.S. insurance companies to get better data from hurricane impacts. No matter which way the world turns next week, they have the ability to scale. That’s the definition of a “dual-use” technology - and a highly scalable, backable company.