The Convergence of DefenseTech and ClimateTech: A Nexus of Innovation
Ask founders and investors what are some ‘hot’ spaces in 2024, and you will likely hear: Artificial Intelligence, DefenseTech, ClimateTech. In recent times, a notable surge of interest has emerged among founders and investors in the intersecting realms of Defensetech and Climatetech. While traditionally distinct, these fields are increasingly intertwining in the pursuit of groundbreaking solutions to complex global challenges. This convergence is driven by shared commonalities in how business get built, challenges that are faced, and a collective need for deep technological innovation.
Divergent Perspectives, Common Ground
Defensetech and Climatetech are sometimes perceived to diverge in terms of political and social views within their respective participant communities. it is thought that Defensetech grapples with issues like war, weapons, and geopolitical alliances, while Climatetech focuses on globalization, resource consumption, environmental preservation, and human development. Despite these differences, a surprising common ground is emerging, fueled by the shared necessity for technological innovation to address pressing global problems. And similarities in challenges that ambitious founders in these spaces face — from capital availability to develop technologies to talent pool required to regulatory complexity, and eventually figuring out how to sell to fewer but very large bureaucratic customers. Global powers are busy staking claim on natural resources (mines, water resources, highways, ports, etc), aligning their trade partnerships to further their national security goals, and we have seen how war is often started by putting a chokehold on commerce channels, supply chains, and a community’s access to natural resources and critical energy infrastructure. Environment suffers drastically when war breaks out, and it has been said before that the next big global war might be fought over water, not oil.
Capital-Intensive Nature and Prolonged Development Cycles
Both Defensetech and Climatetech companies share a common trait in their capital-intensive nature. Developing innovative solutions in these domains demands significant financial resources and involves extended development periods. This results in large purchase commitments, known as Programs of Record in the U.S., or otherwise major infrastructure projects driven by commercial, industrial, utility (often pseudo-oligopolies) or government partners. The importance of patient capital and long-term investment strategies becomes evident in driving meaningful advancements in both sectors.And investors often end up building institutional capabilities and networks to help companies along various vectors — fundraising, recruiting, corporate partnerships, policy, government relations, lobbying, contracting, and global supply chain logistics.
Regulatory Challenges: A Double-Edged Sword
Navigating regulatory hurdles is a common challenge for companies in Defensetech and Climatetech. While regulations can sometimes create protective moats, they also introduce a binary nature to commercial success, making companies highly dependent on external factors. Understanding certification and permitting requirements, export restrictions, funding and business opportunities in existing bilateral trade agreements, and how to utilize appropriate debt and equity financing instruments as well as sovereign fund participation becomes useful in these sectors. Investors are often not comfortable when risk cannot be minimized by management’s actions, or when technical risk is compounded by commercial risk (Investors prefer to take one but not both kinds of risks in the same company). Successfully navigating these regulatory-related landscapes at various levels (local, state, national, international) becomes crucial for early commercialization and sustained long-term growth.
Globalization and Dual-Use Technologies
Startups in both sectors are experiencing a rapid globalization of their products. Unlike traditional tech companies, Defensetech and Climatetech often find international markets and customers sooner. The changing geopolitical order worldwide is creating opportunities for companies to source manufacturing and supply chain from other countries, while also promoting energy efficiency and less resource-intensive processes.
Funding Trends: The Rise of Deeptech-Focused Funds:
Capital follows talent, and talent follows rapidly emerging opportunities in large markets. Two factors attracting talent to defensetech and climate tech sectors are: (a) There is a feeling among mission-driven founders that this is an opportunity for technology to build towards a greater good — reward outweighing risks, and (b) there are large TAMs (total accessible market size) associated with Defensetech and Climatetech sectors — thus ability to build very large multi-generational companies if successful. Founders aspire to build companies like Tesla, SpaceX, Palantir, Enphase Energy, Anduril, Applied Intuition, Saildrone, Planet, etc. Great talent focused on large market opportunities has also attracted capital, with formation of several sector-specific funds as well as dedicated pools of capital within large general funds. Investors are recognizing the potential for impactful returns and positive societal contributions by supporting companies operating at the intersection of defense, climate, and industry.
Infrastructure Focus and Mission Alignment:
Emerging trends suggests that investors are not merely looking for financial returns but are mission-aligned approaches towards longer term infrastructure development — such companies tend to get developed more responsibly and with good governance, have longer staying power with multi-product strategies, and are good candidates for becoming stand alone large public companies. The focus on infrastructure development within these sectors underscores a commitment to developing solutions that have far-reaching consequences for global challenges — and opens a clear opportunity for public-private partnerships.. Founders and investors that are mission driven tend to gravitate towards big ideas that aspire to change the world for the better. Mission driven companies also tend to have longer time horizons and patience to build despite adversity from incumbents, bureaucracy, and political quagmires.
