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.