Brian Schettler, the head of Boeing’s HorizonX venture fund, talks to DefenseNews.

Boeing’s HorizonX venture fund has invested across 25 companies. Each investment is less than $10 million, and the cumulative amount would be small when juxtaposed against the sums deployed by traditional VC firms in commercial ventures (not defense or aerospace).

Speaking to DefenseNews, Schettler provided interesting insights on why traditional VCs are giving the cold shoulder to startups in defense and aero.

The problems from hard tech

Schettler admitted that start-ups focused on hard tech in the defense or aerospace industries (not software), have very capital intensive business plans. These take “a lot of iterations to mature.” The start-up, therefore, becomes a “no-go” area for a traditional VC.

“Hard tech is still a tough pill to swallow for a lot of VCs,” he added.

In contrast, a corporate VC, such as Boeing backed Horizon X, can bring to the table a level of technical due diligence around the technology, aerospace, for instance, that is impossible for the commercial focused VC firm.

When backed by Horizon X, the start-up also benefits from the best practices that the investor shares with them.

Different business model, different capitalization

In Schettler’s view, traditional VC firms would be more likely to engage with defense start-ups if they were able to solve the problems surrounding the manner of their investment.

“Where are other types of money that could come to the table to ensure that these early-stage companies just mature enough to the point of being able to address the Defense Department needs?” he asks.

And why should it only be equity, can’t it be a different vehicle, like a long-term note or grant?

Another problem is the near-term, quick-hit mentality of most VC investors.

“If you can get your technology on a program of record and that trail can last 30 years, those are the sort of things that are just different worlds from traditional thinking,” says Schettler.

In such a case, the VC would likely seek a different opportunity in commercial tech.

The Pentagon, Committee on Foreign Investment in the US,  and China

Another problem hindering VC investment in defense startups is the Pentagon’s allergy to anything China.

So, if a VC fund has substantial exposure to Chinese ventures, that would be frowned upon.

Ultimately, the VC fund would simply opt-out because it doesn’t want to spend time on political and procedural hurdles – “they’re looking at what’s the path of least resistance sometimes.”

These difficulties have also scared away foreign investors.

“Those investors aren’t even knocking at the door anymore because, before they’ve even filtered down their pipeline, they’re just prioritizing something with less headache and less resistance that’s maybe in another country or maybe in their own country,” observes Schettler.

What could boost VC interest in defense and aero startups?

According to Schettler, traditional VCs might see the value in defense ventures if, as they say, the music stopped.

VC’s have had a good run lately, and only a counter-cyclical turn would put a brake on their hunt for the next unicorn.

“If the economy started having any kind of slowdown or you saw a traditional VC drying up a little bit, there might be opportunities for redeployment to safer bets, if you will,” observes Schettler. “It might be long-term, it might be slower, but good, methodical, maturing defense programs that have long life cycles may start being a little more attractive.”

By the same token, the emergence of more commercial unicorns could dampen VC interest in defense and aero.

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