The Math: A Venture Capitalist Breaks Down Investment In Defense Startups

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The calculus that venture capitalists make in the defense sector is a harsh one. But few in government and too few in the private sector understand how it really works.

The calculus that venture capitalists make in the defense sector is harsher than in other businesses. But few in government and too few in the private sector understand how it really works., has been teaching “VC 101” to Pentagon program managers, contracting officers and warfighters at the behest the Department of Defense.

The reality is that when VCs deploy their funds to seed a group of fledgling defense companies with promising business cases, they’re betting on just a handful to generate all the returns. Chapman breaks down VC 101 as follows.Remembering Chuck Feeney A Maverick Philanthropist Who Became A Billionaire And Gave It All Away

The distribution is actually starker than that Chapman adds. Six percent of venture investments generate 60 percent of all venture returns. This has a number of implications for VC firm strategy. That reliance on a few startup outliers to generate a fund’s returns explains the frustration faced by founders - and DoD organizations with interest in their potential products or services - in obtaining the capital needed to propel them to market. The problem is more acute in the defense space where VCs need to seek even higher returns.

VCs typically get their return on investments when the startups they’ve staked are acquired by or merge with existing primes or large to midsize defense suppliers. Initial public offerings of red-hot startups are another path to exit but they are extremely rare.

 

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