Tuesday, October 13, 2020

Silicon Valley & Defense Tech

Over the last few years there has been a lot of press coverage of Google canceling project Maven, a defense contract. This has led to claims Silicon Valley is no longer engaging in defense tech, despite tech's roots working with the Department of Defense and other government agencies. Things like the Internet, various semiconductor companies, and GPS/location services are all outgrowths of defense-related work.

It turns out that despite the popular narrative, companies both large and small have continued to work with the government. Indeed, Amazon and Microsoft are publicly fighting over a major contract with the DoD called JEDI. Other companies such as Intel, IBM, and Oracle have long standing defense relationships. Salesforce has long had a "Government Cloud" and DoD ATO approvals.

A few years ago, I thought new DefenseTech would largely consist of specialist companies like Anduril, whose primary focus is defense (Anduril recently landed a $250 million, 5 year contract with DHS as well as a $13.5 million Marine Corps contract). I have long thought there is room for an AI/ML-centric software only defense contractor. 

The reality is that, in addition to defense-first companies like Anduril or Shield.AI, many of the companies recently landing large government contracts are tech companies that do not have defense as their primary vertical. The current generation of new defense tech companies look similar to the prior generation of defense tech companies - they are simply the leading companies of their broader respective areas selling technology to multiple markets including defense. Despite all the punditry claiming the opposite, mainstream Silicon Valley remains quite active in serving the defense world. 

Specialist firms like Anduril will continue to thrive. However there turns out to be a lot of room for standard tech companies to add defense as an important vertical market. Some examples of private non-defense tech companies working with national defense:

  • Applied Intuition. Applied Intuition's core business is with autonomous vehicle companies. However its simulation infrastructure software is being used in multiple defense mobility applications.
  • Palantir. Palantir has won an $876 million deal with the DoD. Their business includes fintech, healthcare (NIH and CDC), and other applications. [Note: Palantir went public while I was writing this post].
  • Scale.AI. Scale provides labelled data sets for machine learning applications across multiple verticals and is used by Airbnb, SAP, Pinterest, DoorDash and others. They recently signed a $91 million Army contract.
  • Skydio. Skydio started off as a consumer drone company only to quickly find enterprise applications in public safety and inspection. More recently it has also added defense.
  • SpaceX. Elon Musk's SpaceX has signed a $145 million contract with the Pentagon to build missile tracking satellites. SpaceX has also signed contract with the DoD to develop rockets with different defense cargo payloads. Existing incumbent solutions (the C-17 rockets) cost $200M each.
  • Tons of SaaS companies. Most SaaS companies eventually end up with the government as customers. However, in these cases it is a standard few hundred thousand to few million SaaS purchase so not notable enough to mention.
The common themes for emerging defense work include space, drones and AI. There are also many SaaS companies that sell their standard software to the various military branches. Outside of Google, the large tech companies (Amazon, Cisco, IBM, Microsoft, Oracle, etc) continue to work with the defense world as well.  

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