- Lockheed Martin Ventures has invested $100 million in 22 start-ups since 2007.
- The goal is to get on the ground floor of innovation in key areas, including cybersecurity, nanosatellites and unmanned technology.
- Smaller companies, operating on lean start-up principles, are able to move rapidly, test out new technologies, and scale them up at a substantially lower price point.
When Chris Moran took over the internal venture fund of Lockheed Martin in June 2016, the nation's largest defense contractor had already been investing in start-up technology companies for nine years. More than $100 million had been invested in 22 separate companies since the fund launched in 2007. But Moran, as the new executive director and general manager of Lockheed Martin Ventures, was on a slightly different mission.
Up until last summer, Lockheed Martin Ventures had typically tailored its investments to companies in the later stages of development. Moran has refocused the company's funding to target earlier-stage start-ups and get in at the ground level of young companies that might still be trying to figure out their business paths but are generating innovating technology in the process.
So far this year, Moran's Ventures division has invested in start-ups working in several key areas. Among them: Terran Orbital, a manufacturer of nanosatellites; Cyberreason, which makes cybersecurity software; and Peloton Technology, a maker of autonomous technology for trucks that raised a $60 million round in April that included Lockheed funding. All told, Lockheed Martin Ventures has funded companies to the tune of $20 million over the last year.
While much of the venture capital activity in the United States is concentrated in Silicon Valley, in recent years a sector of the economy with closer ties to Washington, D.C., than San Francisco has been upping its investments in start-up technology companies — America's defense industry. That includes tier-one contractors like Northrop Grumman and Boeing, in addition to Lockheed Martin.
There are several reasons why. For one, half of American defense contractors believe that the fields they play in — unmanned technology, cybersecurity and satellites — are ripe for commercial-sector disruption, per a recent McKinsey survey. And by partnering with start-ups moving quickly in fields that have commercial and military applications, such as autonomous technology and cybersecurity, defense contractors gain access to promising new technology that it can turn around and offer to their own customers: the Pentagon and other government agencies.
"We're investing in commercial tech and trying to find dual-use applications in defense. We're honestly hoping that the commercial business scales that business," Moran said.
In recent years, it's become all the more important for the U.S. defense industry to tap into America's commercial tech sector. Over the past several years, China has been encouraging businesses owned by its government or with close government ties to invest in American companies building artificial intelligence and robotics technology, not only for the gains the country hopes to make in its own commercial economy, but also for potential military applications.
"It is a concern. We don't want to see these type of defense-oriented technologies leave the country," said Moran.
Yet looking to the commercial sector is not new for the U.S. Army. The Department of Defense has the Defense Advanced Research Projects Agency, commonly known by its acronym, DARPA. The U.S. intelligence community has In-Q-Tel. Arsenal Venture Partners manages a fund that invests in businesses for the U.S. Army, something the Army created last decade as a result of the Army Venture Capital Initiative.
What is different now is a more pronounced turn to Silicon Valley. Defense contractors have traditionally looked at themselves as the innovation for the U.S. military, but looking to commercial technology start-ups has been an increasingly growing activity for them. Among defense companies, Lockheed Martin has been the most active dealmaker since 2014, according to research from CB Insights. In three years the company has made 15 investments and M&A deals.
"Defense contractors are investing in start-ups as a sort of outsourced R&D," said Anand Sanwal, CEO of CB Insights. "Advances in areas ranging from drones to satellites to autonomous vehicles all have implications in the defense industry, and it would be foolish to think that any single organization has the talent and expertise to do all of these things well."
As Moran points out, partnering with commercial start-ups by investing in them allows Lockheed Martin to be vertically integrated in a number of areas, like satellites and autonomous technology, which in turn affects the efficiency and affordability of the technology the company can offer.
Take Lockheed Martin's investment in Terran Orbital this summer as just one example. On the defense side, there are missions in space that can be achieved by launching several smaller, cheaper satellites instead of one big satellite. Once those smaller satellites are positioned in orbit, they can transmit images with good-enough resolution to indicate that maybe an existing, high-resolution satellite should be pointed in a certain direction. This type of "tipping and cuing" is valuable for the Pentagon when it comes to intelligence and surveillance.
"That's finally at the point where it will become possible. But without all these innovations in small satellites, that would have been a dream," said Moran.
Moran's small satellite example underscores why it's valuable for contractors to enter into more investment partnerships with the commercial start-up sector. It's often the case that smaller companies, operating on lean start-up principles, are able to move rapidly, test out new technologies, and scale them up at a substantially lower price point that it would cost a large defense contractor. Right now, for instance, there are more opportunities in the commercial sector for self-driving cars — but that doesn't mean advances in autonomous technology aren't things the U.S. defense industry also wants a piece of.
"The reason the private sector is moving faster is because the total adjustable market is huge," said Maynard Holliday, a senior engineer and analyst at the RAND Corporation. "It used to be flipped — the government, the Department of Defense, was the big customer."
As a result, the U.S. government has also stepped up its investments. In 2015 the Defense Innovation Unit Experimental, or DIUx, was founded. It's a government entity that makes capital investments to commercial companies working in areas that have direct applications to Department of Defense problems.
As for Lockheed Martin Ventures, Moran said more investments are planned, especially in the areas that the Department of Defense is most interested in: artificial intelligence, autonomy, cybersecurity and space.
"The government has known for quite a long time that interesting things happen out in the commercial space," said Moran. "It's part of the government's realization that things are happening at a high rate of speed and that we need to play in that space."
— By Andrew Zaleski, special to CNBC.com