Sep 11, 2021

Axios Pro Rata

Welcome back to our Saturday edition.

  • This week, as we mark 20 years since the tragic attacks of 9/11, we're taking a look at how investment into defense and related sectors has and hasn't changed in the two decades since.
  • As always, feel free to reach me by replying to this email or on Twitter @imkialikethecar.

Today’s Smart Brevity™ count is 965 words, 3½ minutes.

1 big thing: Uneven defense investing after tragedy

Illustration: Sarah Grillo/Axios

The tragedy of Sept. 11, 2001 bolstered America’s efforts to combat terrorism at home and abroad, though venture investment into cybersecurity startups saw the biggest growth and traditional defense remained modest.

Why it matters: This stands in contrast to the unprecedented growth in the overall VC and startup markets, and Silicon Valley's roots in government and defense technology.

Flashback: The events of that day not only derailed virtually all deals in progress as the country reeled from the attack, but also had a chilling effect on the venture capital industry for some time after, as investors have recounted.

  • Any sign of recovery from the dot-com crash was erased, leading to a few more years of sluggishness before the next wave got underway.

Since then: While cybersecurity investment has seen immense growth and there's been an increase in VCs backing defense startups, the latter has remained small.

  • Funding defense startups: Though there's been a modest increase in recent times, it's stayed small over the last two decades. Companies like Palantir and Anduril have raised copious amounts of capital, and firms like Founders Fund, 8VC and General Catalyst have leaned into their interest in financing defense technology, though it remains less popular across the industry.
  • Relationship with the Pentagon (and the government): While the CIA’s venture arm, In-Q-Tel, has been around since 1999, other defense agencies have turned to backing startups and creating programs to improve things like government procurement processes and timelines. DHS opened a Silicon Valley office in 2015, and that same year the Pentagon established an experimental unit to work with startups, making it permanent three years later.
  • Cybersecurity: It's likely the tech sector that has seen the biggest growth in prominence and activity. Investment in cybersecurity has grown tremendously as the internet became ubiquitous at home and at work. Cyberattacks have become a risk for all institutions, big and small. VCs have already poured $10.2 billion into 288 deals in 2021, per Pitchbook.

The big picture: Total defense revenue more than doubled from 2001 to $551 billion globally in 2020, per Defense News.

Yes, but: The math of defense investing remains an obstacle for many investors.

  • "The math is the reason why investors are hesitant to put a third of their fund into these types of technologies because history shows us that they haven’t worked out well," General Catalyst's Katherine Boyle told Defense News, pointing to the historical lack of margins, valuations and returns that VCs are accustomed to.

The big question: The convergence of the tech industry’s artificial intelligence efforts and the U.S. government’s interest in harnessing AI for defense.

  • Already, cultural clashes at big tech companies like Google have offered a preview of the tensions both sides will have to navigate.
  • Yet, advances in AI and applications of it continue to grow, with investors pouring more and more money into the sector.

The bottom line: Silicon Valley's avoidance of the defense sector is unlikely to last forever.

2. Private equity bets big on defense

Illustration: Aïda Amer/Axios

Private equity has leaned into the defense and aerospace industry much more over the last 20 years than the venture capital industry has.

By the numbers: $7.6 billion in PE has been invested in aerospace and defense in 2021 so far, per Pitchbook data.

  • That’s up from $5.9 billion invested across 52 deals last year, and the same as the $7.6 billion invested across 77 deals in 2019.
  • In 2002, there were only six deals, totaling about $400 million.

PE has also made huge investments into cybersecurity, investing more than three times as much capital in 2021 so far as venture capital:

  • $33.6 billion across 90 deals in 2021 so far, up from $19.2 billion across 104 deals in 2020.
  • In 2002, about $100 million was invested via five deals.
3. Top deals

Illustration: Annelise Capossela/Axios

While private equity's biggest deals in the last 20 years have been in more traditional defense companies, venture capital has focused on aerospace:

Private equity:

  • Beechcraft: $3.3 billion LBO (2007)
    • The then-subsidiary of Raytheon was acquired by Goldman Sachs Capital Partners, Chatham Capital and Onex. It's since changed hands twice, most recently in 2014 when it was acquired by Textron for $1.48 billion.
  • Cubic: $3.1 billion LBO (2021)
    • The company was taken private earlier this year by Veritas Capital, Evergreen Coast Capital and Elliott Management.
  • Sequa: $2.8 billion LBO (2007)
    • The company was taken private in 2007 by The Carlyle Group and AeroEquity, and has since raised more capital to finance more growth.

Venture capital:

  • SpaceX: $1.2 billion (2021), $1.9 billion (2020), $1 billion (2015)
    • The private space exploration company founded by Elon Musk has been a darling of venture investors, who have poured billions of dollars into it over the years.
  • Relativity Space: $650 million (2021)
    • Fidelity led the company's financing earlier this year, with Centricus, BlackRock, K5 Global, Tribe Capital, Tiger Global and others also participating.
  • Joby Aviation: $590 million (2020)
    • The maker of electric vertical takeoff and landing aircraft raised a massive round in early 2020 led by Toyota, with Intel Capital, JetBlue Technology Ventures and others also participating. Earlier this year, it went public by merging with Reinvent Technology Partners, a special purpose acquisition company.
📚 Due Diligence
  • With $55M third fund, Scout Ventures is funding veterans ready to tackle the hardest technical challenges (TechCrunch)
  • Defense Industry Adds Venture Capital to Its Arsenal (WSJ)
  • 'The math doesn’t make sense': Why venture capital firms are wary of defense-focused investments (Defense News)
🧩 Trivia

9/11 led to lasting changes for the U.S. in how it views and approaches terrorism.

  • Question: Which federal government agency was created as a response to the attacks of 9/11? (Answer at the bottom.)
🧮 Final Numbers
Data: Pitchbook; Chart: Jared Whalen/Axios

🙏 Thanks for reading! See you on Monday for Axios Pro Rata's weekday programming, and please ask your friends and colleagues to sign up.

Trivia answer: the Department of Homeland Security. It combined a number of offices and agencies into one new department.